Edgar Filing: Biostar Pharmaceuticals, Inc.

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20-549

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, 2009

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ______________ to _____________

Commission file number: 333-147363

BIOSTAR PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Maryland	20-5101287
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

011-86- 29-33686638

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed 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 ¨ 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” ion 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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

As of May 13, 2009, there are 23,240,899 shares of $0.001 par value common stock issued and outstanding.

FORM 10-Q

BIOSTAR PHARMACEUTICALS, INC.

INDEX

		Page
PART I	FINANCIAL INFORMATION	3

	Item 1. Financial Statements ( Unaudited)	3

	Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and December 31, 2008	F-1

	Consolidated Statements of Income for the Three Months Ended March 31, 2009 and 2008 (Unaudited)	F-2

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008 (Unaudited)	F-3

	Notes to Consolidated Financial Statements as of March 31, 2009 (Unaudited)	F-4

	Item 2. Management’s Discussion and Analysis of Financial Condition or Plan of Operation	4

	Item 3. Quantitative and Qualitative Disclosures About Market Risk.	13

	Item 4. Controls and Procedures	13

PART II	OTHER INFORMATION	14

	Item 1. Legal Proceedings.	14

	Item 1A. Risk Factors.	14

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	14

	Item 3. Defaults Upon Senior Securities.	14

	Item 4. Submission of Matters to a Vote of Security Holders.	14

	Item 5. Other Information.	14

	Item 6. Exhibits	14

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

BIOSTAR PHARMACEUTICALS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Contents

		Page(s)

Financial Statements

	Consolidated Balance Sheets-Unaudited		F-1

	Consolidated Statements of Operations-Unaudited		F-2

	Consolidated Statements of Cash Flows-Unaudited		F-3

	Notes to Consolidated Financial Statements-Unaudited		F-4

BIOSTAR PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

	March 31,		December 31,
	2009		2008
	(Unaudited)

ASSETS
Current Assets
Cash and cash equivalents	$	694,645	$	758,316
Accounts receivable		13,838,976		11,700,841
Inventories		304,605		315,745
Prepaid expenses and other receivables		3,324,594		2,926,505
Total Current Assets		18,162,820		15,701,407

Property and equipment, net		5,845,925		5,930,467

Intangible assets, net		7,284,037		7,365,765

Total Assets	$	31,292,782	$	28,997,639

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable and accrued expenses	$	2,573,483	$	2,191,976
Customer advances		2,559,308		2,592,250
Value-added tax payable		564,814		527,103
Income tax payable		480,221		413,205
Total Current Liabilities		6,177,826		5,724,534

Commitment

Stockholders' Equity
Series A, convertible preferred stock, $0.001 par value, 5,000,000 shares authorized,
None issued and outstanding		-		-
Undesignated preferred stock, $.001 par value, 5,000,000 shares authorized,
None issued and outstanding		-		-
Common stock, $.001 par value, 100,000,000 shares authorized,
23,240,899 shares issued and outstanding at March 31, 2009 and December 31, 2008		23,241		23,241
Additional paid-in capital		10,430,168		10,430,168
Statutory reserves		1,776,634		1,585,383
Retained earnings		12,634,436		10,996,655
Accumulated other comprehensive income		250,477		237,658
Total Stockholders' Equity		25,114,956		23,273,105

Total Liabilities and Stockholders' Equity	$	31,292,782	$	28,997,639

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

F-1

BIOSTAR PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended
	March 31,
	2009		2008

Sales, net	$	7,447,664	$	6,810,259

Cost of sales		2,658,807		2,638,679

Gross profit		4,788,857		4,171,580

Selling, general and administrative expenses		2,479,984		2,052,678

Income from operations		2,308,873		2,118,902

Other Income (Expense)
Interest income		310		79
Interest expense		-		(13,953	)
Total other Income (Expense)		310		(13,874	)

Income before income taxes		2,309,183		2,105,028

Provision for income taxes		480,151		283,898

Net income	$	1,829,032	$	1,821,130

Net income per common share
Basic	$	0.08	$	0.08
Diluted	$	0.08	$	0.08

Weighted average common shares outstanding
Basic		23,240,899		22,152,311
Diluted		23,509,458		23,240,899

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

F-2

BIOSTAR PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended
	March 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,829,032		$	1,821,130
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		166,269			157,299
Provision for doubtful accounts		-			87,246
Changes in operating assets and liabilities:
Accounts receivable		(2,123,128	)		(2,868,440	)
Inventories		11,535			(101,963	)
Prepaid expenses and other receivables		(387,054	)		(320,195	)
Accounts payable and accrued expenses		371,398			366,813
Customer advances		(36,193	)		-
VAT tax payable		37,044			169,682
Income tax payable		66,487			93,201
Net cash provided by (used in) operating activities		(64,610	)		(595,227	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		-			(2,195	)
Acquisitions of land use right		-			-
Net cash provided by (used in) Investing activities		-			(2,195	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by (used in) financing activities		-			-

