10-Q 1 biostarpharma10q093012.htm biostarpharma10q093012.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: September 30, 2012
Or
 
¨
Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
For the transition period from ______________ to _______________

Commission File Number: 001-34708
 
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

The Company had 9,993,549 shares issued and outstanding as of November 15, 2012.    
 
 
TABLE OF CONTENTS
 
TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2012

   
Page
     
PART I  FINANCIAL INFORMATION  
Item 1.
F-1
 
F-1
 
F-2
 
F-3
 
F-4
Item 2.
3
Item 3.
13
Item 4.
13
     
PART II OTHER INFORMATION
  
Item 1.
14
Item 1A.
14
Item 2.
27
Item 3.
27
Item 4.
27
Item 5.
27
Item 6.
28
 
29

 
PART I - FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements

BIOSTAR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
ASSETS
           
Current Assets
           
  Cash and cash equivalents
 
$
12,119,565
   
$
16,971,789
 
  Accounts receivable
   
28,815,263
     
35,033,650
 
  Inventories
   
985,274
     
1,373,459
 
  Tax prepaid
   
451,121
     
-
 
  Prepaid expenses and other receivables
   
5,390,773
     
7,129,911
 
  Prepaid research and development expenses
   
789,390
     
-
 
     Total Current Assets
   
48,551,386
     
60,508,809
 
                 
Deposits
   
-
     
3,148,466
 
Deferred tax assets
   
3,328,228
     
1,617,688
 
Property and equipment, net
   
7,038,982
     
7,379,982
 
Intangible assets, net
   
9,390,806
     
10,406,931
 
     Total Assets
 
$
68,309,402
   
$
83,061,876
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current Liabilities
               
Accounts and other payables
 
$
3,644,084
   
$
3,334,418
 
Short-term bank loans
   
-
     
787,116
 
Value-added tax payable
   
451,088
     
895,487
 
Income tax payable
   
92,677
     
1,643,155
 
     Total Current Liabilities
   
4,187,849
     
6,660,176
 
                 
Commitment and contingencies
               
                 
Stockholders' Equity
               
   Common stock, $0.001 par value, 100,000,000 shares authorized,  
      9,993,549 and 9,400,216 shares issued and outstanding as of September 30, 2012 and December 31, 2011*
   
9,993
     
9,400
  
  Additional paid-in capital
   
23,238,700
     
22,445,660
 
  Statutory reserve
   
6,490,600
     
6,490,600
 
  Retained earnings
   
30,219,062
     
43,473,834
 
  Accumulated other comprehensive income
   
4,163,198
     
3,982,206
 
     Total Stockholders' Equity
   
64,121,553
     
76,401,700
 
                 
     Total Liabilities and Stockholders' Equity
 
$
68,309,402
   
$
83,061,876
 
                 
*Number of shares issued and outstanding retroactively reflects reverse stock split effective on April 3, 2012
 
 
The accompanying notes are an integral part of these financial statements.
 
 
BIOSTAR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Sales, net
  $ 9,969,375     $ 24,779,420     $ 34,028,164     $ 65,980,481  
                                 
Cost of sales
    4,729,894       7,465,966       13,379,287       19,352,264  
                                 
Gross profit
    5,239,481       17,313,454       20,648,877       46,628,217  
                                 
Operating expenses:
                               
   Selling expenses
    6,009,227       10,391,335       18,498,671       26,908,239  
   General and administrative expenses
    2,640,240       983,778       5,124,789       4,103,154  
   Credits for negative publicity
    -       -       7,904,513       -  
   Administrative penalty
    1,596,174       -       1,596,174       -  
   Research and development expenses
    789,702       -       2,370,605       -  
                                 
   Total operating expenses
    11,035,343       11,375,113       35,494,752       31,011,393  
                                 
(Loss) Income from operations
    (5,795,862 )     5,938,341       (14,845,875 )     15,616,824  
                                 
Other income (expense)
                               
   Interest income
    55,642       127,423       247,342       271,737  
   Interest expense
    (1,059 )     (2,984 )     (33,193 )     (10,371 )
   Other income
    152       273       598       821  
Total other income (expenses)
    54,735       124,712       214,747       262,187  
                                 
(Loss) Income before income taxes
    (5,741,127 )     6,063,053       (14,631,128 )     15,879,011  
                                 
Income tax expenses (benefits)
    198,508       1,599,316       (1,376,356 )     4,539,127  
                                 
Net (loss) income
    (5,939,635 )     4,463,737       (13,254,772 )     11,339,884  
                                 
Other comprehensive income
                               
 Foreign currency translation adjustment
    (117,289 )     640,119       180,992       1,733,586  
                                 
Total comprehensive (loss) income
  $ (6,056,924 )   $ 5,103,856     $ (13,073,780 )   $ 13,073,470  
                                 
                                 
(Loss) Earnings per share, on net income
                               
   Basic
  $ (0.63 )   $ 0.47     $ (1.41 )   $ 1.22  
   Diluted
  $ (0.63 )   $ 0.47     $ (1.41 )   $ 1.22  
                                 
Weighted average number of common stock outstanding
                               
   Basic
    9,490,506       9,398,876       9,430,532       9,264,104  
   Diluted
    9,490,506       9,398,876       9,430,532       9,264,104  
 
The accompanying notes are an integral part of these financial statements.
 
