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EX-31.1 - EX-31.1 - Biostar Pharmaceuticals, Inc.ex31-1.htm
EX-31.2 - EX-31.2 - Biostar Pharmaceuticals, Inc.ex31-2.htm
EX-32.2 - EX-32.2 - Biostar Pharmaceuticals, Inc.ex32-2.htm
EX-32.1 - EX-32.1 - Biostar Pharmaceuticals, Inc.ex32-1.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: June 30, 2015
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

As of August 18, 2015, the Company had 15,476,113 shares issued and outstanding.     
 
 
TABLE OF CONTENTS
 
 
 
 
PART I - FINANCIAL INFORMATION
 
Item 1.    Condensed Consolidated Financial Statements (unaudited)
 
BIOSTAR PHARMACEUTICALS, INC.
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Contents
 
 

 
BIOSTAR PHARMACEUTICALS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
June 30,
 
December 31,
 
 
2015
 
2014
 
 
(Unaudited)
       
ASSETS
 
             
Current Assets
           
Cash and cash equivalents
 
$
313,320
   
$
1,685,154
 
Accounts receivable, net
   
28,931,939
     
26,962,078
 
Inventories
   
517,857
     
673,989
 
Deposits and other receivables
   
2,978,567
     
4,471,992
 
Income tax recoverable
   
67,933
     
67,370
 
Loan receivables
   
9,854,158
     
9,772,464
 
Total Current Assets
   
42,663,774
     
43,633,047
 
                 
Non-current Assets
               
Deposits
   
10,511,102
     
8,795,218
 
Deferred tax assets
   
7,775,117
     
7,065,523
 
Property and equipment, net
   
 8,310,684
     
8,483,113
 
Intangible assets, net
   
 12,690,199
     
13,270,330
 
Total Non-Current Assets
   
39,287,102
     
37,614,184
 
                 
Total Assets
 
$
81,950,876
   
$
81,247,231
 
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
                 
Current Liabilities
               
Accounts and other payables
 
$
5,778,304
   
$
5,001,086
 
Short-term bank loans
   
 2,931,612
     
3,094,614
 
Value-added tax payable
   
594,314
     
432,885
 
Warrants liability
   
 302,841
     
383,295
 
Total Current Liabilities
   
9,607,071
     
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
   June 30, 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
   
27,617,425
     
28,269,956
 
Accumulated other comprehensive income
   
7,052,983
     
6,391,998
 
Total Stockholders’ Equity
   
72,343,805
     
72,335,351
 
                 
Total Liabilities and Stockholders’ Equity
 
$
81,950,876
   
$
81,247,231
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
BIOSTAR PHARMACEUTICALS, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Sales, net
  $ 14,176,234     $ 19,198,854     $ 21,084,981     $ 32,380,018  
Cost of sales
    8,237,555       9,931,316       11,565,052       15,859,392  
Gross profit
    5,938,679       9,267,538       9,519,929       16,520,626  
                                 
Operating expenses:
                               
Advertising expenses
    2,491,577       2,318,826       3,868,741       4,107,367  
Selling expenses
    2,310,314       2,537,288       3,610,031       4,472,010  
General and administrative expenses
    1,183,795       1,690,465       1,959,550       3,018,770  
Impairment loss on accounts receivable
    -       1,576,123       -       3,845,811  
Research and development expenses
    1,026,177       689,488       2,044,789       1,384,432  
Total operating expenses
    7,011,863       8,812,190       11,483,111       16,828,390  
                                 
(Loss) Income from operations
    (1,073,184 )     455,348       (1,963,182 )     (307,764 )
                                 
Other income (expense)
                               
Interest income
    320,680       334,467       643,025       650,898  
Interest expense
    (1,396 )     -       (62,851 )     -  
Fair value adjustment on warrants
    90,321       393,162       80,454       393,162  
Additional compensation received for the disposal of land use rights
    -       -       -       1,099,292  
Other income (expense)
    2,080       (4,132 )     2,080       (50,832 )
      411,685       723,497       662,708       2,092,520  
                                 
(Loss) Income before income taxes
    (661,499 )     1,178,845       (1,300,474 )     1,784,756  
                                 