Effect of exchange rate changes on cash and cash equivalents		939			80,890

Net Increase (Decrease) in cash and cash equivalents		(63,671	)		(516,532	)

Cash and cash equivalents, beginning balance		758,316			2,286,419

Cash and cash equivalents, ending balance	$	694,645		$	1,769,887

SUPPLEMENTAL DISCLOSURES:
Interest payments	$	-		$	13,953
Income tax payments	$	413,665		$	190,698

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

F-3

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 1 - ORGANIZATION

Biostar Pharmaceuticals, Inc. (“Biostar” or “the Company”) was incorporated in the State of Maryland on March 27, 2007. On June 15, 2007, Biostar formed Shaanxi Biostar Biotech Ltd (“Shaanxi Biostar” or the “WFOE). 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 (the “Agreements”) with Shaanxi Aoxing Pharmacy Co., Ltd ("Aoxing Pharmaceutical") and its shareholders (the “Transaction”). Aoxing Pharmaceutical is a corporation formed under the laws of the PRC. According to these Agreements, Shaanxi Biostar acquired management control of Aoxing Pharmaceutical whereby Shaanxi Biostar is entitled to all of the net profits of Aoxing Pharmaceutical as a management fee, and is obligated to fund Aoxing Pharmaceutical’s operations and pay all of the debts. In exchange for entering into the Agreements, on November 1, 2007, the Company issued 19,832,311 shares of its common stock to Aoxing Pharmaceutical owners, representing approximately 90% of the Company’s common stock outstanding after the Transaction. Consequently, the owners of Aoxing Pharmaceutical own a majority of the Company's common stock immediately following the Transaction, therefore, the Transaction is being accounted for as a "reverse acquisition", and Aoxing Pharmaceutical is deemed to be the accounting acquirer in the reverse acquisition.

These contractual arrangements completed on November 1, 2007 provide that Shaanxi Biostar has controlling interest in Aoxing Pharmaceutical as defined by FASB Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN 46R”), an Interpretation of Accounting Research Bulletin No. 51, 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”).

The Company, through its subsidiary and exclusive contractual arrangement with Aoxing Pharmaceutical, is engaged in the business of discovering, developing, manufacturing and marketing of over-the-counter (“OTC”) and prescription pharmaceutical products as well as medical supplement products which include capsules, granules and powder type medicines for a variety of diseases and conditions such as hepatitis, gynecopathy and various male diseases 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.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its subsidiary and variable interest entity (“VIE”) for which the Company is the primary beneficiary. All inter-company accounts and transactions have been eliminated in consolidation. The Company has adopted FIN 46R which requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns.

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

F-4

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Shaanxi Biostar has the full right to control and administrate the financial affairs and daily operation of Aoxing Pharmaceutical and has the right to manage and control all assets of Aoxing Pharmaceutical. The equity holders 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 was assigned all voting rights of Aoxing Pharmaceutical and has the right to appoint all directors and senior management personnel of Aoxing Pharmaceutical. The equity holders of Aoxing Pharmaceutical possess no substantive voting rights.

·	Shaanxi Biostar will provide financial support if Aoxing Pharmaceutical requires additional funds to maintain its operations and to repay its debts.

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

Aoxing Pharmaceutical is wholly owned by the majority shareholders of the Company. The capital provided to Aoxing Pharmaceutical by the Company was recorded as interest-free loan to Aoxing Pharmaceutical. There was no written note to this loan and the loan is not interest bearing and was eliminated during consolidation. Under various contractual agreements, the shareholders of Aoxing Pharmaceutical are required to transfer their ownership to the Company’s subsidiary in China when permitted by 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 shareholders of Aoxing Pharmaceutical have pledged their shares in Aoxing Pharmaceutical as collateral to secure these contractual arrangements.

Foreign Currency

The Company’s reporting currency is the U.S. dollar. The Company’s operation in China uses Chinese Yuan Renminbi (CNY) as its functional currency. The financial statements of the subsidiary are translated into U.S. Dollars (USD) in accordance with Statement of Financial Accounts Standards (SFAS) No. 52, Foreign Currency Translation. According to the Statement, 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 SFAS No. 130, Reporting Comprehensive Income as a Component of Shareholders Equity. Foreign exchange transaction gains and losses are reflected in the income statement. During the three months ended March 31, 2009, the foreign currency translation adjustments to the Company’s comprehensive income were $12,819.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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.

F-5

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

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.

