Biostar Pharmaceuticals, Inc. - FORM 10-Q

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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, 2015

¨	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, 2015, the Company had 15,476,113 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	9
Item 4.	Controls and Procedures	9

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	10
Item 1A.	Risk Factors	10
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	10
Item 3.	Defaults Upon Senior Securities	10
Item 4.	Mine Safety Disclosures	10
Item 5.	Other Information	10
Item 6.	Exhibits	11
Signatures		12

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

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2015			2014
	(Unaudited)
ASSETS

Current Assets
Cash and cash equivalents		$	2,709,391		$	1,685,154
Accounts receivable, net			24,617,802			26,962,078
Inventories			395,511			673,989
Deposits and other receivables			3,699,290			4,471,992
Income tax recoverable			67,707			67,370
Loan receivables			9,821,414			9,772,464
Total Current Assets			41,311,115			43,633,047

Non-current Assets
Deposits			10,476,175			8,795,218
Deferred tax assets			7,581,878			7,065,523
Property and equipment, net			8,426,993			8,483,113
Intangible assets, net			12,994,318			13,270,330
Total Non-Current Assets			39,479,364			37,614,184

Total Assets		$	80,790,479		$	81,247,231


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts and other payables		$	4,703,876		$	5,001,086
Short-term bank loans			2,946,424			3,094,614
Value-added tax payable			190,705			432,885
Warrants liability			393,162			383,295
Total Current Liabilities			8,234,167			8,911,880

Commitment and contingencies

Stockholders' Equity
Common stock, $0.001 par value, 100,000,000 shares authorized, 15,476,113 shares issued and outstanding as of March 31, 2015 and December 31, 2014			15,476			15,476
Additional paid-in capital			30,303,508			30,303,508
Statutory reserve			7,354,413			7,354,413
Retained earnings			28,109,852			28,269,956
Accumulated other comprehensive income			6,773,063			6,391,998
Total Stockholders' Equity			72,556,312			72,335,351

Total Liabilities and Stockholders' Equity		$	80,790,479		$	81,247,231

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

F-2

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BIOSTAR PHARMACEUTICALS, INC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME(LOSS)

(Unaudited)

	Three Months Ended March 31,
	2015			2014

Sales	$	6,908,747		$	13,181,164
Cost of sales		3,327,497			5,928,076
Gross profit		3,581,250			7,253,088

Operating expenses:
Advertising expenses		1,377,164			1,788,541
Selling expenses		1,299,717			1,934,722
General and administrative expenses		775,755			1,328,305
Impairment loss on accounts receivable		-			2,269,688
Research and development expenses		1,018,612			694,944
Total operating expenses		4,471,248			8,016,200

Loss from operations		(889,998	)		(763,112	)

Other income (expense)
Interest income		322,345			316,431
Interest expense		(61,455	)		-
Additional compensation received for the disposal of land use rights		-			1,099,292
Fair value adjustment on warrants		(9,867	)		-
Other expense		-			(46,700	)
Total other income, net		251,023			1,369,023

(Loss) income before income taxes		(638,975	)		605,911

(Income tax benefit) provision for income tax		(478,871	)		299,241

Net (loss) income	$	(160,104	)	$	306,670

Other comprehensive income (loss) - foreign currency translation adjustment		381,065			(533,979	)

Comprehensive income (loss)	$	220,961		$	(227,309	)

Net (loss) income per share
Basic	$	(0.01	)	$	0.02
Diluted	$	(0.01	)	$	0.02

Weighted average number of common shares outstanding
Basic		15,476,113			13,024,446
Diluted		15,476,113			13,030,643

