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| BSPM > SEC Filings for BSPM > Form 10-Q on 14-Aug-2012 | All Recent SEC Filings |
14-Aug-2012
Quarterly Report
The following discussion should be read in conjunction with our financial statements and the notes thereto which appear elsewhere in this report. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based on current expectations, which involve uncertainties. In some cases, you can identify forward-looking statements by terminology such as "anticipate," "estimate," "plan," "project," "predict," "potential," "continue," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," or the negative of these terms or other comparable terminology. All forward-looking statements included in this document are based on information available to the management on the date hereof. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors. Readers should also carefully review factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission.
You should read the following discussion and analysis in conjunction with our unaudited financial statements contained in this report as well as the audited financial statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Risk Factors" contained in our Annual Report on Form 10-K, as amended to date, for the fiscal year ended December 31, 2011. We undertake no obligation and do not intend to update, revise or otherwise publicly release any revisions to our forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.
Overview
Biostar Pharmaceuticals, Inc. ("we", the "Company" or "Biostar") was incorporated on March 27, 2007 in the State of Maryland. Our business operation is conducted in China primarily through our variable interest entity ("VIE"), Shaanxi Aoxing Pharmaceutical Co., Ltd. ("Aoxing Pharmaceutical"), which we control through contractual arrangements between Aoxing Pharmaceutical and our wholly owned subsidiary, Shaanxi Biostar Biotech Ltd. ("Shaanxi Biostar").
On March 28, 2010, we, through Shaanxi Biostar, entered into an agreement to acquire the assets of Xi'an Meipude Bio-Technology Co., Ltd., a Xi'an-based medical equipment manufacturer ("Meipude"), for Chinese Yuan Renminbi ("RMB") 7.85 million ($1.2 million), including certain assets registered to a family member of an original Meipude shareholder. We took control over the assets of Meipude on March 29, 2010. To facilitate the transfer of some of the assets, however, we were required to acquire all of the outstanding equity interests of Meipude, which we subsequently applied for deregistration on January 18, 2011.
In October 2011, Aoxing Pharmaceutical entered into a Share Transfer Agreement to acquire Shaanxi Weinan Huaren Pharmaceuticals, Ltd ("Shaanxi Weinan") from the holders of 100% of equity interests in Shaanxi Weinan. The aggregate purchase price is RMB61 million (approximately $9.55 million), in cash and payable in several tranches.
Shaanxi Weinan owns drug approvals and permits for a portfolio of 86 drugs and one health product, all of which, were added to the Company's current drug portfolio following the completion of this acquisition. The Company completed this acquisition on October 25, 2011, and the name of the acquired company changed to Shaanxi Weinan Aoxing Pharmaceuticals, LLC.
Our products also include six over-the-counter ("OTC") medicines, eight prescription-based pharmaceuticals, six health products and one medical device which are sold and distributed in over 25 provinces and provincial-level cities throughout China. Our best-selling product, Xin Ao Xing Oleanolic Acid Capsule ("Xin Ao Xing Capsule"), is a state-approved OTC drug for treatment of Hepatitis B.
Recent Developments
Reverse Common Stock Split
On April 3, 2012, the Company filed Articles of Amendment to the Company's Articles of Incorporation with the Secretary of State of the State of Maryland to effect a one-for-three reverse stock split of the issued and outstanding common stock of the Company (the "Reserve Split"). The Reverse Split became effective on April 3, 2012. The Reverse Split was duly approved by the Board of Directors of the Company without shareholder approval, in accordance with the authority conferred by Section 2-309(e)(2) of the Maryland General Corporation Law. Holders of the Company's common stock are deemed to hold one whole, post-split share of the Company's common stock for every three whole, pre-split shares of the Company's issued and outstanding common stock. Fractional share holdings are rounded up to the nearest whole number. At the market opening on April 4, 2012, the Company's common stock began trading on The NASDAQ Stock Market on a post-split adjusted basis. The Company's common stock continues to trade under the symbol "BSPM,", but is assigned a new CUSIP number.
