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, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K, as amended to date, for the fiscal year ended December 31, 2012. 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 RMB7.85 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 RMB 61 million (approximately $9.55 million) in cash and payable in several tranches.
Shaanxi Weinan owns drug approvals and permits for a portfolio of 86 drugs and one health product, all of which, were added to the Company’s 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. We are in the process of integrating the administration, operation and sales functions of Shaanxi Weinan with those of Aoxing Pharmaceutical.
We currently manufacture and sell 20 over-the-counter (“OTC”) medicines, prescription-based pharmaceuticals, and health products, which are sold and distributed in over 25 provinces and provincial-level cities throughout China. We also have exclusive supply contract with a hospital to supply three pharmaceutical products. Our best-selling product, Xin Aoxing Oleanolic Acid Capsule (“Xin Aoxing Capsule”), is a state-approved OTC drug for treatment of Hepatitis B.
Recent Developments
On March 11, 2013, Aoxing Pharmaceutical entered into a supplemental agreement to the Share Transfer Agreement with all the former equity holders of Shaanxi Weinan to acquire 13 drug approval numbers which were excluded from the Share Transfer Agreement due to incomplete reregistration. Following the execution of the supplemental agreement, the Company will acquire the ownership of the 13 drug approval numbers for which reregistration has been completed. The aggregate purchase price is RMB 66 million (approximately $10.6 million) for the 13 drug approval numbers, of which RMB 30 million (approximately $4.8 million) was paid on November 26, 2012, RMB 25 million (approximately $4.0 million) was paid on December 31, 2012 and the balance of RMB 11 million (approximately $1.8 million) were paid in the Company’s common stock. Based on an agreed issuance price of $1.10 per share, RMB 11 million is equivalent to 1,602,564 shares of common stock of the Company. The Company completed this acquisition in April 2013.
Gel Capsule Related Developments (the “Capsule Incident”)
In April 2012, PRC State Food and Drug Administration (SFDA) launched an investigation of several capsule manufacturers based in Zhejiang, Hebei and Jiangxi provinces into their use of industrial gelatin, which contained impermissibly high chromium content. On May 25, 2012, following a nationwide inspection, SFDA authorities reported that 669 batches of gel capsules from 254 drug manufacturers in 28 provinces were found to have high chromium levels. The results of this inspection were publicly distributed in China, including publication on SFDA’s website http://www.sda.gov.cn/WS01/CL0001. As a result, SFDA effectively suspended sales of gel capsules nationwide until the investigation was completed.
In May 2012, following an onsite inspection by the Xianyang State Food and Drug Administration (SFDA), samples from a batch of our Xin Aoxing capsules were found to contain chromium content higher than edible gelatin. Specifically, samples from a batch of 150 cases of the Xin Aoxing capsules (each of the 150 cases contains 8,000 capsules), representing Biostar sales of approximately RMB1,188,000 or approximately $188,000 were also found to contain high levels of chromium, which capsules, in the Company’s estimation, were sold in the market in mid-2011. The Company did not check the batch in question for the chromium levels at that time since PRC pharmaceutical companies were not required to test their gel capsule inventories and purchases for chromium levels in 2011.
As required by SFDA in April 2012, the Company purchased gel capsule inspection equipment to measure the chromium levels in gel capsules it used. The Company also undertook a thorough inspection of all samples of drugs sold and its current product inventory to ensure that all of the gel capsules it had purchased and currently uses comply with the SFDA chromium content requirements. In addition, the Company conducted checks of every batch of raw materials it uses in every production category and, except as discussed above, found no violations of the chromium content requirements. Further, the Company recalled all such affected capsules as promptly and thoroughly as possible, and imposed heightened quality control and assurance measures going forward.
On July 30, 2012, the SFDA approved the Company’s resumption of sales of its gel capsules following a thorough inspection of raw materials used in every production category, all samples of drugs sold and the current product inventory. However, the suspension of sales of gel capsule products severely affected all China-based pharmaceutical companies that use gelatin capsules to manufacture their drugs. Negative publicity associated with the Capsule Incident continues to affect consumer’s confidence of capsule products.