Accounts Receivable

The Company maintains reserves 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 reserves. Terms of the sales vary. Reserves are recorded primarily on a specific identification basis. Allowance for doubtful accounts amounted to $134,958 and $134,789 as at March 31, 2009 and December 31, 2008, respectively.

Inventories

Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The 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 consist of the following:

	March 31,		December 31,
	2009		2008

Raw materials	$	246,553	$	29,387
Work in process		24,248		8,597
Finished goods		33,804		277,761
	$	304,605	$	315,745

F-6

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property, Plant & 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. As the real property is situated on the land with 50 years of land use rights, thus the 50-year-life is used as the estimated life of real property. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:

Real property	50 years
Machinery & equipment	15 years
Leasehold improvements	10 years
Computers & office equipment	5 years

Property, plant & equipment consist of the following:

	March 31,			December 31,
	2009			2008

Real property	$	4,393,371		$	4,393,371
Machinery & equipment		541,063			541,063
Leasehold improvements		1,946,831			1,946,831
Furniture & fixtures		62,982			62,982
Vehicle		19,437			19,437
		6,963,684			6,963,684
Less: Accumulated depreciation		(1,117,759	)		(1,033,217	)
	$	5,845,925		$	5,930,467

Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from ten to fifty years. Management evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No impairments of intangible assets have been identified during any of the periods presented. The land use rights will expire in 2056 and 2058. The proprietary technologies were contributed by four shareholders of the Company and relate to the production of the Company's five state approved drugs. All of the Company’s intangible assets are subject to amortization with estimated lives of:

Land use right	50 years
Proprietary technologies	10 years

F-7

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

	March 31,			December 31,
	2009			2008

Land use right	$	6,478,769		$	6,478,769
Proprietary technologies		1,511,544			1,511,544
		7,990,313			7,990,313
Less: Accumulated amortization		(706,276	)		(624,548	)
	$	7,284,037		$	7,365,765

The estimated future amortization expenses related to intangible asset as of March 31, 2009 are as follows:

Years Ending December 31,
2009, nine months			245,200
2010			326,900
2011			326,900
2012			326,900
2013			326,900
Thereafter			5,731,237

Long-Lived Assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a Disposal of a Segment of a Business. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of March 31, 2009 there were no significant impairments of its long-lived assets.

Fair Value of Financial Instruments

Statement of financial accounting standard No. 107, Disclosures about fair value of financial instruments, requires that the Company discloses estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

Value Added Tax Payable

The Company is subject to a value added tax rate of 17% on product sales by the Peoples Republic of China. Value added tax payable is computed net of value added tax paid on purchases for all sales in the Peoples Republic of China.

F-8

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition

The Company’s revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. 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 collectibility 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.

Stock-Based Compensation

In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights.

In December 2004, the FASB issued FASB Statement No. 123R ("SFAS 123R"), "Share-Based Payment, an Amendment of FASB Statement No. 123". SFAS 123R requires companies to recognize in the statement of operations the grant date fair value of stock options and other equity-based compensation issued to employees. SFAS 123R is effective beginning in the Company's first quarter of fiscal 2006.

The Company did not issue any stock options to employees during the three months ended March 31, 2009, therefore pro forma disclosures are not required.

Advertising

Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred.

Income Taxes

The Company utilizes SFAS No. 109, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007 The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

F-9

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Net Income Per Share

Basic net income per share is computed on the basis of the weighted average number of common shares outstanding during the period.

Diluted net income per share is computed on the basis of the weighted average number of common shares and common share equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted net income per share are excluded from the calculation.

Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

Comprehensive income

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income, foreign currency translation adjustments.

Statement of Cash Flows

In accordance with SFAS No. 95, Statement of Cash Flows, cash flows from the Company’s operations is based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in China. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

Segment Reporting

Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosure about Segments of an Enterprise and Related Information requires use of the management approach model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

For the Company, the reportable business segments are based on products.

F-10

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent accounting pronouncements

On May 8, 2008, FASB issued Statement of Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles, which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. With the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature. The Company is currently assessing the impact of SFAS No. 162 on its financial position and results of operations.

In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. Management does not expect the impact of this adoption to be material.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. The impact of the adoption of SFAS 141R on the Company’s financial position, results of operations will largely be dependent on the size and nature of the business combinations completed after the adoption of this statement.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective for fiscal years beginning October 1, 2009. The Company does not expect the impact of the adoption of SFAS 160 to be material.

F-11

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. This Statement improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded statues in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements.

A brief description of the provisions of this Statement

The date that adoption is required

The date the employer plans to adopt the recognition provisions of this Statement, if earlier.

The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management does not expect the impact of this adoption to be material.

Note 3 – PREPAID EXPENSES AND OTHER RECEIVABLES

The Company made a deposit for acquiring 8.6 acres land located in Xi'an for building a raw material processing plant. The deposit amount was the total land cost of approximately $2.92 million (RMB 20,000,000).