Provision for income tax (recovery)
    (169,072 )     (466,649 )     (647,943 )     (167,408 )
                                 
Net (loss) income
  $ (492,427 )   $ 1,645,494     $ (652,531 )   $ 1,952,164  
                                 
Foreign currency translation adjustment
    279,920       98,949       660,985       (435,030 )
                                 
Comprehensive (loss) income
  $ (212,507 )   $ 1,744,443     $ 8,454     $ 1,517,134  
                                 
Net (loss) income per share
                               
Basic
  $ (0.03 )   $ 0.11     $ (0.04 )   $ 0.14  
Diluted
    (0.03 )     0.11       (0.04 )     0.14  
                                 
Weighted average number of common shares outstanding
                               
Basic
    15,476,113       14,326,113       15,476,113       13,678,875  
Diluted
    15,476,113       14,326,113       15,476,113       13,681,830  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
BIOSTAR PHARMACEUTICALS, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Six Months Ended June 30,
 
   
2015
   
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net (loss) income
 
$
(652,531
)
 
$
1,952,164
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Accrued interest income
   
(318,987
   
-
 
Deferred tax benefit
   
(647,943
   
(741,402
)
Depreciation and amortization
   
977,876
     
1,591,581
 
Impairment loss on accounts receivable
   
-
     
3,845,811
 
Loss on disposal
   
-
     
3,277
 
Recognition of deferred research and development expenses
   
1,022,395
     
1,384,433
 
Stock-based compensation
   
-
     
199,100
 
Warrant liability
   
(80,454
   
(393,162
Provision for sales discounts
   
1,149,652
     
-
 
                 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(2,882,616
)
   
(9,059,901
)
Inventories
   
161,123
     
155,118
 
Deposits and other receivables
   
821,318
     
916,527
 
Accounts payable and accrued expenses
   
732,542
     
1,075,535
 
Value-added tax payable
   
157,183
     
199,615
 
Income tax payable/recoverable
   
-
     
(92,119
Net cash provided by operating activities
   
 439,558
     
1,036,577
 
                 
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
               
Deposit payment for intended acquisition
   
(1,635,831
   
-
 
Purchase of property, plant and equipment
   
(30,760
)
   
(479,792
Sales proceeds of property, plant and equipment
   
-
     
2,932
 
Settlement of outstanding receivable from the disposal of land use rights
   
-
     
1,562,749
 
Net cash (used in) provided by investing activities
   
(1,666,591
   
      1,085,889
 
                 
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
               
(Repayment) Proceeds of bank loans
   
(188,121
   
3,257,488
 
Advance from a related party
   
-
     
33,944
 
Proceeds from stock issuance and warrants
   
-
     
3,862,533
 
Net cash (used in) provided by financing activities
   
(188,121
   
7,153,965
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
43,320
     
(15,399
                 
Net (decrease) increase in cash and cash equivalents
   
(1,371,834
)
   
9,261,032
 
                 
Cash and cash equivalents, beginning balance
   
1,685,154
     
80,072
 
Cash and cash equivalents, ending balance
 
$
313,320
   
$
9,341,104
 
                 
SUPPLEMENTAL DISCLOSURES:
               
Interest received
 
$
5,015
   
$
-
 
Interest (payments)
 
$
(59,867
 
$
-
 
Income tax (payments)
 
$
-
   
$
(526,770
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
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.
 
 
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 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.
 
 
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 June 30, 2015 and 2014, the Company recognized foreign translation under other comprehensive income (loss) adjustment of a gain for $660,985 and loss for $435,030, 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.
 