 
BIOSTAR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
  Net (loss) income
 
$
(13,254,772
)
 
$
11,339,884
 
  Adjustments to reconcile net income to net cash provided by operating activities:
               
  Deferred tax assets
   
(1,705,866
)
   
-
 
  Research and development expenses
   
2,370,605
     
-
 
  Depreciation and amortization
   
1,368,205
     
396,267
 
  Credits to accounts receivable due to negative publicity
   
7,904,513
     
-
 
  Allowance for doubtful debts
   
962,399
     
-
 
  Written off of property and equipment
   
21,704
     
-
 
  Stock-based compensation and other non-cash expenses
   
793,633
     
1,642,413
 
  Changes in operating assets and liabilities:
               
Accounts receivable
   
(2,547,289
)
   
(2,931,921
)
Inventories
   
392,153
     
(1,448,494
)
Prepaid expenses and other receivables
   
-
     
(14,757
)
Tax prepaid
   
(451,121
)
   
-
 
Accounts payable and accrued expenses
   
1,120,998
     
1,999,095
 
Value-added tax payable
   
(446,986
)
   
(710,873
)
Income tax payable
   
(1,555,225
)
   
1,362,342
 
  Exchange difference
   
11,583
     
213,924
 
     Net cash (used in) provided by operating activities
   
(5,015,466
)
   
11,847,880
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
  Purchase of property and equipment
   
(32,784
)
   
(105,488
)
  Balance payment for acquisition of business
   
(822,173
)
   
-
 
  Refund of deposit paid for acquisition of business *
   
-
     
928,361
 
  Deposit paid for acquisition of proprietary technologies
   
-
     
(3,119,798
)
  Compensation received for disposed land use rights
   
1,760,341
     
-
 
     Net cash provided by (used in) investing activities
   
905,384
     
(2,296,925
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
  Proceeds from short-term loan
   
-
     
782,656
 
  Advance from a shareholder
   
-
     
334,957
 
  Repayment to a shareholder
   
-
     
(334,957
)
  Repayment for short-term bank loan
   
(791,176
)
   
-
 
     Net cash (used in) provided by financing activities
   
(791,176
)
   
782,656
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
49,034
     
461,785
 
                 
Net increase in cash and cash equivalents
   
(4,852,224
)
   
10,795,396
 
                 
Cash and cash equivalents, beginning balance
   
16,971,789
     
13,211,443
 
                 
Cash and cash equivalents, ending balance
 
$
12,119,565
   
$
24,006,839
 
                 
SUPPLEMENTAL DISCLOSURES:
               
  Income tax payments
 
$
(2,348,336
)
 
$
(3,197,761
)
 
* In October 2011, Aoxing Pharmaceutical entered into a Share Transfer Agreement to acquire Shaanxi Weinan from the holders of 100% of equity interest in Shannxi Weinan. The aggregate purchase price is RMB 61 million (approximately $9.55 million), in cash and payable in several tranches. The payment of $822,173 represents the last tranche which was included in "accounts and other payables" as of December 31, 2011.

The accompanying notes are an integral part of these financial statements.
 
 
BIOSTAR PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
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.

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

The Agreements dated July 9, 2010 are merely replacement of the Agreements dated November 1, 2007 and therefore, there is no significant change in the contractual terms between the Agreements dated 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 July 9, 2010. 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 Financial Accounting Standard Board (“FASB”) Interpretation No. 46R “Consolidation of Variable Interest Entities”, included in the FASB Accounting Standards Codification (“Codification”) as 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 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.

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.

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 (“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 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 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.

§
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.

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

§
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, 2012.

The consolidated balance sheets and certain comparative information as of December 31, 2011 are derived from the audited consolidated financial statements and related notes for the year ended December 31, 2011 (“2011 Annual Financial Statements”), included in the Company’s 2011 Annual Report on Form 10-K. These unaudited interim consolidated financial statements should be read in conjunction with the 2011 Annual Financial Statements.

Use of Estimates

The preparation of the consolidated financial statements in conformity with 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.
  
Accounts Receivable

The Company maintains allowances 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 allowances. Terms of sales vary. Allowances are recorded primarily on a specific identification basis. Allowance for doubtful accounts amounted to $930,699, and $143,928 as of September 30, 2012 and December 31, 2011, respectively.
 
 
Customer Credits  Accounts receivable have been reduced by $7,904,513, representing credits issued to customers in August 2012.  These credits were given to maintain the customers relationship following the negative publicity in the PRC related to medicines delivered in capsule form. Although the credits were not issued until August 2012, the press release by public media related to tainted capsules and the negative impact to our customers occurred in the second quarter of 2012, therefore this loss was recognized during the three months ended June 30, 2012.  
 