Note 4 – STOCKHOLDERS’ EQUITY

Series A Convertible Preferred Stock

Between May 29, 2007 and June 4, 2007, the Company raised $725,000 from two investors in a private placement of its Series A Convertible Preferred Stock ($0.001 par value) at a purchase price of $10.00 per unit, for a unit consisting of one share of Preferred Stock and one Warrant.

The Series A preferred stock was not entitled to any dividends. The Series A Preferred Stock has no voting rights except that the approval of the holders of at least 51% of the Series A Preferred Stock is required for the authorization, creation, or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking equal or prior to the Series A Preferred; or the amendment, alteration, or repeal of any of the provisions of the Articles of Incorporation of the corporation which would alter or change the powers, preferences, or special rights of the shares of the Series A Preferred so as to affect them adversely.

Each share of Series A Preferred Stock is convertible into shares of common stock at the option of the holder at a conversion price of $.67 per share. The aggregate number of shares of common stock which may be issued upon conversion of the Series A Preferred Stock shall be no more than 2 million shares.

F-12

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 4 – STOCKHOLDERS’ EQUITY (CONTINUED)

Upon completion of the conversion of the Series A Preferred Stock into common stock, the Company will record a deemed dividend and as an increase in additional paid-in capital, the intrinsic value of the beneficial conversion feature (the "BCF"). The intrinsic value of the BCF will be the difference between the fair value of the common stock received upon conversion and the amount of proceeds to be allocated to the preferred stock. The $725,000 proceeds received were allocated to the preferred stock and warrants based on their relative fair values. The warrants were valued using the Black-Scholes model and recorded in additional paid-in capital.

On October 20, 2008, the 72,500 shares of Series A Convertible Preferred Stock issued and outstanding on that date were converted into 1,088,588 shares of common shares. In connection with the conversion, the Company recorded a deemed dividend of $1,462,240 for the beneficial conversion feature embedded in the preferred stock for the year ended December 31, 2008.

Undesignated Preferred Stock

The Blank Check Preferred Stock may be issued from time to time in one or more classes or series.

Common stock

At March 31, 2009, the Company has 100,000,000 shares of common stock authorized and 23,240,899 shares issued and outstanding at par value $0.001 per share.

Warrants

The Company has issued warrants to purchase its common stock in the 2007 private placement of Series A Convertible Preferred Stock. The warrants are equity classified and amounts attributable to the warrants are classified within additional paid-in capital.

The following table summarizes the activity for the warrants for the three months ended March 31, 2009

			Weighted
	Underlying		Average
	Shares		Exercise Price
Warrants outstanding, December 31, 2008		1,088,588	$	1.00
Issued/(exercised)		-		-
Warrants outstanding, March 31, 2009		1,088,588	$	1.00

Exercisable as of March 31, 2009		1,088,588	$	1.00

F-13

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

NOTE 5 - 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,
	2009		2008

Basic net income per share:
Numerator:
Net income used in computing basic net income per share	$	1,829,032	$	1,821,130
Net income applicable to common shareholders	$	1,829,032	$	1,821,130

Denominator:
Weighted average common shares outstanding		23,240,899		22,152,311
Basic net income per share	$	0.08	$	0.08

Diluted net income per share:
Numerator:
Net income used in computing diluted net income per share	$	1,829,032	$	1,821,130
Net income applicable to common shareholders	$	1,829,032	$	1,821,130

Denominator:
Weighted average common shares outstanding		23,240,899		22,152,311
Weighted average effect of dilutive securities:
Convertible preferred stocks		-		1,088,588
Stock warrants		268,559		-
Shares used in computing diluted net income per share		23,509,458		23,240,899
Diluted net income per share	$	0.08	$	0.08

Note 6 - INCOME TAXES

The Company was incorporated in the United States of America and has operations in two tax jurisdictions - the United States of America (“USA”) and the PRC. For the operation in the USA, the Company has incurred net accumulated operating losses for income tax purposes. The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, the Company has provided full valuation allowance for the deferred tax assets arising from the losses in the United States as of December 31, 2008. The Company generated substantially all of its net income from its PRC operations for the three months ended March 31, 2009 and has recorded income tax provision for the period.

United States of America

As of March 31, 2009, the Company had federal and state net operating loss carryforwards of approximately $132,020 available to offset future taxable income in the USA. The net operating loss carryforwards will expire, if unused, in varying amounts through the year ending December 31, 2029. The deferred tax assets for the USA operation at March 31, 2009 consists mainly of net operating loss carryforwards and for which a full valuation allowance has been provided, as the management believes it is more likely than not that these assets will not be realized in the future.