Results of Operations
Net Sales
For the three months ended March 31, 2013, total net sales decreased by approximately $3.8 million or 23.9% compared to the same period in 2012. The decrease is mainly attributed to the decrease in sales volume of Aoxing Pharmaceutical’s capsule products, offset by the sales of several newly introduced products. The following table illustrates our sales results for the three months ended March 31, 2013 and 2012.
|
|
Three Months Ended March 31,
|
|
|
Increase (Decrease) due to changes in
|
|
|
|
2013
|
|
|
2012
|
|
|
Product offering
|
|
|
Sales volume
|
|
|
Sales price
|
|
Aoxing Pharmaceutical Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xin Aoxing Oleanolic Acid Capsule
|
|
$
|
5,443,928
|
|
|
$
|
10,388,009
|
|
|
$
|
-
|
|
|
$
|
(5,438,584
|
)
|
|
$
|
494,503
|
|
Other Aoxing Pharmaceutical products
|
|
|
2,502,174
|
|
|
|
3,315,975
|
|
|
|
-
|
|
|
|
(667,068
|
)
|
|
|
(146,733
|
)
|
New product
|
|
|
110,155
|
|
|
|
-
|
|
|
|
110,155
|
|
|
|
-
|
|
|
|
-
|
|
Temporarily discontinued (4 products)
|
|
|
-
|
|
|
|
622,840
|
|
|
|
(622,840
|
)
|
|
|
-
|
|
|
|
-
|
|
Sub-total
|
|
|
8,056,257
|
|
|
|
14,326,824
|
|
|
|
(512,685
|
)
|
|
|
(6,105,652
|
)
|
|
|
347,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shaanxi Weinan Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shaanxi Weinan products
|
|
|
1,639,478
|
|
|
|
1,563,653
|
|
|
|
|
|
|
|
177,100
|
|
|
|
(101,275
|
)
|
New products
(5 products)
|
|
|
443,736
|
|
|
|
-
|
|
|
|
443,736
|
|
|
|
-
|
|
|
|
-
|
|
Sub-total
|
|
|
2,083,214
|
|
|
|
1,563,653
|
|
|
|
443,736
|
|
|
|
177,100
|
|
|
|
(101,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital products
|
|
|
1,952,438
|
|
|
|
-
|
|
|
|
1,952,438
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical device
|
|
|
-
|
|
|
|
9,064
|
|
|
|
(9,064
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
12,091,909
|
|
|
$
|
15,899,541
|
|
|
$
|
1,874,425
|
|
|
$
|
(5,928,552
|
)
|
|
$
|
246,495
|
|
Sales of our products under the Aoxing Pharmaceutical brand decreased by approximately $6.3 million, or 43.8%, for the three months ended March 31, 2013, compared to the same period in 2012. The decrease is mainly attributable to the decrease in sales volume of our flagship product, Xin Aoxing Capsule, as well as other Aoxing Pharmaceutical products as a result of the Capsule Incident discussed above. Decrease in sales of other Aoxing Pharmaceutical products was also attributable to increased competition from similar products. During the three months ended March 31, 2013, we have introduced one product and temporarily discontinued four products. The products were temporarily discontinued due to expiration of their drug approval numbers, and, reregistration of the approval numbers were still pending as at March 31, 2013.
Sales of Shaanxi Weinan’s products increased by approximately $0.5 million or 33.2% for the three months ended March 31, 2013 compared to the same period in 2012. The increase is attributable to an increase in sales volume and introduction of five new products since the second quarter in 2012.
We have also begun selling three new products exclusively to a local hospital since the third quarter in 2012. These products accounted for approximately $2.0 million of our total net sales for the three months ended March 31, 2013.