Inventories

Inventories are valued at the lower of weighted average cost or market. 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:
        
   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Raw materials
 
$
650,159
   
$
534,338
 
Work in process
   
141,628
     
135,510
 
Finished goods
   
193,487
     
187,286
 
Goods in transit
   
-
     
516,325
 
   
$
      985,274
   
$
     1,373,459
 

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:
 
Real property
30 years
Leasehold improvements
30 years
Machinery & equipment
 5-10 years
Furniture & fixtures and vehicles
5-10 years

Property and equipment consisted of the following:
             
   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Real property
 
$
3,515,301
   
$
3,515,301
 
Leasehold improvements
   
1,956,289
     
1,956,289
 
Machinery & equipment
   
1,159,495
     
1,131,235
 
Furniture & fixtures
   
66,282
     
66,282
 
Vehicles
   
129,225
     
157,239
 
Construction in progress
   
2,069,640
     
2,065,116
 
     
8,896,232
     
8,891,462
 
Less: Accumulated depreciation
   
(1,857,250
)
   
(1,511,480
)
   
$
7,038,982
   
$
7,379,982
 
             
As of September 30, 2012 and December 31, 2011, expenditures incurred for the construction of a raw material processing plant and a new production plant were $2,069,640 and $2,065,116, respectively.
 
 
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. No impairments have been identified for the nine months ended September 30, 2012. 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:

   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Land use rights
 
$
3,406,406
   
$
3,406,406
 
Proprietary technologies
   
8,851,814
     
8,851,814
 
     
12,258,220
     
12,258,220
 
Less: Accumulated amortization
   
(2,867,414
)
   
(1,851,289
)
   
$
9,390,806
   
$
10,406,931
 
                                                               
The estimated future amortization expenses related to intangible assets as of September 30, 2012 are as follows:
                           
Years Ending December 31,
     
2012 (3 months)
 
$
342,268
 
2013
   
1,369,071
 
2014
   
1,369,071
 
2015
   
1,369,071
 
2016
   
1,369,071
 
Thereafter
   
3,572,254
 
 
Deferred tax assets

Deferred tax assets recognized as of September 30, 2012 are primarily due to tax losses carried forward of $2.7 million and impairment loss recognized for proprietary technologies and land use rights of $0.6 million. Realization of tax losses carried forward and impairment loss for proprietary technologies and land use rights are dependent on judgments of the local tax authority for the assessment for their tax deductibility. No valuation allowance is recognized because management believes it is more likely than not that all of the deferred tax asset will be realized.
 
Advertising

Advertising expense consists primarily of costs of promoting the Company’s corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred. For the nine months ended September 30, 2012 and 2011, the Company incurred advertising expense of approximately $11.3 million and $14.9 million, respectively.

(Loss) Earnings Per Share

Basic (loss) earnings per share is computed on the basis of the weighted average number of common stock outstanding during the period.
 
 
Diluted (loss) earnings per share is computed on the basis of the weighted average number of common stock and common stock equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.

Dilution is computed by applying the treasury stock method for options and warrants. 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.

Dilution is computed by applying the if-converted method for convertible preferred stocks. Under this method, convertible preferred stock is assumed to be converted at the beginning of the period (or at the time of issuance, if later), and preferred dividends (if any) will be added back to determine income applicable to common stock. The shares issuable upon conversion will be added to weighted average number of common stock outstanding. Conversion will be assumed only if it reduces earnings per share (or increases loss per share).

Recent accounting pronouncements

Effective during the nine months ended September 30, 2012, the Company adopted the following Accounting Standards Updates (“ASU”) issued by the FASB:
 
·
ASU No. 2011-03, “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements.” ASU No. 2011-03 removes the transferor’s ability criterion from the consideration of effective control for repurchase agreements and other agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before their maturity. It also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. This guidance is effective for interim and annual periods beginning on or after December 15, 2011.
   
·
ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.” ASU No. 2011-04 provides a consistent definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011.
   
·
ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for impairment.” The ASU No. 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The ASU No. 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.
   
·
ASU No. 2011-09, “Compensation – Retirement benefits – Multiemployer Plans (Subtopic 715-80): Disclosure about an Employer’s Participation in a Multiemployer Plan. The ASU No. 2011-09 require that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. The ASU No. 2011-09 are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted.
   
·
ASU No. 2011-12, "Comprehensive Income (Topic 220)" The amendments in this Update supersede certain pending paragraphs in Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in the Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. The amendments in this Update are effective at the same time as the amendments in Update 2011-05 so that entities will not be required to comply with the presentation requirements in Update 2011-05 that this Update is deferring. For this reason, the transition guidance in paragraph 220-10-65-2 is consistent with that for Update 2011-05. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has elected to present a single statement of comprehensive income as presented in these financial statements.
 
Except for stated above, the adoption of the foregoing ASUs did not have a material effect on the Company’s consolidated financial statements. 
 
 
In addition, the FASB has issued the following updates which are not yet effective for the nine months ended September 30, 2012 and which have not been early adopted in the Company’s financial statements:
 
·  
In December 2011, the FASB issued ASU No. 2011-10, “Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate – a Scope Clarification (a consensus of the FASB Emerging Issues Task Force). The ASU No. 2011-10 requires that a parent deconsolidate a subsidiary if the parent ceases to have a controlling financial interest in the subsidiary (except for a sale of in substance real estate). However, in situations other than a sale of in substance real estate, differing views exist in practice on whether the parent of an in substance real estate subsidiary must satisfy the criteria in Subtopic 360-20, Property, Plant, and Equipment – Real Estate Sales, in order to derecognize the in substance real estate. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted. The Company has not elected to early adopt this ASU and is not expected to have a material impact on the Company’s financial statements.