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

F-3

Table of Contents

BIOSTAR PHARMACEUTICALS, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(160,104	)	$	306,670
Adjustments to reconcile net income to net cash provided by operating activities:
Accrued interest income		(317,807	)		(314,489	)
Deferred tax benefit		(478,871	)		(137,124	)
Depreciation and amortization		487,437			736,124
Impairment loss on accounts receivable		-			2,269,688
Recognition of deferred research and development expenses		1,018,612			694,943
Stock-based compensation		-			99,550
Warrants liability		9,867			-
Changes in operating assets and liabilities:
Accounts receivable		2,468,538			(3,450,423	)
Inventories		280,628			91,423
Deposits and other receivables		90,837			1,396,128
Accounts payable and accrued expenses		(320,825	)		963,311
Value-added tax payable		(243,286	)		104,737
Income tax payable/recoverable		-			343,723
Net cash provided by operating activities		2,835,026			3,104,261

CASH FLOWS FROM INVESTING ACTIVITIES
Deposit paid for intended acquisition		(1,629,779	)		-
Purchase of property, plant and equipment		(30,646	)		(1,957	)
Net cash used in investing activities		(1,660,425	)		(1,957	)

CASH FLOWS FROM FINANCING ACTIVITIES
Advance from a related party		-			107,692
Repayment of short-term bank loans		(162,978	)		-
Proceeds from stock issuance and warrants		-			3,862,533
Net cash (used in) provided by financing activities		(162,978	)		3,970,225

Effect of exchange rate changes on cash and cash equivalents		12,614			(20,043	)

Net increase in cash and cash equivalents		1,024,237			7,052,486

Cash and cash equivalents, beginning balance		1,685,154			80,072
Cash and cash equivalents, ending balance	$	2,709,391		$	7,132,558

SUPPLEMENTAL DISCLOSURES:
Interest received	$	4,538		$	1,943
Interest paid	$	(61,455	)	$	-
Income tax paid	$	-		$	(92,641	)

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

F-4

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BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – ORGANIZATION AND NATURE OF OPERATIONS

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 (representing 6,610,770 shares, after the one-for-three reverse split of the issued and outstanding common stock of the Company effective on April 3, 2012) of its common stock to Aoxing Pharmaceutical’s registered owners, representing approximately 90% of the Company’s common stock outstanding immediately after the Transaction.

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 replacements 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 24, 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 replacements 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.

Following to the change in registered owners of Aoxing Pharmaceutical on October 29, 2014, a set of new Agreements had been entered into with all the existing registered owners of Aoxing Pharmaceutical on October 29, 2014.

The Agreements dated October 29, 2014 are merely replacements of the Agreements dated May 24, 2013 and therefore, there is no significant change in the contractual terms between the Agreements dated October 29, 2014, 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 October 29, 2014. The interest of Biostar in Aoxing Pharmaceutical was not and would not be affected by the replacement for the Agreements.

The Agreements provide Shaanxi Biostar with control over Aoxing Pharmaceutical as defined by Accounting Standards Codification (“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.

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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.

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 condensed 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 those condensed consolidated financial statements. 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 either (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.

●	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.

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Unaudited Interim Financial Information

These unaudited interim condensed 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, 2015.

The consolidated balance sheets and certain comparative information as of December 31, 2014 are derived from the audited consolidated financial statements and related notes for the year ended December 31, 2014 (“2014 Annual Financial Statements”), included in the Company’s 2014 Annual Report on Form 10-K. These unaudited interim condensed consolidated financial statements should be read in conjunction with the 2014 Annual Financial Statements.

Foreign Currency

The Company’s reporting currency is the U.S. dollar (“$”). The Company’s operations in the PRC use the Chinese Yuan Renminbi (“RMB”) as its functional currency. The financial statements of the subsidiary and VIEs are translated into U.S. dollars in accordance with ASC 830, Foreign Currency Matters. According to the topic, all assets and liabilities were translated at the current exchange rate, stockholders’ equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC 220, Comprehensive Income. Foreign exchange transaction gains and losses are reflected in the statement of operations. For the period ended March 31, 2015 and 2014, the Company recognized foreign translation under other comprehensive income (loss) adjustment of a gain for $381,065 and loss for 533,979, respectively.