 
The following tables present the estimated fair value of the following financial assets and liabilities of the Company:

As of June 30, 2015:
 
   
Carrying amount
     
   
Level 1
   
Level 2
   
Level 3
   
Estimated
fair value
Financial assets
                     
                       
Carried at (amortized) cost:
                     
Cash and cash equivalents
 
$
313,320
   
$
-
   
$
-
   
$
313,320
 
Loan receivables
   
-
     
-
     
9,854,158
     
9,854,158
 
   
$
313,320
   
$
-
   
$
9,854,158
   
$
10,167,478
 

   
Carrying amount
       
   
Level 1
   
Level 2
   
Level 3
   
Estimated
fair value
 
Financial liabilities
                       
                         
Carried at (amortized) cost:
                       
Short-term bank loans
 
$
-
   
$
-
   
$
2,931,612
   
$
2,931,612
 
                                 
Carried at fair value:
                               
Warrants liability
   
-
     
-
     
302,841
     
302,841
 
   
$
-
   
$
-
   
$
3,234,453
   
$
3,234,453
 

As of 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 June 30, 2015
   
(80,454
Value at June 30, 2015
 
$
302,841
 

At June 30, 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 $1.04, an exercise price of $3.23, expected volatility of 99.01%, risk free rate of 1.01% and time to expiration of 3 years. The change in fair value was recognized on the Company’s statement of operations during the six months ended June 30, 2015.

 
In accordance to ASC-820-1-50-2(g), the Company has performed a sensitivity analysis of the outstanding warrants of the Company which are classified as level 3 financial instruments. The Company recalculated the value of warrants by applying a +/- 5% changes to the input variables in the binomial model that vary overtime, namely, the volatility and the risk free rate. A 5.0% decrease in volatility would decrease the value of the warrants to $276,189; a 5.0% increase in volatility would increase the value of the warrants to $328,647. A 5.0% decrease in the risk free rate would have not affected the price of the warrants, while a 5.0% increase the risk free rate would have increased the value of the warrants to $303,600.
 
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 June 30, 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 June 30, 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:
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
Raw materials
 
$
246,990
   
$
380,529
 
Work in process
   
 78,241
     
143,475
 
Finished goods
   
 192,626
     
132,491
 
Goods in transit
   
-
     
17,494
 
   
$
517,857
   
$
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
 
 
Property and equipment consisted of the following:
 
             
 
June 30,
   
December 31,
 
   
2015
   
2014
 
             
Buildings
 
$
3,685,693
   
$
3,651,647
 
Building improvements
   
 5,960,649
     
5,895,382
 
Machinery & equipment
   
 1,255,560
     
1,224,229
 
Furniture & fixtures
   
 70,189
     
68,853
 
Vehicle
   
 120,668
     
119,553
 
Construction in progress
   
 522,345
     
516,959
 
   
 11,615,104
   
$
11,476,623
 
Less: Accumulated depreciation
   
 (3,304,420
)
   
(2,993,510
)
   
$
 8,310,684
   
$
8,483,113
 

As set out in Note 5, buildings with carrying value of approximately $1.4 million as of June 30, 2015 and December 31, 2014 were pledged to a local bank in the PRC as part of security for 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:
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
Land use rights
 
$
3,556,403
   
$
3,521,705
 
Proprietary technologies
   
 19,193,920
     
19,006,655
 
     
 22,750,323
     
22,528,360
 
Less: Accumulated amortization and impairment
   
(10,060,124
)
   
(9,258,030
)
   
$
12,690,199
   
$
13,270,330
 
  
The estimated future amortization expenses related to intangible assets as of June 30, 2015 are as follows:
 
Years Ending December 31,
     
2015
 
$
646,117
 
2016
   
1,248,216
 
2017
   
1,248,216
 
2018
   
1,248,216
 
2019
   
1,248,216
 
Thereafter
   
7,051,218
 
 

As set out in Note 5, land use right with carrying value of approximately $2.2 million as of June 30, 2015 and December 31, 2014 were pledged to a local bank in the PRC as part of security for 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.

 
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 fulfill 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 the Company’s 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). The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on the Company’s consolidated financial statements.
 
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 Company is currently evaluating the impact the pronouncement will have on the Company’s consolidated financial statements.
 
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 financial statements.
 
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out (“LIFO”). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the impact the pronouncement will have on the Company’s consolidated financial statements.


As of June 30, 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 consolidated financial statements.