Note 3 – PREPAID EXPENSES AND OTHER RECEIVABLES

Prepaid expenses and other receivables consisted of the following:

   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Deposit for research and development
 
$
1,302,496
   
$
1,298,743
 
Contingent assets
   
1,048,146
     
1,045,126
 
Other receivables
   
3,040,131
     
4,786,042
 
   
$
5,390,773
   
$
7,129,911
 
 
Other receivable and contingent assets are mainly from the two land use rights disposed in year 2011.

Note 4 – DEPOSITS/ PREPAID RESEARCH AND DEVELOPMENT EXPENSES
 
The deposits/ prepaid research and development expenses consisted of the following:
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
Prepaid research and development expenses (Current)
 
$
789,390
   
$
-
 
Deposits (Long-term)
   
-
     
3,148,466
 
   
$
789,390
   
$
3,148,466
 
 
During the year 2011, the Company deposited Chinese Yuan Renminbi (“RMB”) 20,000,000 (approximately $3.2 million) to a university as part of a four year research and development contract to develop a new drug for the treatment cardiovascular disease. The Company recorded it as a long-term deposit at December 31, 2011. During the first quarter of the year 2012, the Company evaluated the progress of the clinic tests (stage one and stage two) of the research and development project and expected the tests would be completed within a year. In addition, the Company agrees with the university that such deposits paid would be utilized as a reimbursement of research and development expenses incurred instead of purchase acquisition provided that the Company’s total commitment and benefits in respect of the project would be remained unchanged. Accordingly, the Company reclassified the long-term deposits into current assets and started to amortize the research and development expense during the year 2012. As of September 30, 2012, approximately $2.4 million was amortized as expense, and another $0.8 million was reclassified as prepaid research and development expenses in current assets.
 
Note 5 – SHORT-TERM BANK LOAN

On March 21, 2011, the Company was granted RMB3,000,000 (approximately $474,000) one year short-term bank loan from a local bank in the PRC, with annual interest rate at 7.88%, for working capital purpose. On May 25, 2011, the Company was granted another RMB2,000,000 (approximately $316,000) one year short-term bank loan with annual interest rate at 8.20% from the same local bank in the PRC. The loan is secured by (1) personal guarantee executed by a major shareholder of the Company and (ii) pledge of the Company’s real property and land use right with carrying amount of approximately $2.7 million as of March 31, 2012. The Company paid off both the RMB 3,000,000 and RMB 2,000,000 loans during the second quarter of the year.


Note 6 – 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”). 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.

In accordance with SEC Staff Accounting Bulletin Topic 4C “Equity Accounts: Changes in Capital Structure”, the changes in the capital structure arising from the Reserve 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. Accordingly, the number and price of common stocks, including warrants and options and other related disclosures made throughout these financial statements retroactively reflected the effect of such Reverse Split.

Common stock

As of September 30, 2012 and December 31, 2011, the Company has 100,000,000 shares of common stock authorized, 9,993,549 and 9,400,216 shares of common stock issued and outstanding, respectively, at par value of $0.001 per share.

On September 17, 2012, the Company issued 33,333 shares of common stock to a former consultant based on previous agreement. Stock compensation expense of $1.17 per share or $39,000 was recognized in the third quarter of 2012 related to this stock issuance.

On September 17, 2012, the Company awarded 560,000 shares of common stock (the “Award Stocks”) to its employees based on 2011 Incentive Stock Plan (see below).  The Award Stocks were recorded as a stock-based compensation expense of approximately $655,200, using the grant date closing stock price at $1.17 per share, for the three and nine months ended September 30, 2012.

Both of the stock issued to a former consultant and the Award Stocks have been included in the calculation of “weighted average number of common stock outstanding” for the purpose of computation of basic income per share from the grant date.

Warrants

166,667 warrants were issued in connection with the November 2, 2009 private placement of Series B Convertible Preferred Stock are exercisable for a period of five years from their issuance date at an initial exercise price of $9 per share.  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 warrants are classified as equity and amounts attributable to the warrants are classified within additional paid-in capital.

On June 1, 2010, the Company issued 18,333 warrants to an investor relations firm.  The warrants are exercisable by May 31, 2013 at $6 per share.

On June 1, 2011, the Company issued 10,784 warrants to an investor relations firm.  The warrants are exercisable by June 30, 2014 at $8.22 per share.

No warrants were issued during the first nine months of 2012.

 
The following table summarizes the Company’s outstanding warrants as of September 30, 2012 and December 31, 2011.
 
         
Exercise
         
Weighted Average
 
Grant date
 
Issued
   
Price
   
Outstanding
   
Exercise Price
 
                         
November 2, 2009
   
166,667
   
$
9.00
     
166,667
         
June 1, 2010
   
18,333
   
$
6.00
     
18,333
         
  Total, as of December 31, 2010
   
  185,000
             
     185,000
   
$
8.70
 
June 1, 2011
   
   10,784
   
$
   8.22
     
      10,784
         
  Total, as of December 31, 2011
   
  195,784
             
     195,784
   
$
         8.67
 
  Total, as of September 30, 2012
   
195,784
             
195,784
   
$
8.67
 
 
Stock Options

The Company’s board of directors approved its 2009 stock plan (“2009 Stock Plan”) under which it may grant incentive and nonqualified stock options, stock awards or restricted stocks to eligible participants.  Options are generally granted for a term of 5 years.  Except for the options granted to the Company’s existing management on October 22, 2009, options granted under the 2009 Stock Plan generally vest annually in 3 equal installments, the first being on the first anniversary of the grant contingent upon employment with the Company on the vesting date.  Options granted on October 22, 2009 vest annually in 3 equal installments, the first being on the grant date. Options granted on October 27, 2010 vested in one year from the issuance date of such options. Except for the cancelled options, the remaining options were fully vested during the year ended December 31, 2011.
 