Fair Value of Financial Instruments

ASC 825, Financial Instruments, requires that the Company discloses estimated fair values of financial instruments. The carrying amounts reported in the balance sheets for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

The Company applies the provisions of ASC 820-10, Fair Value Measurements and Disclosures. ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, loan receivables and short-term bank loans, the carrying amounts approximate fair value due to their relatively short maturities. The three levels of valuation hierarchy are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant are valued using the Binominal Model.

The Company uses Level 3 inputs for its valuation methodology for the fair value of warrant.

The binomial lattice relies on the following Level 3 inputs: (1) expected volatility of the Company’s common stock; and (2) risk free rate which is based on daily treasury yield curve rates as published by U.S. Department of the Treasury. The expected volatility of the Company’s common stock is estimated from the historical volatility of daily returns in the Company’s common stock price.

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The following tables present the estimated fair value of the following financial assets and liabilities of the Company:

At March 31, 2015:

	Carrying amount
	Level 1		Level 2		Level 3		Estimated fair value
Financial assets

Carried at (amortized) cost:
Cash and cash equivalents	$	2,709,391	$	-	$	-	$	2,709,391
Loan receivables		-		-		9,821,414		9,821,414
	$	2,709,391	$	-	$	9,821,414	$	12,530,805

	Carrying amount
	Level 1		Level 2		Level 3		Estimated fair value
Financial liabilities

Carried at (amortized) cost:
Short-term bank loans	$	-	$	-	$	2,946,424	$	2,946,424

Carried at fair value:
Warrants liability		-		-		393,162		393,162
	$	-	$	-	$	3,339,586	$	3,339,586

At December 31, 2014:

	Carrying amount
	Level 1		Level 2		Level 3		Estimated fair value
Financial assets

Carried at (amortized) cost:
Cash and cash equivalents	$	1,685,154	$	-	$	-	$	1,685,154
Loan receivables		-		-		9,772,464		9,772,464
	$	1,685,154	$	-	$	9,772,464	$	11,457,618

	Carrying amount
	Level 1		Level 2		Level 3		Estimated fair value
Financial liabilities

Carried at (amortized) cost:
Short-term bank loans	$	-	$	-	$	3,094,614	$	3,094,614

Carried at fair value:
Warrants liability		-		-		383,295		383,295
	$	-	$	-	$	3,477,909	$	3,477,909

Warrants Liability
Value at December 31, 2014	$	383,295
Fair value adjustment of warrants during the three months end March 31, 2015		9,867
Value at March 31, 2015	$	393,162

At March 31, 2015, the fair value of the warrants liability, which are recognized as level 3 financial instruments, were calculated using the binomial model that included the following inputs: stock price of the underlying asset of $1.22, an exercise price of $3.23, expected volatility of 100.42%, risk free rate of 0.89% and time to expiration of 3 years. The change in fair value was recognized on the Company’s statement of operations during the three months ended March 31, 2015.

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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.

Cash and Cash Equivalents

Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. As of March 31, 2015 and December 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.

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.

As of March 31, 2015 and December 31, 2014, the bad debt allowance was approximately $2.4 million.

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:

	March 31,		December 31,
	2015		2014

Raw materials	$	231,874	$	380,529
Work in process		62,735		143,475
Finished goods		100,902		132,491
Goods in transit		-		17,494
	$	395,511	$	673,989

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

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Property and equipment consisted of the following:

	March 31,			December 31,
	2015			2014

Buildings	$	3,672,155		$	3,651,647
Building improvements		5,938,753			5,895,382
Machinery & equipment		1,250,948			1,224,229
Furniture & fixtures		69,931			68,853
Vehicle		120,225			119,553
Construction in progress		519,862			516,959
	$	11,571,874		$	11,476,623
Less: Accumulated depreciation		(3,144,881	)		(2,993,510	)
	$	8,426,993		$	8,483,113

As set out in Note 5, buildings with carrying value of approximately $1.4 million as of March 31, 2015 and December 31, 2014 were pledged to a local bank in PRC as part of security for a short term bank loan facilities granted to the Company.