Gel Capsule Related Developments and Effects on the Company's Sales
In April 2012, PRC State Food and Drug Administration (SFDA) launched an investigation of several capsule manufacturers based in Zhejiang, Hebei and Jiangxi provinces into their use of industrial gelatin, which contains impermissibly high chromium content. On May 25, 2012, following a nationwide inspection, SFDA authorities reported that 669 batches of gel capsules from 254 drug manufacturers in 28 provinces were found to have high chromium levels. The results of this inspection were publicly distributed in China, including publication on SFDA's website http://www.sda.gov.cn/WS01/CL0001. As a result, SFDA effectively suspended sales of gel capsules nationwide until the investigation was completed.
In May 2012, following an onsite inspection by the Xianyang State Food and Drug Administration (SFDA), samples from a batch of the Company's Xin Aoxing capsules were found to contain chromium content higher than edible gelatin. Specifically, samples from a batch of 150 cases of the Xin Aoxing capsules (each of the 150 cases contains 8,000 capsules), representing Biostar sales of approximately RMB1,188,000 or approximately $188,000 were also found to contain high levels of chromium, which capsules, in the Company's estimation, were sold in the market in mid-2011. The Company did not check the batch in question for the chromium levels at that time since PRC pharmaceutical companies were not required to test their gel capsule inventories and purchases for chromium levels in 2011.
As required by SFDA in April 2012, the Company purchased gel capsule inspection equipment to measure the chromium levels in gel capsules it used. The Company also undertook a thorough inspection of all samples of drugs sold and its current product inventory to ensure that all of the gel capsules it had purchased and currently uses comply with the SFDA chromium content requirements. In addition, the Company conducted checks of every batch of raw materials it uses in every production category and, except as discussed above, found no violations of the chromium content requirements. Further, the Company recalled all such affected capsules as promptly and thoroughly as possible, and imposed heightened quality control and assurance measures going forward.
On July 30, 2012, the SFDA approved the Company's resumption of sales of its gel capsules following a thorough inspection of raw materials used in every production category, all samples of drugs sold and the current product inventory. However, the suspension of sales of gel capsule products severely affected all China-based pharmaceutical companies that use gelatin capsules to manufacture their drugs. The Company was not immune to the industry-wide losses and, as discussed below, the Company's sales and overall results for the 2012 second quarter were similarly adversely affected. The Company has been taking a number of steps to restart sales of gel capsule drugs immediately following the SFDA approval, including, among others, engaging its employees to work overtime, adding a second shift, launching an aggressive advertising campaign to help improve consumer confidence, establishing incentives for the sales force in all of the distribution offices nationwide, and launching an innovating B2C call center to take order and provide hands-on sales support.
Results of Operations
Net Sales
As discussed in detail above, our sales of gel capsule products were severely affected. Our total sales declined approximately $17.8 million or 69%, and $17.1million or 42% for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. Sales from our flagship product Xin Aoxing Oleanolic Acid Capsule dropped approximately 83% and 53% for the three and six months ended June 30, 2012, respectively. Only two non-capsule products (Danshen Granule and Taohuasan Pediatrics Medicine) were not affected during the quarter and they counted for 33% and 17 % of the total sales for the three and six months ended June 30, 2012, compared to 9.6% and 10.3% the same periods last year. Our newly acquired Shaanxi Weinan facility brought in approximately 22% and 14% sales for the three and six months ended June 30, 2012, respectively. Shaanxi Weinan facility was acquired during the fourth quarter of 2011.