In April 2011, the Company issued 30,000 stock options under the 2009 Stock Plan to its officer and director, among which 23,333 options vest in one year and expire in five years, and 6,667 vest annually in 3 equal installments and expire in three years.

In August 2011, the Company’s board of directors approved the 2011 Stock Option Plan (“2011 Stock Plan”) and it was subsequently approved by shareholders at the Company’s annual shareholders’ meeting in October 2011. According to the 2011 Stock Plan all of employees, officers, and directors, and consultants are eligible to be granted options or restricted stock awards (each, an “Award”) under the plan. The plan is currently administered by the Board of Directors, which has all the power to administer the plan according to its terms, including the power to grant Awards, determine who may be granted Awards and the types and amounts of Awards to be granted, prescribe Award agreements, and establish programs for granting Awards. Awards may be made under the 2011 Stock Plan for up to 850,000 shares of the Company’s stock.
 
In April 2012, the Company issued 24,000 stock options under the 2011 Stock Plan to one of its officers at the exercise price of $1.68 per share. The options vest in one year and expire in five years.

 
The following table summarizes the Company’s outstanding options as of September 30, 2012 and December 31, 2011.
 
Grant date
 
Number of option
   
Exercise Price
 
Expiration Date
 
Cancelled
   
Options outstanding as of December 31, 2011
   
Options Outstanding as of
September 30, 2012
 
Vested as of December 31, 2011
 
Vested as of September 30, 2012
                                                 
October 22, 2009
   
326,667
   
$
7.80
 
October 21, 2014 
   
(44,444
)
   
282,222
     
282,222
 
282,222
 
282,222
December 30, 2009
   
33,333
   
$
13.35
 
October 21, 2015  
   
-
     
33,333
     
33,333
 
22,222
 
22,222
October 27, 2010
   
40,000
   
$
8.40
 
 October 26, 2015
   
(23,333
)
   
16,667
     
16,667
 
16,667
 
16,667
April 7, 2011
   
23,333
   
$
5.91
 
 April 6, 2016
   
-
     
23,333
     
23,333
 
-
 
23,333
April 7, 2011
   
6,667
   
$
7.80
 
 April 6, 2014
   
-
     
6,667
     
6,667
 
-
 
2,222
April 20, 2012
   
24,000
   
$
1.68
 
 April 7, 2017
   
-
     
-
     
24,000
 
-
 
-
                                                 
     
454,000
               
(67,777
)
   
362,222
     
386,222
 
321,111
 
346,666
                                                 
Weighted Average Exercise Price
                           
$
8.22
   
$
7.81
       
Weighted Average Remaining Life (in years)
                             
2.90
     
2.30
       
 
 
Note 7 – (LOSS) EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted (loss) earnings per share of common stock:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Basic net (loss) earnings per share:
                       
Net (loss) income used in computing basic net (loss) earnings per share
  $ (5,939,635 )   $ 4,463,737     $ (13,254,772 )   $ 11,339,884  
Weighted average number of common stock outstanding
    9,490,506       9,398,876       9,430,532       9,264,104  
Basic net (loss) earnings per share
  $ (0.63 )   $ 0.47     $ (1.41 )   $ 1.22  
                                 
Diluted net (loss) earnings per share:
                               
Net (loss) income used in computing diluted net earnings per share
  $ (5,939,635 )   $ 4,463,737     $ (13,254,772 )   $ 11,339,884  
                                 
Weighted average number of common stock outstanding
    9,490,506       9,398,876       9,430,532       9,264,104  
Weighted average effect of dilutive securities:
                               
   Stock warrants and options
    -       -       -       -  
Shares used in computing diluted net (loss) earnings per share
    9,490,506       9,398,876       9,430,532       9,264,104  
                                 
Diluted net (loss) earnings per share
  $ (0.63 )   $ 0.47     $ (1.41 )   $ 1.22  
 
Note 8 - 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 PRC operations for three and nine months ended September 30, 2012 and 2011, and has recorded income tax provision for the periods.

The Company’s subsidiaries and VIE were incorporated in the PRC and are governed by the Income Tax Law of the PRC and various local income tax laws. Effective January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises).

Uncertain Tax Positions

Interest associated with unrecognized tax benefits are classified as income tax, and penalties are classified in general and administrative expenses in the statements of operations.

For the three and nine months ended September 30, 2012 and 2011, 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 9 - 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 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, not to 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 September 30, 2012 and December 31, 2011, the Company’s VIE had allocated $6,490,600 and $6,490,600, respectively, to these non-distributable reserve funds.
 