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 include land use rights and drug approvals and permits. 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,
	2015			2014

Land use rights	$	3,542,418		$	3,521,705
Proprietary technologies		19,118,445			19,006,655
		22,660,863			22,528,360
Less: Accumulated amortization and impairment		(9,666,545	)		(9,258,030	)
	$	12,994,318		$	13,270,330

The estimated future amortization expenses related to intangible assets as of March 31, 2015 are as follows:

Years Ending December 31,
2015	$	954,987
2016		1,244,068
2017		1,244,068
2018		1,244,068
2019		1,244,068
Thereafter		7,063,059

As set out in Note 5, land use right with carrying value of approximately $2.2 million as of March 31, 2015 and December 31, 2014 were pledged to a local bank in PRC as part of security for a short term bank loan facilities granted to the Company.

Share warrants

In accordance with ASC815, Derivatives and Hedging, share warrants with term of down-round provision are initially recognized at fair value at grant date as a derivative liability. At each reporting period date, the fair value of the share warrants will be re-measured and the fair value change will be reported as gain/loss in the Condensed Consolidated Statements of Operations and Comprehensive Income.

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Revenue Recognition

The Company’s revenue recognition policies are in compliance with ASC 605, Revenue Recognition. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

The Company does not allow its customers to return products. The Company’s customers can exchange products only if they are damaged in transportation.

Revenue reported is net of value added tax and sales discounts.

Recent accounting pronouncements

In May 2014, the FASB issued Accounting Standards Update ASU No. 2014-09, “Revenue from Contracts with Customers”, a converged standard on revenue recognition. The new pronouncement requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for some costs to obtain or fulfil a contract with a customer, as well as enhanced disclosure requirements. ASU 2014-9 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The adoption of ASC 2014-9 is not expected to have a material effect on our consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update ASU No. 2014-15, “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

In February 2015, the FASB issued Accounting Standards Update ASU No. 2015-02, “Consolidation” (Topic 810). ASU 2015-02 changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation mode. ASU 2015-02 affects the following areas: (1) Limited partnerships and similar legal entities. (2) Evaluating fees paid to a decision maker or a service provider as a variable interest. (3) The effect of fee arrangements on the primary beneficiary determination. (4) The effect of related parties on the primary beneficiary determination. (5) Certain investment funds. ASU 2015-02 is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in this guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of ASU 2015-02 is not expected to have any impact on the Company's financial statement presentation or disclosures.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The accounting guidance requires that debt issuance costs related to a recognized debt liability be reported on the Consolidated Statements of Financial Condition as a direct deduction from the carrying amount of that debt liability. The guidance is effective for the Company retrospectively beginning in the first quarter of fiscal 2017 and early adoption is permitted. The adoption of this accounting guidance is not expected to have a material impact on the Company’s Consolidated Statements of Financial Condition.

As of March 31, 2015, except for the above, there are no recently issued accounting standards not yet adopted that would have a material effect 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,
	2015		2014
Current portion
a) Deposits paid for research and development of new medicine	$	3,069,192	$	4,071,860
b) Prepaid sale commission		275,332		348,745
c) Loan interest income receivables		319,196		-
d) Other receivables and prepaid expenses		35,570		51,387
Deposits and other receivables	$	3,699,290	$	4,471,992

Non-current portion
e) Deposits paid for intended acquisition of a health product material supplier	$	6,547,609	$	4,886,232
f) Deposits paid for intended acquisition of a health product manufacturer		3,928,566		3,908,986
Deposits	$	10,476,175	$	8,795,218

Deposits paid for research and development represents progress payment for the development of a new drug, 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.