F-14

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 6 - INCOME TAXES (CONTINUED)

The following table sets forth the significant components of the net deferred tax assets for operation in the USA as of March 31, 2009 and December 31, 2008:

	March 31,			December 31,
	2009			2008

Deferred tax assets:
Net operating loss carryforwards	$	51,000		$	50,200
Total deferred tax assets		51,000			50,200
Less: valuation allowance		(51,000	)		(50,200	)
Net deferred tax assets	$	-		$	-

China

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

The Company’s VIE is a high-tech enterprise and under PRC Income Tax Laws, it is entitled to a two-year tax exemption followed by three years with a 50% reduction in the tax rate, commencing the first profitable year. The VIE’s application for an income tax reduction was accepted on December 4, 2005 by the Tax Department of Xian Yang Government. That is a reduction of income tax payable by 50% from January 1, 2007 to December 31, 2009 and an exemption from income tax from January 1, 2005 to December 31, 2006. The deferred tax assets for the Company’s China subsidiary and VIE were immaterial at March 31, 2009.

The income tax expenses for China operation consist of the following:

	Three Months Ended March 31,
	2009		2008

Income tax provision	$	480,151	$	283,898
Change in deferred tax assets		-		-
Change in valuation allowance		-		-
Income tax expenses	$	480,151	$	283,898

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, 2009 and 2008, 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.

F-15

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 7 - STATUTORY RESERVES

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

Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. 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, 2009 and December 31, 2008, the Company’s VIE had allocated $1,776,634 and $1,585,383 to these non-distributable reserve funds, respectively.

Note 8 - OTHER COMPREHENSIVE INCOME

Balance of related after-tax components comprising accumulated other comprehensive income (loss) included in stockholders’ equity at March 31, 2009 and December 31, 2008 were as follows:

	March 31,		December 31,
	2009		2008

Accumulated other comprehensive income (loss), beginning of period	$	237,658	$	(53,517	)
Change in cumulative translation adjustment		12,819		291,175
Accumulated other comprehensive income, end of period	$	250,477	$	237,658

Note 9 - COMMITMENT

Lease Agreements

The Company utilizes office space provided by one of its directors at no cost.

Note 11 - SEGMENT INFORMATION

The following is a summary of revenues by reportable business:

	Three Months Ended
	March 31,
	2009		2008

Xin Aoxing Oleanolic Acid Capsule	$	3,836,680	$	3,887,380
Taohuasan Pediatrics Medicine		922,369		830,948
Gan Wang Compound Paracetamol Capsule		776,555		724,790
Tianqi Dysmenorrhea Capsule		1,100,340		733,367
Danshen Granule		784,756		633,774
Healthcare supplement products		26,964		-

	$	7,447,664	$	6,810,259

F-16

BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

UNAUDITED

Note 12 - CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS

The Company’s major operations are carried out in the PRC, therefore the Company is subject to the risks not typically associated with entities operating in the United States of America. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC's economy. All of the following risks may impair the Company’s business operations. If any of the following risks actually occurs, the Company’s business, financial condition or results of operations could be materially adversely affected. In such case, investor may lose all or part of the investment. Additional risks include:

The Company may not be able to adequately protect and maintain its intellectual property.

The Company may not be able to obtain regulatory approvals for its products.

The Company may have difficulty competing with larger and better financed companies in the same sector. New legislative or regulatory requirements may adversely affect the Company’s business and operations. The Company is dependant on certain key existing and future personnel.

The Company’s growth is dependent on its ability to successfully develop, market, or acquire new drugs. The Company may be subject to product liability claims in the future.

Changes in the laws and regulations in the PRC may adversely affect the Company’s ability to conduct its business.

The Company may experience barriers to conducting business due to governmental policy.

Capital outflow policies in the PRC may hamper the Company’s ability to remit income to the United States.

Fluctuation of the Renminbi could materially affect the Company’s financial condition and results of operations.

The Company may face obstacles from the communist system in the PRC.

The Company may have difficulty establishing adequate management, legal and financial controls in the PRC.

Trade barriers and taxes may have an adverse affect on the Company’s business and operations.

There may not be sufficient liquidity in the market for the Company’s securities in order for investors to sell their securities.

F-17

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.

OVERVIEW

Biostar Pharmaceuticals, Inc. (“We”, the “Company” or “Biostar”) was incorporated on March 27, 2007, under the laws of the State of Maryland. Our business operation in the People’s Republic of China (“PRC”) is conducted primarily through our wholly-owned subsidiary, Shaanxi Biostar Biotech Ltd., and our variable interest entity (“VIE”), Shaanxi Aoxing Pharmaceutical Co., Ltd (“Aoxing Pharmaceutical”).

Aoxing Pharmaceutical currently has five state- approved drugs on the market as listed below, with additional nine drugs in development, and derives all of its revenues in China.