Note 3 - DEPOSITS AND OTHER RECEIVABLES

Deposits and other receivables consisted of the following:
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
Current portion
           
a) Deposits paid for research and development of new medicine
 
$
2,052,950
   
$
4,071,860
 
b) Prepaid sale commission
   
 249,408
     
348,745
 
c) Loan interest income receivables
   
640,520
     
-
 
d) Other receivables and prepaid expenses
   
 35,689
     
51,387
 
       Deposits and other receivables
 
$
 2,978,567
   
$
4,471,992
 
                 
Non-current portion
               
e) Deposits paid for intended acquisition of a health product material supplier
 
$
 6,569,439
   
$
4,886,232
 
f) Deposits paid for intended acquisition of a health product manufacturer
   
 3,941,663
     
3,908,986
 
       Deposits
 
$
 10,511,102
   
$
8,795,218
 
 
a.  
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 June 30, 2015, the amount of approximately $2.0 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.

e.
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 $6.8 million is expected to be settled by December 31, 2015.

f.  
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. The remaining balance of $5.3 million is expected to be settled by December 31, 2015.
 
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 six months ended June 30, 2015 and 2014, the Company recognized approximately $0.6 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 borrower is realizing its investments in various projects.
 

Note 5 - SHORT-TERM BANK LOANS

Short-term bank loans consisted of the followings:
 
       
Balance as at
 
Inception date
 
Details
 
June 30,
2015
   
December 31,
2014
 
                 
May 26, 2014
 
RMB 20,000,000, one year term loan, annual interest rate at 7.80%. As of December 31, 2014, the Company repaid RMB 1,000,000. During the six months ended June 30, 2015, the Company repaid RMB 1,150,000; as of June 30, 2015, the Company had cumulatively repaid RMB 2,150,000.
 
$
2,931,612
   
$
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 June 30, 2015 and December 31, 2014 (Note 2); and the guarantee executed by Shaanxi Biostar. The Company, in principal, has agreed with the bank to extend a portion of the outstanding loan balance in the amount of approximately US$1.45 million (RMB 9 million) for a period of 12 months, and to repay approximately US$ 1.45 million (RMB 9 million) by August 31, 2015.

Note 6 - STOCKHOLDERS’ EQUITY

(a) Common stock

As of June 30, 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 six months ended June 30, 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 June 30, 2015, the carrying amount of the warrant was $302,841, being its fair value.
 
As of June 30, 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 June 30, 2015 and December 31, 2014.
 
         
Outstanding as of
 
Expiry date
 
Exercise Price
   
June 30, 2015
   
December 31, 2014
 
March 12, 2017
   
3.23
     
759,000
     
759,000
 
 
The Company’s recurring fair value measurements as of June 30, 2015 were as follows: 
 
   
Fair Value as of
 June 30, 2015
 
Significant
Unobservable
Inputs
 (Level 3)
 
Liabilities:
               
Warrants expiring March 2017
 
$
302,841
   
$
302,841
 

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.
 

(c) Stock Options

The following tables summarize activities for the Company’s options for the six months ended June 30, 2015.
 
         
Weighted Average
 
   
Number of options
   
Exercise Price ($)
   
Remaining Life (years)
 
Balance, December 31, 2014
   
64,000
     
4.97
     
1.54
 
Balance, June 30, 2015
   
64,000
     
4.97
     
1.04
 
                         
Vested and exercisable as of June 30, 2015
   
64,000
     
4.97
     
1.04
 

As of June 30, 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 six months ended June 30, 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 six months ended June 30, 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 June 30, 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.
 
 
Note 9 - (LOSS) EARNINGS PER SHARE

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

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Basic (loss) earnings per share:
                       
Numerator:
                       
Net (loss) income used in computing basic earnings per share
 
$
(492,427
)
 
$
1,645,494
   
$
(652,531
)
 
$
1,952,764
 
                                 
Denominator:
                               
Weighted average common shares outstanding
   
15,476,113
     
14,326,113
     
15,476,113
     
13,678,875
 
Basic (loss) earnings per share
 
$
(0.03
)
 
$
0.11
   
$
(0.04
)
 
$
0.14
 
                                 
Diluted earnings per share:
                               
Numerator:
                               
Net (loss) income used in computing diluted earnings per share
 
$
(492,427
)
 