In year 2014, the Company paid approximately $4.0 million as further prepaid research fee for the testing process of the new drug which to be performed in year 2015 by the research institution. As of March 31, 2015, the amount of approximately $1.0 million bought forward from year 2014 had been recognized as research and development expense under straight-line basis.

b.	The amount represents prepayment of sale commission expense to a distributor which will be used for the deduction of future sale commission payment.

In December 2014, the Company signed a letter of intent to acquire 100% interest in a company in the PRC, which is principally engaged in supply of raw materials to produce health product, for an aggregate consideration of approximately $13.4 million (RMB82 million) in cash. The deposit is fully refundable if certain conditions set out in the letter of intent are not met. The remaining balance of $6.9 million is expected to be paid by December 31, 2015.

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

In November 2012, the Company advanced approximately $9.5 million (RMB 60 million) to a third party as a commercial loan, interest bearing at 13% per annum. The principal and interest were originally to be repaid on December 31, 2013. In 2013, the term of loan was extended to June 30, 2014. In 2014, the term of loan was further extended to December 31, 2015.

During the three months ended March 31, 2015 and 2014, the Company recognized approximately $0.3 million as interest income. The loan is accounted for at cost and is evaluated periodically for impairment.

The Company considered that the credit risk of the loan receivable is low as the borrower is a creditworthiness company in the local community and the Company received the interest from the borrower on quarterly basis without default payment.

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Note 5 - SHORT-TERM BANK LOANS

Short-term bank loans consisted of the followings:

		Balance as at
Inception date	Details	March 31, 2015		December 31, 2014

May 26, 2014	RMB 20,000,000, one year term loan, annual interest rate at 7.80%. Repaid RMB 1,000,000 and RMB 2,000,000 as of December 31, 2014 and March 31, 2015 respectively.	$	2,946,424	$	3,094,614

The loan is secured by (i) personal guarantee executed by a major shareholder of the Company; (ii) pledge of the Company’s buildings and land use right with carrying amount of approximately $3.6 million as of March 31, 2015 and December 31, 2014 (Note 2); and the guarantee executed by Shaanxi Biostar. The loan will become due on May 26, 2015.

Note 6 – STOCKHOLDERS’ EQUITY

(a) Common stock

As of March 31, 2015 and December 31, 2014, the Company has 100,000,000 shares of common stock authorized, 15,476,113 shares issued and outstanding at par value of $0.001 per share.

For the three months ended March 31, 2014, the Company issued 1,650,000 shares to selected investors through placement agent at $2.49 per share less financing costs to raise $3,862,533.

(b) Warrants

On March 13, 2014, in connection with the shares placement as detailed in Note 6 (a), 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 placement. The warrants are exercisable immediately as of the date of issuance and expiring three years from the date of issuance.

In accordance with the Company’s stated accounting policy in Note 2, the warrants are initially recognized as a derivative liability at fair value at grant date. Accordingly, an amount $960,894, representing the full fair value of the warrants was recognized. As of March 31, 2015, the carrying amount of the warrant was $393,162, being its fair value.

As of March 31, 2015 and December 31, 2014, the Company has 759,000 warrants outstanding, with weighted average exercise price of $3.23.

The following table summarizes the Company’s outstanding warrants as of March 31, 2015 and December 31, 2014.

Outstanding as at,

Expiry date

Exercise Price

March 31, 2015

December 31, 2014

March 12, 2017

3.23

759,000

The Company’s recurring fair value measurements at March 31, 2015 were as follows:

	Fair Value as of March 31, 2015		Significant Unobservable Inputs (Level 3)
Liabilities:
Warrants expiring March 2017	$	393,162		$	393,162

The Company determined the fair value of the warrant liability using the Binomial Model. The model considered amounts and timing of future possible equity and warrant issuances and historical volatility of the Company’s stock price.

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The following tables summarize activities for the Company’s options for the three months ended March 31, 2015.