Xin AoXing Oleanolic Acid Capsule: an over-the-counter (“OTC”) drug that treats chronic hepatitis B disease.

Compound Paracetamol and Amantadine Hydrochloride Capsule: an OTC drug that treats common cold.

Danshen Granule: a prescription drug treating coronary heart disease, myocardditis and angina pectoris.

Pediatrics Medicine: a prescription drug used for treating children’s cough and respiratory tract infection.

Tianqi Dysmenorrhea: an OTC traditional Chinese medicine for treating dysmenorrhea.

The best-selling product of Aoxing Pharmaceutical, Xin Aoxing Oleanolic Acid Capsule, is the only non-prescription drug in the PRC that treats hepatitis and the only oral intake hepatitis treatment product licensed for sale by the PRC government. Xin Aoxing Oleanolic Acid Capsule meets the requirements of the PRC’s “Chronic Hepatitis Prevention Guide” and is listed as a designated quality product for Hepatitis B in the PRC.

Aoxing Pharmaceutical currently has three patents pending approval. Its marketing network covers 21 provinces and it sells products in more than 30 provinces throughout the PRC.

RECENT DEVELOPMENTS

We started an acquisition of 8.6 acres land located in Xi'an in October 2008 and will complete the acquisition procedure in mid-2009. We are planning for the construction of a pharmaceutical raw material processing plant on the land acquired,which is expected to be operational by the end of 2009. We anticipate using approximately 25% of the harvested and processed herbal raw materials for our internal production and to sell the remaining inventory to regional wholesalers.

Aoxing Pharmaceutical is planning to begin the “Mercury” project in 2009 once we obtain enough capital to support this project. The “Mercury” project targets counties within 31 provinces in the PRC to promote Aoxing Pharmaceutical’s “Gan Wang” Compound Paracetamol and Amantadine Hydrochloride Capsule with the goal of making it one of the most popular brands of OTC drugs for influenza treatment.

Aoxing Pharmaceutical anticipates the project will generate total sales of approximately $13 million in the first year. The estimated costs to undertake the project are advertising expenses of approximately 25% of sales and salary expenses of approximately 9% of sales.

The merger and acquisition strategic plan of Aoxing Pharmaceutical contemplates the acquisition of four or five pharmaceutical manufacturers and one medical supplement company over the next five-year period. Currently, Aoxing Pharmaceutical is still searching for and reviewing acquisition opportunities. In the event that we obtain future financing, we may use the funds for future acquisitions. And the amount of future financing we are able to obtain will affect Aoxing Pharmaceutical’s decision on acquisition.

Aoxing Pharmaceutical’s goal is to have its various pharmaceutical and medical supplement products, such as the medicines for hepatitis, gynecopathy and various male diseases, and other conditions, distributed to 31 provinces in the PRC and to expand the sales network to approximately 300 cities, and ultimately become the pharmaceutical industry leader in northwestern PRC.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2009, we had cash and cash equivalents of approximately $694,645. 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. We plan to review acquisition opportunities as a strategy for further growth. We expect to be the primary financing vehicle for Aoxing Pharmaceutical and will forward them the equity financing proceeds we receive. The additional funds would be provided to Aoxing Pharmaceutical through Shaanxi Biostar; would be accounted for as loan to Aoxing Pharmaceutical and would be eliminated during consolidation. The loan would not be interest bearing and would not be evidenced by a written note. The foregoing treatment is consistent with the prior financing of Series A Convertible Preferred Stock.

Net cash used in operating activities for the three months ended March 31, 2009 was $64,610. This was primarily due to the net income of $1,829,032, adjusted by non-cash related expenses including depreciation and amortization of $166,269, offset by a net decrease in working capital items of $2,059,911. The net decrease in working capital items was mainly due to an increase in accounts receivable resulting from slower payments of customers during the current economic slowdown and less collection effort during the first two months of the quarter as 2009 Chinese Spring Festival holiday started a little earlier at the end of January and continued through the beginning of February. The increase in prepayments to suppliers also contributed to the net decrease in working capital items. The net decrease in working capital items was partially offset by the increase in accounts payable and accrued expenses, VAT tax payable, and income tax payable.

Net cash used in operating activities for the three months ended March 31, 2008 was $595,227. This was primarily due to the net income of $1,821,130, adjusted by non-cash related expenses including depreciation and amortization of $157,299, and allowance for doubtful accounts of $87,246, offset by a net decrease in working capital items of $2,660,902. The net decrease in working capital items was mainly due to increase in accounts receivable which resulted from the significant increase in revenue during the three months ended March 31, 2008 and the longer credit term provided to customers as part of the sales promotion (for customers with two years or more business relationship with us, the payment term may be extended to six months as opposed to the general payment term of three months), increase in prepayments to suppliers, and increase in inventory to prepare for the ongoing sales promotion. The net decrease in working capital items was partially offset by the increase in accounts payable and accrued expenses, VAT tax payable and income tax payable.