$
1,645,494
   
$
(652,531
)
 
$
1,952,764
 
                                 
Denominator:
                               
Weighted average common shares outstanding
   
15,476,113
     
14,326,113
     
15,476,113
     
13,678,875
 
Weighted average effect of dilutive securities:
                               
Stock warrants and options
   
-
     
-
     
  -
     
2,955
 
Shares used in computing diluted earnings per share
   
15,476,113
     
14,326,113
     
15,476,113
     
13,681,830
 
Diluted (loss) earnings per share
 
$
(0.03
)
 
$
0.11
   
$
(0.04
)
 
$
0.14
 
 
Dilutive securities having an anti-dilutive effect on diluted (loss) earnings per share are excluded from the calculation.
 
In accordance to ASC-260-10-50-I(c), for the three and six months ended June 30, 2015, the Company, using the treasury stock method, determined that both the outstanding options and warrants would have been anti-dilutive if included in the denominator of the Company's dilutive loss and earnings per share calculation because they were both out of the money. Holders of either securities would not have exercised the rights under these securities; accordingly, the options and warrants have been excluded from the loss and earnings per share calculation. Details of the attributes, such a strike price and time to maturity of the options and warrants are detailed in "Note 6 Equity".
 
Note 10 - OTHER COMPREHENSIVE INCOME

Balance of related after-tax components comprising accumulated other comprehensive income included in stockholders’ equity as of June 30, 2015 and December 31, 2014 were as follows:

   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
Accumulated other comprehensive income, beginning of period
 
$
6,391,998
   
$
6,600,454
 
Change in cumulative translation adjustment
   
660,985
     
(208,456
)
Accumulated other comprehensive income, end of period
 
$
7,052,983
   
$
6,391,998
 
 
 
Note 11 - COMMITMENTS

   
Total capital 
payment commitment
   
June 30,
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
     
 6.8
     
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 $9.2 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.
   
9.2
     
5.3
     
5.3
 
Total capital payment commitment
         
$
12.9
   
$
14.6
 
 
Note 12 - SEGMENT INFORMATION
 
For the six months ended June 30, 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 13 - RISKS CONCENTRATION

For the six months ended June 30, 2015, two customers accounted for 50% 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
   
Six Months Ended June 30,
 
     
2015
   
2014
 
               
A      
42
%
   
25
%
B      
8
%
   
25
%
Total risks concentration
     
50
%
   
50
%
 
Note 14 - SUBSEQUENT EVENTS

No significant event occurred from June 30, 2015 to the date these condensed consolidated financial statements are filed with the Securities Exchange Commission that would have a material impact on the Company’s condensed consolidated financial statements.
 
 
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. 

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.

Since 2013, we broaden our portfolio of services by providing subcontracted prescription drug manufacturing services to a hospital.  During the six months ended June 30, 2015, the Company recognized revenue for these subcontracted services to the hospital in the amount of approximately $7.2 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.
 
 
Results of Operations

Net Sales
 
   
Three Months Ended June 30,
   
%
 
   
2015
   
2014
   
change
 
Aoxing Pharmaceutical Products
       
%
         
%
       
Xin Aoxing Oleanolic Acid Capsule
 
$
5,838,067
     
41.2
%
 
$
5,840,766
     
30.4
%
   
0.0
%
Other Aoxing Pharmaceutical Products
   
2,109,381
     
14.9
%
   
6,647,729
     
34.6
%
   
(68.3
%)
Sub-total
   
7,947,448
     
56.1
%
   
12,488,495
     
65.0
%
   
(36.4
%)
                                         
Shaanxi Weinan Products
   
153,925
     
1.1
%
   
3,209,135
     
16.7
   
(95.2
%)
                                         
Hospital products
   
7,219,943
     
50.9
%
   
3,501,224
     
18.2
%
   
106.2
%
                                         
Subtotal
 
$
15,321,316
     
108.1
%
 
$
19,198,854
     
100.0
%
   
(20.2
%)
                                         
Less provision for sales discount
 
$
(1,145,082
)
   
(8.1
%)
 
$
-
     
-
     
(100
%) 
                                         
Net sales
 
$
14,176,234
     
100.0
%
 
$
19,198,854
     
100.0
%
   
(26.2
%)

For the three months ended June 30, 2015, total net sales decreased by approximately $5.0 million or 26.2% as compared to the same period in 2014.