			Weighted Average
	Number of options		Exercise Price ($)		Remaining Life (years)
Balance, December 31, 2014		64,000		4.97		1.54
Balance, March 31, 2015		64,000		4.97		1.29

Vested and exercisable as at March 31, 2015		64,000		4.97		1.29

As of March 31, 2015, there was no unrecognized compensation cost related to outstanding stock options, and the intrinsic value was close to zero because the exercise price was out-of-the-money.

Note 7 - 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, 2015 and 2014, and has recorded income tax (benefits)/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, 2015 and 2014, 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 8 - 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, 2015 and December 31, 2014, the Company’s VIE had allocated approximately $7.4 million and $7.4 million, respectively, to these non-distributable reserve funds.

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Note 9 - 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,
	2015			2014

Basic earnings per share:
Numerator:
Net (loss) income used in computing basic earnings per share	$	(160,104	)	$	306,670

Denominator:
Weighted average common shares outstanding		15,476,113			13,024,446
Basic earnings per share	$	(0.01	)	$	0.02

Diluted earnings per share:
Numerator:
Net (loss) income used in computing diluted earnings per share	$	(160,104	)	$	306,670

Denominator:
Weighted average common shares outstanding		15,476,113			13,024,446
Weighted average effect of dilutive securities:
Stock warrants and options		-			6,197
Shares used in computing diluted earnings per share		15,476,113			13,030,643
Diluted earnings per share	$	(0.01	)	$	0.02

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

Note 10 - OTHER COMPREHENSIVE INCOME

Balance of related after-tax components comprising accumulated other comprehensive income included in stockholders’ equity as of March 31, 2015 and December 31, 2014 were as follows:

	March 31,		December 31,
	2015		2014

Accumulated other comprehensive income, beginning of period	$	6,391,998	$	6,600,454
Change in cumulative translation adjustment		381,065		(208,456	)
Accumulated other comprehensive income, end of period	$	6,773,063	$	6,391,998

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Note 11 - COMMITMENTS

	Total capital payment commitment		March 31, 2015		December 31, 2014
a) Three agreements with certain research institutes to conduct clinical trials for two new and one existing drugs.	$	2.2	$	0.8	$	0.8
b) In December 2014, the Company signed a letter of intent to acquire 100% interest in a company in the PRC, which is principally engaged in supply of raw materials to produce health product, for an aggregate consideration of approximately $13.4 million (RMB 82 million) in cash.		13.4		6.9		8.5
c) 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 $9.1 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.		9.1		5.3		5.3
Total capital payment commitment			$	13.0	$	14.6

Note 12- RELATED PARTY TRANSACTIONS

During the three months ended March 31, 2014, the Company obtained an advance of $107,692 from a director, who is also an officer of the Company. The advance was unsecured, non-interest bearing and payable upon demand.

Note 13-SEGMENT INFORMATION

For the three months ended March 31, 2015 and 2014, 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 14–RISKS CONCENTRATION

For the three months ended March 31, 2015, two customers accounted for 43% 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,
	2015			2014

A		31	%		30	%
B		12	%		16	%
Total risks concentration		43	%		46	%

Note 15– SUBSEQUENT EVENTS

No significant event occurred from March 31, 2015 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, for the fiscal year ended December 31, 2014. 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”).

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 drug portfolio following the completion of this acquisition. The Company completed this acquisition on October 25, 2011.

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 reregistration 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.

Since 2013, we broaden our portfolio of services by providing subcontracted prescription drug manufacturing services to a hospital. During the three months ended March 31, 2015 and 2014, the Company recognized revenue for these subcontracted services to the hospital in the amount of $2.2 million.