Cost of sales
Compared to the same period in 2012, cost of sales decreased by about $0.3 million or 6.7% for the three months ended March 31, 2013. This decrease is mainly due to the decrease in net sales and the temporarily discontinuation of several products, offset by cost of sales for the new hospital products. The following table summarizes our cost of goods sold for the three months ended March 31, 2013 and 2012:
|
|
Three Months Ended March 31,
|
|
|
Increase (Decrease) due to changes in
|
|
|
2013
|
|
|
2012
|
|
|
Product offering
|
|
|
Sales volume
|
|
|
Product cost
|
Aoxing Pharmaceutical Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xin Aoxing Oleanolic Acid Capsule
|
|
$
|
1,367,670
|
|
|
$
|
2,135,507
|
|
|
$
|
-
|
|
|
$
|
(1,366,327
|
)
|
|
$
|
598,490
|
|
Other Aoxing Pharmaceutical products
|
|
|
1,666,223
|
|
|
|
1,895,158
|
|
|
|
-
|
|
|
|
(407,200
|
)
|
|
|
178,265
|
|
New Product
|
|
|
79,659
|
|
|
|
-
|
|
|
|
79,659
|
|
|
|
-
|
|
|
|
-
|
|
Temporarily discontinued (4 products)
|
|
|
-
|
|
|
|
302,490
|
|
|
|
(302,490
|
)
|
|
|
-
|
|
|
|
-
|
|
Sub-total
|
|
|
3,113,552
|
|
|
|
4,333,155
|
|
|
|
(222,831
|
)
|
|
|
(1,773,527
|
)
|
|
|
776,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shaanxi Weinan Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shaanxi Weinan products
|
|
|
703,896
|
|
|
|
723,568
|
|
|
|
-
|
|
|
|
76,770
|
|
|
|
(96,442
|
)
|
New Products
(5 products)
|
|
|
191,827
|
|
|
|
-
|
|
|
|
191,827
|
|
|
|
-
|
|
|
|
-
|
|
Sub-total
|
|
|
895,723
|
|
|
|
723,568
|
|
|
|
191,827
|
|
|
|
76,770
|
|
|
|
(96,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital products
|
|
|
1,393,744
|
|
|
|
-
|
|
|
|
1,393,744
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical device
|
|
|
-
|
|
|
|
6,427
|
|
|
|
(6,427
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
5,403,019
|
|
|
$
|
5,063,150
|
|
|
$
|
1,356,313
|
|
|
$
|
(1,696,757
|
)
|
|
$
|
680,313
|
|
There was an average increase of 10.1% in the unit cost of our products, for the three months ended March 31, 2013 as compared to the same period in 2012. The increase is attributable to increase in the cost of raw material and labor.
For the three months ended March 31, 2013, average unit cost of Xin Aoxing Capsule increased by 28.0%, compared to the same period in 2012, as we included additional products as promotional items, in addition to the increased cost of raw material and labor. Average unit cost of other Aoxing Pharmaceutical products increased by 8.3% as a result of increase in cost of raw material and labor.
Average unit cost of Shaanxi Weinan products decreased by 14.5% for the three months ended March 31, 2013, as compared to the same period in 2012. The decrease was due to more effective control of material purchase and production management.
Cost margin of our hospital products was 71.4% for the three months ended March 31, 2013. Management believes that we may lower the average cost of these products as we increase our sales and utilize economy of scale.
Gross Profit
Gross profit decreased by approximately $4.1 million or 38.3% for the three months ended March 31, 2013, as compared to the same period in 2012. The decrease in gross profit was due primarily to the decrease in sales volume and increase in unit cost of our products.