Three Months Ended June 30,
2012 2011
Drugs
Xin Aoxing Oleanolic Acid
Capsule $ 2,896,049 35.5 % $ 17,200,920 66.3 %
Gan Wang Compound
Paracetamol Capsule 209,854 2.6 % 1,828,638 7.1 %
Tianqi Dysmenorrhea
Capsule 238,865 2.9 % 1,990,872 7.7 %
Danshen Granule 1,146,433 14.0 % 1,144,017 4.4 %
Taohuasan Pediatrics
Medicine 1,499,386 18.4 % 1,337,277 5.2 %
Subtotal 5,990,587 73.4 % 23,501,724 90.7 %
Health products
Tangning Capsule 71,810 0.9 % 708,431 2.7 %
Yizi Capsule 225,362 2.7 % 1,310,901 5.1 %
Shengjing Capsule 30,113 0.4 % 276,751 1.1 %
Aoxing Ointment 56,735 0.7 % 114,327 0.4 %
Subtotal 384,020 4.7 % 2,410,410 9.3 %
Medical device
Hernia belt 4,596 0.1 % - -
Shaanxi Weinan Products 1,780,045 21.8 % - -
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Total sales $ 8,159,248 100 % $ 25,912,134 100 %
Six Months Ended June 30,
2012 2011
Drugs
Xin Aoxing Oleanolic Acid
Capsule $ 13,284,058 55.2 % $ 28,268,329 68.6 %
Gan Wang Compound
Paracetamol Capsule 1,085,121 4.5 % 2,667,108 6.4 %
Tianqi Dysmenorrhea
Capsule 1,160,793 4.8 % 2,964,976 7.2 %
Danshen Granule 1,711,285 7.1 % 1,756,873 4.3 %
Taohuasan Pediatrics
Medicine 2,453,314 10.2 % 2,458,812 6.0 %
Subtotal 19,694,571 81.8 % 38,116,098 92.5 %
Health products
Tangning Capsule 285,049 1.2 % 928,033 2.3 %
Yizi Capsule 435,627 1.8 % 1,606,209 3.9 %
Shengjing Capsule 210,787 0.9 % 408,690 1.0 %
Aoxing Ointment 75,397 0.3 % 142,031 0.3 %
Subtotal 1,006,860 4.2 % 3,084,963 7.5 %
Medical device
Hernia belt 13,660 0.1 % - -
Shaanxi Weinan Products 3,343,698 13.9 % - -
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Total revenue $ 24,058,789 100 % $ 41,201,061 100 %
Cost of sales
Total cost of sales decreased by about $3.7 million or 51%, and $3.2 million or 27% for the three and six months ended June 30, 2012, respectively, compared to the same period last year. The decline in sales of capsule products was the mainly reason for the cost decrease. Two non-capsule products counted for approximately 50% and 31% of the total costs for the three and six months ended June 30, 2012, respectively. Cost from Weinan facility counted for approximately 23% and 18% of total cost for the three and six months ended June 30, 2012, respectively.
Three Months Ended June 30,
2012 2011
Drugs
Xin Aoxing Oleanolic Acid
Capsule 551,328 15.4 % 2,626,532 36.1 %
Gan Wang Compound
Paracetamol Capsule 112,870 3.1 % 964,486 13.2 %
Tianqi Dysmenorrhea
Capsule 142,122 4.0 % 1,103,916 15.2 %
Danshen Granule 1,066,361 29.7 % 975,272 13.4 %
Taohuasan Pediatrics
Medicine 724,814 20.2 % 591,911 8.1 %
Subtotal 2,597,495 72.4 % 6,262,117 86.0 %
Health products
Tangning Capsule 35,160 1.0 % 226,276 3.1 %
Yizi Capsule 74,174 2.0 % 501,735 6.9 %
Shengjing Capsule 23,494 0.7 % 215,254 3.0 %
Aoxing Ointment 39,263 1.1 % 77,203 1.0 %
Subtotal 172,091 4.8 % 1,020,468 14.0 %
Medical
device
Hernia belt 3,104 0.1 % - -
Shaanxi Weinan Products 813,553 22.7 % - -
Total cost 3,586,243 100 % 7,282,585 100 %
Six Months Ended June 30,
2012 2011
Drugs
Xin Aoxing Oleanolic Acid
Capsule $ 2,686,835 31.0 % $ 4,252,577 35.8 %
Gan Wang Compound
Paracetamol Capsule 585,586 6.8 % 1,409,402 11.9 %
Tianqi Dysmenorrhea
Capsule 664,150 7.7 % 1,640,030 13.8 %
Danshen Granule 1,550,823 17.9 % 1,494,737 12.6 %
Taohuasan Pediatrics
Medicine 1,140,766 13.2 % 1,764,885 14.8 %
Subtotal 6,628,160 76.6 % 10,561,631 88.9 %
Health products
Tangning Capsule 103,539 1.2 % 296,385 2.5 %
Yizi Capsule 154,695 1.8 % 614,753 5.2 %
Shengjing Capsule 164,482 1.9 % 317,618 2.7 %
Aoxing Ointment 51,865 0.6 % 95,911 0.7 %
Subtotal 474,581 5.5 % 1,324,667 11.1 %
Medical
device
Hernia belt 9,531 0.1 % - -
Shaanxi Weinan Products 1,537,121 17.8 % - -