Net cash used in investing activities for the three months ended March 31, 2008, was $2,195. This was primarily due to capital expenditure on equipment of $2,195.

RESULTS OF OPERATIONS

NET SALES.

	Three Months Ended March 31,								% of
	2009				2008				change
Xin Aoxing Oleanolic Acid Capsule	$	3,836,680	52	%	$	3,887,380	57	%		-1	%
Taohuasan Pediatrics Medicine		922,369	12	%		830,948	12	%		11	%
Gan Wang Compound Paracetamol Capsule		776,555	10	%		724,790	11	%		7	%
Tianqi Dysmenorrhea Capsule		1,100,340	15	%		733,367	11	%		50	%
Danshen Granule		784,756	11	%		633,774	9	%		24	%
Healthcare supplement products		26,964	-			-	-			n/a
Total net sales	$	7,447,664	100	%	$	6,810,259	100	%		9	%

During the three months ended March 31, 2009, total net sales increased by approximately $637,405 or 9%, compared to the same period of 2008. This was mainly due to the sales increases in four of Aoxing Pharmaceutical’s five state approved drugs. The sales in the four products increased mainly due to the continued implementation of the “Blue Sea” project which markets directly to consumers in the PRC’s rural area through retail pharmacies at higher retail prices. Domestic Chinese customers still accounted for 100% of total sales.

COST OF SALES.

	Three Months Ended March 31,								% of
	2009				2008				change
Xin Aoxing Oleanolic Acid Capsule	$	842,548	32	%	$	1,069,229	40	%		-21	%
Taohuasan Pediatrics Medicine		323,240	12	%		280,061	11	%		15	%
Gan Wang Compound Paracetamol Capsule		424,826	16	%		396,046	15	%		7	%
Tianqi Dysmenorrhea Capsule		394,854	15	%		232,957	9	%		69	%
Danshen Granule		646,688	24	%		660,386	25	%		-2	%
Healthcare supplement products		26,651	1	%		-	-			n/a
Total cost of sales	$	2,658,807	100	%	$	2,638,679	100	%		1	%

Compared to the same period of 2008, cost of sales increased about $20,128 or 1% in the three months ended March 31, 2009. This was primarily as a result of the increase in product net sales. As the sales increased for some of Aoxing Pharmaceutical’s five state approved drugs, so did the cost of sales for those drugs. The period-over-period percentage increase of cost of sales in the three months ended March 31, 2009 compared to the same period of 2008 was less than the percentage increase of net sales mainly because of the decreases in the costs of Xin Aoxing Oleanolic Acid Capsule and Danshen Granule. The decrease in the costs of those two products were due to the decrease in the raw material prices for those two products as the main area that produces those raw materials, Sichuan province, is recovering from the earthquake and resuming the herbal raw materials supply. Previously when the Sichuan province was devastated from the earthquake in 2008, it affected the supply of raw materials from this region and increased their prices.

GROSS PROFIT

	Three Months Ended March 31,
	2009					2008
			gross profit						gross profit			% of
			margin						margin			change
Xin Aoxing Oleanolic Acid Capsule	$	2,994,132		78	%	$	2,818,151			72	%		6	%
Taohuasan Pediatrics Medicine		599,129		65	%		550,887			66	%		9	%
Gan Wang Compound Paracetamol Capsule		351,729		45	%		328,744			45	%		7	%
Tianqi Dysmenorrhea Capsule		705,486		64	%		500,410			68	%		41	%
Danshen Granule		138,068		18	%		(26,612	)		-4	%		n/a
Healthcare supplement products		313		1	%		-			-			n/a
Total	$	4,788,857		64	%	$	4,171,580			61	%		15	%

Gross profit increased $617,277 or 15% in the three months ended March 31, 2009 compared to the same period in 2008. The increase in gross profit was due primarily to the increase in net sales achieved through the “Blue Sea” project targeting China’s rural retail market.

The overall gross profit margin increased 3 percentage points in the three months ended March 31, 2009 compared to the same period of 2008 and was primarily due to the increase in the gross profit margin of Xin Aoxing Oleanolic Acid Capsule and Danshen Granule as a result of the aforementioned decreases in the costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.