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Gross Profit
|
|
|
Product Gross Margin %
|
|
|
Gross Profit
|
|
|
Product Gross Margin%
|
|
Aoxing Pharmaceutical Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Xin Aoxing Oleanolic Acid Capsule
|
|
$
|
4,076,258
|
|
|
|
74.9
|
%
|
|
$
|
8,252,502
|
|
|
|
79.4
|
%
|
Other Aoxing Pharmaceutical products
|
|
|
835,951
|
|
|
|
33.4
|
%
|
|
|
1,420,817
|
|
|
|
42.8
|
%
|
New Product
|
|
|
30,496
|
|
|
|
27.7
|
%
|
|
|
-
|
|
|
|
-
|
|
Temporarily discontinued (4 products)
|
|
|
-
|
|
|
|
-
|
|
|
|
320,350
|
|
|
|
51.4
|
%
|
Sub-total
|
|
|
4,942,705
|
|
|
|
61.4
|
%
|
|
|
9,993,669
|
|
|
|
69.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shaanxi Weinan Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shaanxi Weinan products
|
|
|
935,582
|
|
|
|
57.1
|
%
|
|
|
840,085
|
|
|
|
53.7
|
%
|
New Product (5 products)
|
|
|
251,909
|
|
|
|
56.8
|
%
|
|
|
-
|
|
|
|
-
|
|
Sub-total
|
|
|
1,187,491
|
|
|
|
57.0
|
%
|
|
|
840,085
|
|
|
|
53.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital products
|
|
|
558,694
|
|
|
|
28.6
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical device
|
|
|
-
|
|
|
|
-
|
|
|
|
2,637
|
|
|
|
29.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
6,688,890
|
|
|
|
55.3
|
%
|
|
$
|
10,836,391
|
|
|
|
68.2
|
%
|
The overall gross profit margin decreased to 55.3% for the three months ended March 31, 2013 from 68.2% for the same period in 2012 mainly because of the increase in the cost of labor and raw material for the three months ended March 31, 2013. The decrease is also due to significant change in the sales of our product mix. Xin Aoxing Capsule, our highest gross profit margin product, contributed 61% to total gross profit for the three months ended March 31, 2013, as compared to 76% during the same period in 2012.
Operating Expenses
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
% of net sales
|
|
|
Operating expenses
|
|
|
% of net sales
|
|
|
% change
|
|
Advertising expenses
|
|
$
|
1,886,681
|
|
|
|
15.6
|
%
|
|
$
|
2,848,933
|
|
|
|
17.9
|
%
|
|
|
(33.8
|
%)
|
Selling expenses
|
|
|
2,197,346
|
|
|
|
18.2
|
%
|
|
|
2,907,801
|
|
|
|
18.3
|
%
|
|
|
(24.4
|
%)
|
General and administrative expenses
|
|
|
1,071,601
|
|
|
|
8.9
|
%
|
|
|
1,057,424
|
|
|
|
6.7
|
%
|
|
|
1.3
|
%
|
Research and development expenses
|
|
|
796,001
|
|
|
|
6.6
|
%
|
|
|
791,127
|
|
|
|
5.0
|
%
|
|
|
0.6
|
%
|
Total operating expenses
|
|
$
|
5,951,629
|
|
|
|
49.2
|
%
|
|
$
|
7,605,285
|
|
|
|
47.8
|
%
|
|
|
(21.7
|
%)
|
Total operating expense decreased by approximately $1.7 million or 21.7% for the three months ended March 31, 2013, as compared to the same period in 2012. The decrease is attributable to decrease in advertising and selling expenses.
Advertising expenses accounted for 15.6% and 17.9% of our total sales for the three months ended March 31, 2013 and 2012. The decrease of approximately $1 million or 33.8% is due to decrease in advertising activities as a result of the temporary discontinuation of several of our products.
Selling expenses consist mostly of sales salaries, commission and other selling expenses. Overall decrease was approximately $0.7 million or 24.4%. The decrease is consistent with the decrease in our sales during the three months ended March 31, 2013 as compared to the same period in 2012.
General and administrative expenses consist of fixed cost such as salaries and wages, amortization and depreciation, stock based compensation and other general and administrative expenses. For the three months ended March 31, 2013 and 2012, general and administrative expenses were approximately $1.1 million.