We currently manufacture and sell twelve over-the-counter (“OTC”) medications and seventeen prescription-based pharmaceuticals 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 six pharmaceutical products, in which there are two additions of pharmaceutical products in 2014. 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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Results of Operations

Net Sales

	Three Months Ended March 31,										%
	2015					2014					change
Aoxing Pharmaceutical Products			%					%
Xin Aoxing Oleanolic Acid Capsule	$	3,274,385		47.4	%	$	5,077,309		38.6	%		(35.5	%)
Other Aoxing Pharmaceutical products		1,008,346		14.6	%		2,971,494		22.6	%		(66.1	%)
Sub-total		4,282,731		62.0	%		8,048,803		61.2	%		(46.8	%)

Shaanxi Weinan Products		426,395		6.2	%		2,958,694		22.4	%		(85.6	%)

Hospital products		2,199,621		31.8	%		2,173,667		16.4	%		1.2	%

Total sales	$	6,908,747		100.0	%	$	13,181,164		100.0	%		(47.6	%)

For the three months ended March 31, 2015, total net sales decreased by approximately $6.3 million or 47.6% as compared to the same period in 2014. For Aoxing Pharmaceutical Products, the decrease is mainly attributable to the temporary reduction in capacity from the maintenance of one of the Company’s main production line in March 2015.

For Shaanxi Weinan Products, there are three good manufacturing practices (“GMP”) certificates that have expired; the Company is currently applying for renewal of such certificates. The Company has temporarily postponed production of these products until the GMP certificates renewals have been granted.

Cost of sales

	Three Months Ended March 31,										%
	2015					2014					change
Aoxing Pharmaceutical Products			%					%
Xin Aoxing Oleanolic Acid Capsule	$	562,385		16.9	%	$	824,112		13.9	%		(31.8	%)
Other Aoxing Pharmaceutical products		766,896		23.0	%		2,104,038		35.5	%		(63.6	%)
Sub-total		1,329,281		39.9	%		2,928,150		49.4	%		(54.6	%)

Shaanxi Weinan Products		267,330		8.1	%		1,427,468		24.1	%		(81.3	%)

Hospital products		1,730,886		52.0	%		1,572,458		26.5	%		10.1	%

Total cost of sales	$	3,327,497		100	%	$	5,928,076		100.0	%		(43.9	%)

For the three months ended March 31, 2015, cost of sales decreased by approximately $2.6 million or 43.9%, as compared to the same period in 2014. This decrease is mainly due to the one month long reduction in production and sales volume related to the repair and maintenance effort as discussed in “Net Sales” above.

The percentage decrease in the cost of sales was less than the percentage decrease in net sales which was mainly due to the fixed costs, such as depreciation, that are allocated to cost of sales.

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Gross Profit

	Three Months Ended March 31,
	2015					2014
	Gross Profit		Product Gross Margin %			Gross Profit		Product Gross Margin %
Aoxing Pharmaceutical Products
Xin Aoxing Oleanolic Acid Capsule	$	2,712,000		82.8	%	$	4,253,197		83.8	%
Other Aoxing Pharmaceutical products		241,450		23.9	%		867,456		29.2	%
Sub-total		2,953,450		69.0	%		5,120,653		63.6	%

Shaanxi Weinan Products		159,065		37.3	%		1,531,226		51.8	%

Hospital products		468,735		21.3	%		601,209		27.7	%

Total gross profit	$	3,581,250		51.8	%	$	7,253,088		55.0	%

Gross profit decreased by approximately $3.7 million or 50.6% for the three months ended March 31, 2015, as compared to the same period in 2014. The decrease in gross profit was due primarily to the decrease in sales volume.

The overall gross profit margin decreased in the first quarter of 2015 compared to the same period of last year is mainly due to because the decrease in sales volume and fixed production costs is allocated to cost of sales.

Operating Expenses

	Three months ended March 31,
	2015					2014
	Operating expenses		% of net sales			Operating expenses		% of net sales			% change
Advertising expenses	$	1,377,164		20.0	%	$	1,788,541		13.6	%		(23.0	%)
Selling expenses		1,299,717		18.8	%		1,934,722		14.7	%		(32.8	%)
General and administrative expenses		775,755		11.2	%		1,328,305		10.1	%		(41.6	%)
Impairment loss on accounts receivable		-		-			2,269,688		17.2	%		(100.0	%)
Research and development expenses		1,018,612		14.7	%		694,944		5.3	%		46.6	%
Total operating expenses	$	4,471,248		64.7	%	$	8,016,200		60.8	%		(44.2	%)

Total operating expenses decreased by approximately $3.5 million or 44.2% for the three months ended March 31, 2015, as compared to the same period last year. For the three months ended March 31, 2014, the Company recognized impairment loss on accounts receivable for approximately $2.3 million; this impairment loss did not re-occur in the three months ended March 31, 2015, which significantly contributed to the decrease in operating expenses.