Total cost $ 8,649,393 100 % $ 11,886,298 100 %
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Gross Profit
Total gross profit declined by approximately $14.1 million or 75%, and $13.9 million or 47% for the three and six months ended June 30, 2012 respectively, compared to the same periods in 2011. Gross profits of Xin Aoxing Oleanolic Acid Capsule decreased by approximately $12.2 million or 84%, and $13.4 million or 56% for the three and six months ended June 30, 2012, respectively. Shaanxi Weinan products contributed approximately $1.0 million or 21%, and $1.8 million or 12% of the total gross profit for the three and six months ended June 30, 2012.Total gross margin was 56% and 64% for the three and months ended June 30, 2012 compared to 72% and 71% at the same periods last year. Gross margins for Shaanxi Weinan products were kept at 54% for both the three and six months ended June 30, 2012.
Three Months Ended June 30,
2012 2011
Drugs
Xin Aoxing Oleanolic Acid
Capsule 2,344,721 51.3 % 14,574,388 78.2 %
Gan Wang Compound
Paracetamol Capsule 96,984 2.1 % 864,152 4.6 %
Tianqi Dysmenorrhea
Capsule 96,744 2.1 % 886,956 4.8 %
Danshen Granule 80,070 1.8 % 168,745 0.9 %
Taohuasan Pediatrics
Medicine 774,572 16.9 % 745,366 4.0 %
Subtotal 3,393,091 74.2 % 17,239,607 92.5 %
Health products
Tangning Capsule 36,650 0.8 % 482,155 2.6 %
Yizi Capsule 151,189 3.3 % 809,166 4.4 %
Shengjing Capsule 6,619 0.1 % 61,497 0.3 %
Aoxing Ointment 17,471 0.4 % 37,124 0.2 %
Subtotal 211,929 4.6 % 1,389,942 7.5 %
Medical device
Hernia belt 1,493 0.1 % - -
Shaanxi Weinan Products 966,492 21.1 % - -
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Total gross profit 4,573,005 100 % 18,629,549 100 %
Six Months Ended June 30,
2012 2011
Drugs
Xin Aoxing Oleanolic Acid
Capsule $ 10,597,223 68.8 % $ 24,015,752 81.9 %
Gan Wang Compound
Paracetamol Capsule 499,535 3.2 % 1,257,706 4.3 %
Tianqi Dysmenorrhea
Capsule 496,643 3.2 % 1,324,946 4.5 %
Danshen Granule 160,462 1.1 % 262,136 0.9 %
Taohuasan Pediatrics
Medicine 1,312,548 8.5 % 693,927 2.4 %
Subtotal 13,066,411 84.8 % 27,554,467 94.0 %
Health products
Tangning Capsule 181,510 1.2 % 631,648 2.2 %
Yizi Capsule 280,932 1.8 % 991,456 3.4 %
Shengjing Capsule 46,305 0.3 % 91,072 0.3 %
Aoxing Ointment 23,532 0.2 % 46,120 0.1 %
Subtotal 532,279 3.5 % 1,760,296 6.0 %
Medical device
Hernia belt 4,129 0.0 % - -
Shaanxi Weinan Products 1,806,577 11.7 % - -
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Total gross profit $ 15,409,396 100 % $ 29,314,763 100 %
Selling, General and Administrative, and Research and Development Expenses
Three Months Ended June 30,
2012 2011
Amount % of Net Sales Amount % of Net Sales % of Change
Selling expenses $ 6,732,710 83 % $ 10,459,879 40 % -36 %
General and
administrative expenses 1,383,843 17 % 2,219,350 9 % -38 %
Research and development
expenses $ 789,776 10 % - - 100 %
Six Months Ended June 30,
2012 2011
Amount % of Net Sales Amount % of Net Sales % of Change
Selling expenses $ 12,489,444 52 % $ 16,516,904 40 % -24 %
General and
administrative expenses 2,484,549 10 % 3,119,376 8 % -20 %
Research and development
expenses $ 1,580,903 7 % - - 100 %
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Selling expenses decreased by approximately $3.7 million or 36%, and $4.0 million or 24% for the three and six months ended June 30, 2012, respectively, compared to the same periods last year, due to the lower net sales. Advertising expenses were approximately $4.4 million and $7.2 million for the three and six months ended June 30, 2012 respectively, compared to approximately $6.1 million and $9.2 million for the three and six months ended June 30, 2011, respectively.