We make periodical assessments as to the progress of our research and development projects, and charge to expense as appropriate, as these projects reach different stages or project milestones. We incurred a total of approximately $0.8 million in research and development expenses for the three months ended March 31, 2013 and 2012, respectively. Our current research developments are in connection with three ongoing clinical trials for two new products and one existing products, and a joint development of a new drug with a research institution.
Provision for Income Taxes
For the three months ended March 31, 2013 and 2012, our income tax expense was approximately $0.5 and $1.1 million. The effective tax rates, taking into consideration differences in allowable deductions, and changes in valuation allowances, were 51.5% and 30.6%, for the three months ended March 31, 2013 and 2012, respectively. The uniform corporate income tax rate is 25% in China. The calculation of effective tax rate include the operating results of all our subsidiaries, including the U.S. corporate company.
Liquidity and Capital Resources
As of March 31, 2013, we had cash and cash equivalents of approximately $6.5 million and net working capital of approximately $30.9 million. We expect to generate sufficient cash and cash equivalents from the realization of our accounts receivables of $16.5 million and maturity of the loan receivables of $10 million. We believe our existing cash and cash equivalents and net working capital as at March 31, 2013, as well as net cash inflows during the next two quarters will be sufficient to maintain our operations at present level for at least the next twelve months.
As at March 31, 2013, cash and cash equivalents were mainly denominated in RMB and were placed with banks in the PRC. These cash and cash equivalents may not be freely convertible into foreign currencies and the remittance of these funds out of the PRC may be subjected to exchange control restrictions imposed by the PRC government.
On an on-going basis, we take steps to identify and plan our needs for liquidity and capital resources, to fund our operations and day to day business operations. Our future capital expenditures will include, among others, expanding product lines, research and development capabilities, and making acquisitions as deemed appropriate.
Based on our current plans for the next 12 months, we anticipate that the sales of the Company’s pharmaceutical products will be the primary organic source of funds for future operating activities in 2013. However, to fund continued expansion of our operation and extend our reach to broader markets, and to acquire additional entities, as we may deem appropriate, we may rely on bank borrowing, if available, as well as capital raises. There is no assurance that we will find such funding on acceptable terms, if at all. Currently, substantially all of our buildings, building improvements and land use rights are pledged against short-term bank loans with various due dates from October to December 2013, which may restrict our abilities to obtain further bank financing until these short-term loans are repaid.
Net cash provided by operating activities for the three months ended March 31, 2013 was approximately $6.2 million. This was primarily due to our net income of approximately $0.6 million, adjusted by a non-cash decrease in deferred tax assets of approximately $0.4 million, and non-cash related expenses including depreciation and amortization of approximately $0.5 million, and research and development expenses of approximately $0.8 million, offset by non-cash accrued interest income of $0.4 million and a net increase in working capital items of approximately $4.4 million. The net increase in working capital items was mainly due to decrease in accounts receivable and increase in accounts payable and accrued expenses, offset by increase in inventories, prepaid expenses and decrease in value added taxes payable.
Net cash used in financing activities for the three months ended March 31, 2013 was approximately $1.6 million, consisting repayment of an advance from a related party.
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 a customer was to deteriorate further, resulting in an impairment of their ability to make payments, additional allowances may be required. Such differences could be material and could significantly impact cash flows from operating activities.
The following are steps the Company takes in collecting accounts receivable:
Step 1: After the payment term has been exceeded, the Company stops taking orders from the delinquent customer and allows the responsible sales person three to six months to collect the accounts receivable. Most of the accounts receivable will be collected in this step because the sales person’s compensation is tied to sales receipts. The Company’s normal sales term is 90 days credit period.
Step 2: If the sales person’s collection efforts are not successful, the Company hires a collection agent and allows the agent another three to six months to collect the accounts receivable.
Step 3: If the collection agent’s efforts are not successful, the Company will commence legal action to collect the accounts receivable.