Advertising expenses accounted for 20.0% and 13.6% of total net sales for the three months ended March 31, 2015 and 2014, respectively. The Company reduced its advertising spending as a result of its planned maintenance of the production line that resulted in lower sales for the quarter.

Selling expenses consist mostly of salesman salaries, commission and other selling expenses. Overall decrease was approximately $0.6 million or 32.8%. The Company’s accrued selling expenses are correlated with the Company’s sales; accordingly, with the reduced sales as function of the maintenance of the production line, the Company’s selling expenses decreased as well.

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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, 2015 and 2014, general and administrative expenses decreased by $0.6 million or 41.6% mainly due to decrease in stock based compensation.

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 $1.0 million and $0.7 million in research and development expenses for the three months ended March 31, 2015 and 2014, respectively.

Provision for Income Taxes

For the three months ended March 31, 2015 and 2014, our deferred tax benefit and income tax expense was approximately $0.5 million and $0.3 million, respectively. 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, 2015, we had cash and cash equivalents of approximately $2.7 million and net working capital of approximately $33.1 million. As of March 31, 2015, 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 2015. 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, 2015 was approximately $2.8 million. The Company’s increase in operating cash flows was primarily attributable to successful collections of accounts receivables and the reduction in the Company’s inventory resulting in inflows of $2.5 million and $0.3 million, respectively. The increases in operating cash flows were partially offset by reduction in accounts payable and VAT payable resulting in outflows of $0.3 million and $0.2 million, respectively.

Net cash used in investing activities for the three months ended March 31, 2015 was approximately $1.7 million, attributable to a deposit for an intended acquisition in the amount of $1.6 million.

Net cash used in financing activities for the three months ended March 31, 2015 was approximately $0.2 million which was the result of the Company’s repayment of short term bank borrowings.

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:

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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 typically offers is 90 to 120 days credit terms to its customers.

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.

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 for share options and Binominal model for warrants and is recognized as expense over the requisite service period. The BSM model and Binominal 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.

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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.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carry-forwards. Management must make assumptions, judgments and estimates to determine the current provision for income taxes and the deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Management’s judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, management’s interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or management’s interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in the financial statements. Management’s assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations. Actual operating results and the underlying amount and category of income in future years could render management’s current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from the estimates, thus materially impact the financial position and results of operations.

Foreign Currency

Our functional currency is the U.S. dollar, and our subsidiary and our VIE in China use their respective local currencies as their functional currencies, i.e. the 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.

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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.

Contractual Obligations

The following table sets forth our contractual obligations as of March 31, 2015:

	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		-		-		-

Payment for intended acquisition of a health product material supplier		6.9		6.9		-		-		-

Short-term bank loans		2.9		2.9		-		-		-

Payment for intended acquisition of a health product manufacturer		5.3		5.3		-		-		-

Total contractual obligations	$	15.9	$	15.9	$	-		-		-

Inflation

Management believes that inflation has not had a material effect on our results of operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, as defined in Regulation S-K Section 303(a)(4).

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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, 2015, 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, 2015	By:	/s/ Ronghua Wang
		Ronghua Wang, Chief Executive Officer and President (Principal Executive Officer)

Date: May 15, 2015	By:	/s/ Qinghua Liu
		Qinghua Liu, Interim Chief Financial Officer (Principal Financial and Accounting Officer)

Attached files

Biostar Pharmaceuticals, Inc. Reports

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