The Company experienced a material decrease in sales volume of Other Aoxing Pharmaceutical Products in the quarter ended June 30, 2015, as Aoxing Pharmaceutical prioritized its production capacity to produce Hospital Products first and then the remaining production capacity to produce Other Aoxing Pharmaceutical Products.
 
Shaanxi Weinan Products is experienced a drop off in production volume and related sales as a result of the maintenance of its production lines in order to renew their related GMP certificates. On June 25, 2015, Shaanxi Weinan received the renewed certificate.

During the quarter ended June 30, 2015, the Company continued to expand its sales revenues derived from the subcontracting of prescription drug manufacturing services to a hospital.  These services helped to partially offset the temporary decline in sales related to the manufacturing down time related to the servicing of the Aoxing gel capsule production line and the servicing of the Shaanxi Weinan facilities and productions line for the renewal of the GMP certification.

In order to improve the Company’s cash management, the Company intends to offer certain customers discounts on certain receivables balances to encourage faster settlement of such outstanding balances.  The Company accounts for these discounts as a reduction of sales revenues.  During the quarter ended June 30, 2015, the Company recognized $1,145,082 in sales discounts.

   
Six Months Ended June 30,
   
%
 
   
2015
   
2014
   
change
 
Aoxing Pharmaceutical Products
       
%
         
%
       
Xin Aoxing Oleanolic Acid Capsule
 
$
9,112,452
     
43.2
 
$
10,918,075
     
33.7
%
   
(16.5
%)
Other Aoxing Pharmaceutical Products
   
3,117,727
     
14.8
   
9,619,223
     
29.7
%
   
(67.6
%)
Sub-total
   
12,230,179
     
58.0
   
20,537,298
     
63.4
%
   
(40.4
%)
                                         
Shaanxi Weinan Products
   
580,320
     
2.8
   
6,167,829
     
19.0
%
   
(90.6
%)
                                         
Hospital Products
   
9,419,564
     
44.7
   
5,674,891
     
17.5
%
   
66.0
%
                                         
Subtotal
 
$
22,230,063
     
105.4
 
$
32,380,018
     
100.0
%
   
(31.3
%)
                                         
Less provision for sales discounts
 
$
(1,145,082
)
   
(5.4
%)   
$
-
     
-
     
(100.0
%)
                                         
Net sales
 
$
21,084,981
     
100.0
 
$
32,380,018
     
100.0
%
   
(34.9
%)
 
 
For the six months ended June 30, 2015, total net sales decreased by approximately $11.3 million or 34.9% as compared to the same period in 2014.

The decrease in sales for Aoxing Pharmaceutical Products during the six month ended June 30, 2015 was in due part of the reduced sales of Xin Aoxing Oleanolic Acid Capsule in the first quarter of 2015 and reduced sales of Other Aoxing Pharmaceutical Products in the second quarter of 2015. These decreases are related to the reduced capacity resulting from the downtime incurred to maintain certain production lines.
 
The decline in sales of Shaanxi Weinan Products is related to the maintenance of the Shaanxi Weinan production facilities required to gain renewal of their GMP certificate. On June 25, 2015, the Shaanxi Weinan received the renewed certificate.
 
The Company experienced a general increase in demand for its subcontracting of prescription drug manufacturing services to a hospital during the six months ended June 30, 2015.

As mentioned above, during the six months end ended June 30, 2015, the Company recognized $1,145,082 in sales discounts.