Note 10 - COMMITMENT

Research and Development (“R&D”) Agreements

As of September 30, 2012, the Company entered into three agreements with certain research institutes to conduct clinical trials for three new drugs and one existing drug.  Pursuant to these agreements as of September 30, 2012 the Company paid approximately $1,302,000 as a deposit for clinical trial expenses and is obligated to pay the research institutes an additional approximately $886,000 upon completion of the clinical trials.

Capital commitments

As of September 30, 2012, the Company had capital expenditure commitments on purchase of proprietary technologies of approximately $5,841,000.
 
Note 11- SEGMENT INFORMATION

During the three and nine months ended September 30, 2012 and 2011, all revenues of the Company represented 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. In addition, all tangible and intangible assets are located in the PRC.

Note 12 – RECLASSIFICATION

Certain amounts in the prior period have been reclassified to conform to the current period’s presentation.


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 Operations,” and “Risk Factors” contained in our Annual Report on Form 10-K, as amended to date, for the fiscal year ended December 31, 2011.  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 Chinese Yuan Renminbi (“RMB”) 7.85 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 RMB61 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. (DBA: Shaanxi Weinan Huaren Pharmaceuticals, Ltd)

Our products also include six over-the-counter (“OTC”) medicines, eight prescription-based pharmaceuticals, six health products, three hospital special supply drugs and one medical device which are sold and distributed in over 25 provinces and provincial-level cities throughout China. Our best-selling product, Xin Ao Xing Oleanolic Acid Capsule (“Xin Ao Xing Capsule”), is a state-approved OTC drug for treatment of Hepatitis B.

 
Recent Developments

Gel Capsule Related Developments and Effects on the Company’s Sales
 
In April 2012, PRC State Food and Drug Administration (SFDA) launched an investigation of several capsule manufacturers based in Zhejiang, Hebei and Jiangxi provinces into their use of industrial gelatin, which contained impermissibly high chromium content. On May 25, 2012, following a nationwide inspection, SFDA authorities reported that 669 batches of gel capsules from 254 drug manufacturers in 28 provinces were found to have high chromium levels. The results of this inspection were publicly distributed in China, including publication on SFDA’s website http://www.sda.gov.cn/WS01/CL0001. As a result, SFDA effectively suspended sales of gel capsules nationwide until the investigation was completed.
 
In May 2012, following an onsite inspection by the Xianyang State Food and Drug Administration (SFDA), samples from a batch of our Xin Aoxing capsules were found to contain chromium content higher than edible gelatin. Specifically, samples from a batch of 150 cases of the Xin Aoxing capsules (each of the 150 cases contains 8,000 capsules), representing Biostar sales of approximately RMB1,188,000 or approximately $188,000 were also found to contain high levels of chromium, which capsules, in the Company’s estimation, were sold in the market in mid-2011. The Company did not check the batch in question for the chromium levels at that time since PRC pharmaceutical companies were not required to test their gel capsule inventories and purchases for chromium levels in 2011.
 
As required by SFDA in April 2012, the Company purchased gel capsule inspection equipment to measure the chromium levels in gel capsules it used. The Company also undertook a thorough inspection of all samples of drugs sold and its current product inventory to ensure that all of the gel capsules it had purchased and currently uses comply with the SFDA chromium content requirements.  In addition, the Company conducted checks of every batch of raw materials it uses in every production category and, except as discussed above, found no violations of the chromium content requirements. Further, the Company recalled all such affected capsules as promptly and thoroughly as possible, and imposed heightened quality control and assurance measures going forward.
 
On July 30, 2012, the SFDA approved the Company’s resumption of sales of its gel capsules following a thorough inspection of raw materials used in every production category, all samples of drugs sold and the current product inventory. However, the suspension of sales of gel capsule products severely affected all China-based pharmaceutical companies that use gelatin capsules to manufacture their drugs.  The Company was not immune to the industry-wide losses and, as discussed below, the Company’s sales and overall results for the 2012 second and third quarter were similarly adversely affected. The Company has been taking a number of steps to restart sales of gel capsule drugs immediately following the SFDA approval, including, among others, engaging its employees to work overtime, adding a second shift, launching an aggressive advertising campaign to help improve consumer confidence, establishing incentives for the sales force in all of the distribution offices nationwide, and launching an innovating B2C call center to take order and provide hands-on sales support.

Results of Operations
 
Net Sales

Following the decrease discussed above, our sales started to increase after the SFDA approved of the resumption of capsule products sales during the third quarter this year. Our net sale increased 22.2% for the three months ended September 30, 2012 from the previous quarter. Compared to the same periods in 2011, our total sales declined approximately $14.8 million or 60%, and $31.9 million or 48% for the three and nine months ended September 30, 2012, respectively. Sales from our flagship product Xin Aoxing Oleanolic Acid Capsule dropped approximately 82% and 63% for the three and nine months ended September 30, 2012, respectively, compared to the same period of last year. Starting from the third quarter this year we added three new products manufactured to specifically supply Xijing Military Hospital. We started test production for these three products in July this year, and after all the products passed the test we signed the supply agreement in September 2012.   These three new products brought in $1.3 million or 13.0% of total revenue for the current quarter.  Our Shaanxi Weinan facility contributed approximately 20% and 16% sales for the three and nine months ended September 30, 2012, respectively. Shaanxi Weinan facility was acquired during the fourth quarter of 2011.