General and administrative expenses decreased by approximately $0.8 million or 38%, and $0.6 million or 20% for the three and six months ended June 30, 2012, respectively, compared to the same periods last year. General and administrative expenses from Shaanxi Weinan plant accounted for 30% of the total G&A expenses for the first six months of the year.
Research and development expenses accounted for 10% and 7% of total net sales for the three and six months ended June 30, 2012, respectively. The Company did not incur research and development expenses for the same periods last year. During the year 2011, the Company deposited Chinese Yuan Renminbi ("RMB") 20,000,000 (approximately $3.2 million) to a university as part of a four year research and development contract to develop a new drug for the treatment cardiovascular disease. The Company recorded it as a long-term deposit at December 31, 2011. During the first quarter of the year 2012, the Company evaluated the progress of the clinic tests (stage one and stage two) of the research and development project and expected the tests would be completed within a year. In addition, the Company agrees with the university that such deposits paid would be utilized as a reimbursement of research and development expenses incurred instead of purchase acquisition provided that the Company's total commitment and benefits in respect of the project would be remained unchanged. Accordingly, the Company reclassified the long-term deposits into current assets and started to amortize the research and development expense during the year 2012. As of June 30, 2012, $1,580,903 was amortized as expense, and $1,582,353 was reclassified as prepaid research and development expenses in current assets.
Stock-based compensation
The Company's Board adopted a Stock Option Incentive Plan in August 2009 and August 2011, respectively. The values of options granted under the Plan are expensed over the term of their respective vesting periods. Stock awards are valued using the market price on or around the date the shares were awarded and included as a period compensation expense. Consequently, we incurred $28,076 and $71,358 in stock-based compensation for the three months and six months ended June 30, 2012, respectively. During the second quarter 2012, the Company awarded one of its employees 24,000 shares of stock option and recorded approximately $6,000 compensation expense for the quarter.
Interest Expense
We incurred interest expense of $17,099 and $32,134 for the three and six months ended June 30, 2012 respectively, compared to interest expense of $7,387 for both the three and six months ended June 30, 2011.
Income Tax Expense (Benefits)
Due to the loss of the second quarter this year, the Company recorded approximately $2.7 million and $1.6 million income tax benefits for the three and six months ended June 30, 2012, mainly resulted from approximately $ 7.9 million credits to accounts receivable due to negative publicity caused by gel capsule incident in China during the second quarter of the year.
The uniform corporate income tax rate is 25% in China. Provisions for income tax expenses were approximately $1.9 million and $2.9 million for the three and six months ended June 30, 2011, respectively.
Liquidity and Capital Resources
As of June 30, 2012, we had cash and cash equivalents of approximately $18.7 million. We believe our existing cash and cash equivalents will be sufficient to maintain our operations at present level for at least the next twelve months.
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 . . .
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