Our policies for writing off the accounts receivable are as follows:
|
1.
|
If after taking legal action, it appears that an accounts receivable is not likely to become collectible, such accounts receivable will be written off if it is more than two years old.
|
|
2.
|
If during the collection period, the customer provides bankruptcy or other insolvency documentation, the corresponding 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 for such customer will be written off if it is more than two years old.
|
Inventory
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future pricing and market conditions. If actual future demands, future pricing or market conditions are less favorable than those projected by management, additional inventory write-downs may be required and the differences could be material. Such differences might significantly impact cash flows from operating activities.
Property and Equipment
Property and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Judgment is required to determine the estimated useful lives of assets, especially for computer equipment, including determining how long existing equipment can function and when new technologies will be introduced at cost-effective price points to replace existing equipment. Changes in these estimates and assumptions could materially impact the financial position and results of operations.
Stock-Based Compensation
Our stock-based compensation expense is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton (BSM) option-pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected volatility and option life. Changes in these assumptions could materially impact the financial position and results of operations.
Valuation of Intangibles
From time to time, we acquire intangible assets that are beneficial to our product development processes. Management periodically evaluates the carrying value of intangibles, including the related amortization periods. In evaluating acquired intangible assets, management determines whether there has been impairment by comparing the anticipated undiscounted cash flows from the operation and eventual disposition of the product line with its carrying value. If the undiscounted cash flows are less than the carrying value, the amount of the impairment, if any, will be determined by comparing the carrying value of each intangible asset with its fair value. Fair value is generally based on either a discounted cash flows analysis or market analysis. Future operating income is based on various assumptions, including regulatory approvals, patents being granted, and the type and nature of competing products. If regulatory approvals or patents are not obtained or are substantially delayed, or other competing technologies are developed and obtain general market acceptance or market conditions otherwise change, our intangibles may have a substantially reduced value, which could be material.
Research and Development
The remuneration of the Company’s research and development staff, materials used in internal research and development activities, and payments made to third parties in connection with collaborative research and development arrangements, are all expensed as incurred. Where the Company makes a payment to a third party to acquire the right to use a product formula which has received regulatory approval, that payment is accounted for as the acquisition of a license or patent and is capitalized as an intangible asset and amortized over the shorter of the remaining license period or patent life (See above “Intangible Assets”).
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carry-forwards. Management must make assumptions, judgments and estimates to determine the current provision for income taxes and the deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Management’s judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, management’s interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or management’s interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in the financial statements. Management’s assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations. Actual operating results and the underlying amount and category of income in future years could render management’s current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from the estimates, thus materially impact the financial position and results of operations.
Foreign Currency
Our functional currency is the U.S. dollar, and our subsidiary and our VIE in China use their respective local currencies as their functional currencies, i.e. the RMB. An entity’s functional currency is the currency of the primary economic environment in which the entity operates. Management must use judgment in determining an entity’s functional currency, assessing economic factors including cash flow, sales price, sales market, expense, financing and inter-company transactions and arrangements. The impact from exchange rate changes related to transactions denominated in currencies other than the functional currency is recorded as a gain and loss in the statements of operations, while the impact from exchange rate changes related to translating a foreign entity’s financial statements from the functional currency to its reporting currency, the U.S. dollar, is disclosed and accumulated in a separate component under the equity section of the balance sheets. Different judgments or assumptions resulting in a change of functional currency may materially impact our financial position and results of operations.
Contractual Obligations
The following table sets forth our contractual obligations as of March 31, 2013:
|
Payments due by period ($ million)
|
|
|
Total
|
|
Within 1 year
|
|
1-3 years
|
|
3-5 years
|
|
>5 years
|
|
Short-term bank loan
|
|
$
|
4.8
|
|
|
$
|
4.8
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Research and development contracts
|
|
|
3.5
|
|
|
|
0.8
|
|
|
|
2.7
|
|
|
|
-
|
|
|
|
-
|
|
Total contractual obligations
|
|
$
|
8.3
|
|
|
$
|
5.6
|
|
|
$
|
2.7
|
|
|
|
-
|
|
|
|
-
|
|
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).