 
     
Three Months Ended September 30,
 
     
2012
   
2011
 
Drugs
                         
 
Xin Aoxing Oleanolic Acid Capsule
  $ 3,026,779       30.4 %   $ 16,265,914       65.7 %
 
Gan Wang Compound Paracetamol Capsule
    412,988       4.1 %     1,780,322       7.2 %
 
Tianqi Dysmenorrhea Capsule
    454,127       4.6 %     1,859,092       7.5 %
 
Danshen Granule
    1,269,800       12.7 %     1,241,407       5.0 %
 
Taohuasan Pediatrics Medicine
    1,093,058       11.0 %     1,201,331       4.8 %
 
Subtotal
    6,256,752       62.8 %     22,348,066       90.2 %
                                   
Health products
                               
 
Tangning Capsule
    112,726       1.1 %     607,489       2.5 %
 
Yizi Capsule
    239,030       2.4 %     1,388,538       5.6 %
 
Shengjing Capsule
    53,532       0.5 %     299,266       1.2 %
 
Aoxing Ointment
    45,686       0.5 %     123,373       0.5 %
 
Subtotal
    450,974       4.5 %     2,418,666       9.8 %
                                   
Hospital products
                               
 
Pharyngitis Granule
    649,370       6.5 %     -       -  
 
Gastritis Granule
    199,374       2.0 %     -       -  
 
Nasosinusitis Granule
    446,511       4.5 %     -       -  
 
Subtotal
    1,295,255       13.0 %     -       -  
                                 
 Medical device
- Hernia belt
    4,599       0.0 %     12,688       0.0 %
                                   
Shaanxi Weinan Products
    1,961,795       19.7 %     -       -  
                                   
 
Total sales
  $ 9,969,375       100 %   $ 24,779,420       100 %
 
     
Nine Months Ended September 30,
 
     
2012
   
2011
 
Drugs
                         
 
Xin Aoxing Oleanolic Acid Capsule
 
$
16,310,838
     
47.9
%
 
$
44,534,244
     
67.5
%
 
Gan Wang Compound Paracetamol Capsule
   
1,498,110
     
4.4
%
   
4,447,430
     
6.7
%
 
Tianqi Dysmenorrhea Capsule
   
1,614,920
     
4.8
%
   
4,824,068
     
7.3
%
 
Danshen Granule
   
2,981,084
     
8.8
%
   
2,998,280
     
4.5
%
 
Taohuasan Pediatrics Medicine
   
3,546,371
     
10.4
%
   
3,660,142
     
5.6
%
 
Subtotal
   
25,951,323
     
76.3
%
   
60,464,164
     
91.6
%
                                   
Health products
                               
 
Tangning Capsule
   
397,775
     
1.2
%
   
1,535,521
     
2.3
%
 
Yizi Capsule
   
674,656
     
2.0
%
   
2,994,746
     
4.6
%
 
Shengjing Capsule
   
264,319
     
0.8
%
   
707,956
     
1.1
%
 
Aoxing Ointment
   
121,084
     
0.3
%
   
265,405
     
0.4
%
 
Subtotal
   
1,457,834
     
4.3
%
   
5,503,628
     
8.4
%
                                   
Hospital products
                               
 
Pharyngitis Granule
   
649,370
     
1.9
%
   
-
     
-
 
 
Gastritis Granule
   
199,374
     
0.6
%
   
-
     
-
 
 
Nasosinusitis Granule
   
446,511
     
1.3
%
   
-
     
-
 
 
Subtotal
   
1,295,255
     
3.8
%
   
-
     
-
 
                                 
 Medical device
- Hernia belt
   
18,259
     
0.1
%
   
12,689
     
0.0
%
                                   
Shaanxi Weinan Products
   
5,305,493
     
15.5
%
   
-
     
-
 
                                   
 
Total revenue
 
$
34,028,164
     
100
%
 
$
65,980,481
     
100
%
 
 
Cost of sales

Total cost of sales decreased by about $2.7 million or 37%, and $6.0 million or 31% for the three and nine months ended September 30, 2012, respectively, compared to the same period last year. The decline in sales of capsule products was the main reason for the cost decrease. When compared to the second quarter this year, total cost increased by 32% for the three months ended September 30, 2012. Cost from Weinan facility counted for approximately 18% of the total cost for both the three and nine months ended September 30, 2012. Cost of the three new drugs started manufacturing this quarter for Xijing Military Hospital was approximately 20% of the total cost for the three months ended September 30, 2012.
 