	Three Months Ended March 31,
	2009					2008
			% of total					% of total			% of
			net sales					net sales			change
Selling, general and administrative expenses	$	2,479,984		33	%	$	2,052,678		30	%		21	%

The year-over-year increases in dollar amount and as a percentage of total net sales for the three months ended March 31, 2009 was mainly due to the increase in promotional and advertising expenditure of $53,773, increase in sales commissions and sales personnel expenses of $289,999, and increase in travel expenses of $55,218, all resulting from the ongoing marketing expansion, and also due to increases in professional fees of $120,197 and administrative facility expense of $50,145. The increase in selling, general and administrative expenses was partially offset by the decrease in provision for doubtful accounts of $87,246.

INTEREST EXPENSE.

We did not incurred interest expense for the three months ended March 31, 2009, compared to $13,953 for the same period of 2008. The year-over-year decrease was mainly because the short-term bank loan was paid off at September 30, 2008.

PROVISION FOR INCOME TAXES.

	Three Months Ended March 31,
	2009			2008
Provision for income taxes	$	480,151		$	283,898
Effective tax rate		21	%		13	%

Our effective tax rate increased in the three months ended March 31, 2009 compared to the same period in 2008 primarily as a result of the expiration of the 50% income tax reduction. Based on our current operating structure and the preferential tax treatments available to us in the PRC, our China operations, Aoxing Pharmaceutical qualifies as a high-tech enterprise entitled to a 50% income tax reduction from January 1, 2007 to December 31, 2008. As the preferential tax treatment expired on December 31, 2008, the statutory income tax rate for Aoxing Pharmaceutical has been increased to 25% effective from January 1, 2009.

CRITICAL ACCOUNTING POLICIES

We believe the following critical accounting policies, among others, affect management’s more significant judgments and estimates used in the preparation of the financial statements:

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on specific identification of customer accounts and management’s best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. Management evaluates the collectability of the receivables at least quarterly. If the financial condition of the customers were to deteriorate further, resulting in an impairment of their ability to make payments, additional allowances may be required. The differences could be material and could significantly impact cash flows from operating activities.

The following table sets out the aging of our accounts receivable for each balance sheet periods presented.

Accounts Receivable Aging	Total		1-30 days		31-60 days		61-90 days		91-120 days		121-365 days		> 365 days
As of March 31, 2009	$	13,973,934	$	3,874,985	$	2,496,913	$	2,129,648	$	3,005,505	$	2,463,430	$	3,453
As of December 31, 2008	$	11,835,630	$	3,627,709	$	4,102,305	$	2,807,852	$	887,760	$	408, 638	$	1,366

The following table presents the days sales outstanding calculated based on sales and accounts receivables in RMB term for the three months ended March 31, 2009 and 2008.

	Three Months Ended March 31,
	2009		2008
Days sales outstanding		169		95

The number of days that sales were outstanding increased to 169 days for three months ended March 31, 2009 from 95 days for the same period last year was due to slower payments of customers during the current economic slowdown and less collection effort during the first two months of the quarter as the 2009 Chinese Spring Festival holiday started a little earlier at the end of January and continued through the beginning of February.

The followings are the steps Aoxing Pharmaceutical takes in collecting accounts receivable.

Step 1: After the payment term has been exceeded, Aoxing Pharmaceutical stops taking orders from the delinquent customer and allows the salesperson three to six months to collect the accounts receivable. Most of the accounts receivable will be collected in this step because the salesperson’s compensation is tied to sales receipts.

Step 2: If the salesperson’s collection efforts are not successful in step 1, Aoxing Pharmaceutical 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 fail, then Aoxing Pharmaceutical will commence legal action to collect the accounts receivable.

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

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

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

3. 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 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.

Accounting for Stock-Based Compensation

In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant date fair value of stock options and other equity-based compensation issued to employees. FAS No. 123R is effective beginning in the first quarter of fiscal 2006.

We did not issue any stock options to employees during the three months ended March 31, 2009, therefore pro forma disclosures are not required.

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.

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 Chinese Yuan Renminbi (CNY). 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. 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 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.

CONTRACTUAL OBLIGATIONS

We have no contractual obligations as of March 31, 2009.

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.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of our Disclosure Controls

As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon their controls evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective at a reasonable assurance level.

Changes in internal control over financial reporting

There have been no changes in our internal controls over financial reporting during our first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

There is no material legal proceeding pending against us.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

Exhibit No.	SEC Ref. No.	Title of Document

1	31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

2.	31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

3	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*

4	32.2	Certification of the Principal Financial Officer pursuant to U.S

* The Exhibits attached to this Form 10-Q shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.

SIGNATURES

In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BIOSTAR PHARMACEUTICALS, INC.

Date: May 13, 2009
	/s/ Ronghua Wang
	Ronghua Wang
	Chief Executive Officer and President (Principal Executive Officer)

Date: May 13, 2009
	/s/ Elaine Lanfeng Zhao
	Elaine Lanfeng Zhao
	Chief Financial Officer (Principal Financial and Accounting Officer)