Cost of sales

   
Three Months Ended June 30,
   
%
 
   
2015
   
2014
   
change
 
Aoxing Pharmaceutical Products
       
%
         
%
       
Xin Aoxing Oleanolic Acid Capsule
 
$
1,018,591
     
12.4
%
 
$
1,005,172
     
10.1
%
   
1.3
%
Other Aoxing Pharmaceutical Products
   
1,572,202
     
19.1
%
   
4,983,639
     
50.2
%
   
(68.5
%)
Sub-total
   
2,590,793
     
31.5
%
   
5,988,811
     
60.3
%
   
(56.7
%)
                                         
Shaanxi Weinan Products
   
136,004
     
1.7
%
   
1,432,573
     
14.4
   
(90.5
%)
                                         
Hospital Products
   
5,510,758
     
66.9
%
   
2,509,932
     
25.3
%
   
119.6
%
                                         
Total cost of sales
 
$
8,237,555
     
100.0
%
 
$
9,931,316
     
100.0
%
   
(17.1
%)
 
For the three months ended June 30, 2015, cost of sales decreased by approximately $1.7 million or 17.1%, as compared to the same period in 2014.  This decrease is correlated to the reduction in production and sales volume as a result of the maintenance of productions lines for Aoxing products and the renewal process of GMP certification as discussed in “Net Sales” above.
 
As expected, the Company’s relative decrease in the cost of sales as compared to decrease in sales was less because of fixed overhead such as such as depreciation that is allocated to cost of sales.

   
Six Months Ended June 30,
   
%
 
   
2015
   
2014
   
change
 
Aoxing Pharmaceutical Products
       
%
         
%
       
Xin Aoxing Oleanolic Acid Capsule
 
$
1,580,976
     
13.7
 
$
1,829,284
     
11.5
%
   
(13.6
%)
Other Aoxing Pharmaceutical Products
   
2,339,098
     
20.2
   
7,087,677
     
44.7
%
   
(67.0
%)
Sub-total
   
3,920,074
     
33.9
   
8,916,961
     
56.2
%
   
(56.0
%)
                                         
Shaanxi Weinan Products
   
403,334
     
3.5
   
2,860,041
     
18.0
%
   
(85.9
%)
                                         
Hospital Products
   
7,241,644
     
62.6
   
4,082,390
     
25.7
%
   
77.4
%
                                         
Total cost of sales
 
$
11,565,052
     
100.0
 
$
15,859,392
     
100.0
%
   
(27.1
%)
 
For the six months ended June 30, 2015, cost of sales decreased by approximately $4.3 million or 27.1%, as compared to the same period in 2014.  As mentioned in “Net Sales” above, the decrease in cost of sales was due to reduced production related to maintenance.
 
As mentioned above, the percentage decrease in the cost of sales was less than the percentage decrease in net sales because of fixed overhead such as depreciation that is allocated to cost of sales.
 
 
Gross Profit
 
   
Three Months Ended June 30,
 
   
2015
   
2014
 
   
Gross Profit
   
Product Gross Margin %
   
Gross Profit
   
Product Gross Margin %
 
Aoxing Pharmaceutical Products
                       
Xin Aoxing Oleanolic Acid Capsule
 
$
4,819,476
     
82.6
%
 
$
4,835,594
     
82.8
%
Other Aoxing Pharmaceutical products
   
537,179
     
25.5
%
   
1,664,090
     
25.0
%
 Sub-total
   
5,356,655
     
67.4
%
   
6,499,684
     
52.0
%
                                 
Shaanxi Weinan Products
   
17,921
     
11.6
%
   
1,776,562
     
55.4
%
                                 
Hospital Products
   
1,709,185
     
23.7
%
   
991,292
     
28.3
%
                                 
   
$
7,083,761
     
46.2
%
 
$
9,267,538
     
48.3
%
                                 
Less provision for sales discounts
 
$
(1,145,082
)
   
-
   
$
-
     
-
 
                                 
Total gross profit
 
$
5,938,679
     
41.9
%
 
$
9,267,538
     
48.3
%
 
Gross profit decreased by approximately $3.3 million or 48.3% for the three months ended June 30, 2015, as compared to the same period in 2014. The decrease in gross profit was primarily due to the decrease in sales volume. See “Net Sales” above.

The overall gross profit margin decreased in the first second 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 allocated to cost of sales. 

   
Six Months Ended June 30,
 
   
2015
   
2014
 
   
Gross Profit
   
Product Gross Margin %
   
Gross Profit
   
Product Gross Margin %
 
Aoxing Pharmaceutical Products