 
 
 
Three Months Ended September 30,
 
     
2012
   
2011
 
Drugs                          
 
Xin Aoxing Oleanolic Acid Capsule
  $ 549,205       11.6 %   $ 2,854,158       38.2 %
 
Gan Wang Compound Paracetamol Capsule
    227,887       4.8 %     943,908       12.6 %
 
Tianqi Dysmenorrhea Capsule
    285,974       6.0 %     1,035,874       13.9 %
 
Danshen Granule
    1,149,069       24.3 %     1,052,944       14.1 %
 
Taohuasan Pediatrics Medicine
    527,002       11.1 %     525,581       7.1 %
 
Subtotal
    2,739,137       57.8 %     6,412,465       85.9 %
                                   
Health products                                  
 
Tangning Capsule
    36,165       0.8 %     194,759       2.6 %
 
Yizi Capsule
    91,548       1.9 %     531,796       7.2 %
 
Shengjing Capsule
    41,775       0.9 %     233,380       3.1 %
 
Aoxing Ointment
    31,640       0.7 %     83,311       1.1 %
 
Subtotal
    201,128       4.3 %     1,043,246       14.0 %
                                   
Hospital products                                  
 
Pharyngitis Granule
    493,547       10.4 %     -       -  
 
Gastritis Granule
    123,306       2.6 %     -       -  
 
Nasosinusitis Granule
    325,198       6.9 %     -       -  
 
Subtotal
    942,051       19.9 %     -       -  
                                   
Medical device
- Hernia belt
    3,106       0.1 %     10,255       0.1 %
                                   
Shaanxi Weinan Products       844,472       17.9 %     -       -  
                                   
 
Total cost
  $ 4,729,894       100 %   $ 7,465,966       100 %
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
2012
   
2011
 
Drugs                          
 
Xin Aoxing Oleanolic Acid Capsule
  $ 3,236,039       24.2 %   $ 7,106,736       36.7 %
 
Gan Wang Compound Paracetamol Capsule
    813,473       6.1 %     2,353,309       12.2 %
 
Tianqi Dysmenorrhea Capsule
    950,124       7.1 %     2,675,904       13.8 %
 
Danshen Granule
    2,699,893       20.2 %     2,547,681       13.2 %
 
Taohuasan Pediatrics Medicine
    1,667,768       12.5 %     2,290,466       11.8 %
 
   Subtotal
    9,367,297       70.1 %     16,974,096       87.7 %
                                   
Health products                                  
 
Tangning Capsule
    127,573       1.0 %     491,143       2.5 %
 
Yizi Capsule
    258,374       1.9 %     1,146,549       5.9 %
 
Shengjing Capsule
    206,256       1.5 %     550,999       2.9 %
 
Aoxing Ointment
    83,505       0.6 %     179,222       0.9 %
 
   Subtotal
    675,708       5.0 %     2,367,913       12.2 %
                                   
Hospital products                                  
 
Pharyngitis Granule
    493,547       3.7 %     -       -  
 
Gastritis Granule
    123,306       0.9 %     -       -  
 
Nasosinusitis Granule
    325,198       2.4 %     -       -  
 
   Subtotal
    942,051       7.0 %     -       -  
                                   
Medical device
- Hernia belt
    12,638       0.1 %     10,255       0.1 %
                                   
Shaanxi Weinan Products       2,381,593       17.8 %     -       -  
                                   
 
   Total cost
  $ 13,379,287       100 %   $ 19,352,264       100 %
 
Gross Profit

Total gross profit declined by approximately $12.1 million or 70%, and $26.0 million or 56% for the three and nine months ended September 30, 2012 respectively, compared to the same periods in 2011. Gross profits of Xin Aoxing Oleanolic Acid Capsule decreased by approximately 82%, and 65% for the three and nine months ended September 30, 2012, respectively. Shaanxi Weinan products contributed approximately $1.1 million or 21%, and $2.9 million or 14% of the total gross profit for the three and nine months ended September 30, 2012.Total gross margin was 53% and 61% for the three and nine months ended September 30, 2012 compared to 70% and 71% at the same periods last year. Gross margins for Shaanxi Weinan products were 55% and 57% for the three and nine months ended September 30, 2012. Gross margins of the three new drugs started manufacturing this quarter for Xijing Military Hospital was approximately 27%.

 
     
Three Months Ended September 30,
 
     
2012
   
2011
 
Drugs                          
 
Xin Aoxing Oleanolic Acid Capsule
  $ 2,477,574       47.3 %   $ 13,411,756       77.5 %
 
Gan Wang Compound Paracetamol Capsule
    185,101       3.5 %     836,414       4.8 %
 
Tianqi Dysmenorrhea Capsule
    168,153       3.2 %     823,218       4.8 %
 
Danshen Granule
    120,731       2.3 %     188,463       1.0 %
 
Taohuasan Pediatrics Medicine
    566,056       10.8 %     675,750       3.9 %
 
   Subtotal
    3,517,615       67.1 %     15,935,601       92.0 %
                                   
Health products                                  
 
Tangning Capsule
    76,561       1.5 %     412,730       2.4 %
 
Yizi Capsule
    147,482       2.8 %     856,742       5.0 %
 
Shengjing Capsule
    11,757       0.2 %     65,886       0.4 %
 
Aoxing Ointment
    14,046       0.3 %     40,062       0.2 %
 
   Subtotal
    249,846       4.8 %     1,375,420       8.0 %
                                   
Hospital products                                  
 
Pharyngitis Granule
    155,823       3.0 %     -       -  
 
Gastritis Granule
    76,068       1.5 %     -       -  
 
Nasosinusitis Granule
    121,313       2.3 %     -       -  
 
   Subtotal
    353,204       6.8 %     -       -  
                                   
Medical device
 - Hernia belt
    1,493       0.0 %     2,433       0.0 %