Alberto Abaterusso's  Instablog

With this article we want to verify that the sales of Biostar Pharmaceuticals Inc. (BSPM) are endorsed by cash.

With this article we do not purport to advise, tell or suggest to buy or sell shares of Biostar Pharmaceuticals Inc. . You should always check with your licensed financial advisor and your tax advisor to determine the suitability for any investment in this stock.

Remember that we are talking about a micro-cap entity with a small market capitalization and trading volume at the moment.

The purpose of this article is only to check BSPM's revenue against cash collected. Nothing more.

''As at the end of the day, sales without the resulting cash are useless.'' (source: here)

Unfortunately the company does not give us enough information to identify risky revenues. They are constantly striving to improve their internal accounting controls, particularly those related to revenue recognition (source: BSPM, FORM 10-Q, 30/09/2012, page 16), and they use estimates for, but not limited to, the accounting for certain items such as allowance for doubtful accounts, depreciation and amortization, impairment, inventory allowance, taxes and contingencies (source: BSPM, FORM 10-Q, 30/09/2012, page F-5).

Since the company's information is really essential on how to recognize revenue, the possibility is to check reported revenues which can be affected by estimates and assumptions, against the actual cash received from customers.

Revenue for 9 months ended September 30, 2012: $34.03M.

Change in accounts receivable: $28.82M (as of 2012-09-30) - $35.03M (as of 2011-12-31) = - 6.21 (in millions of USD). Advances from Customer: -.

Cash Received from customers: $34.03 + $6.21 = $40.24M against $34.03M of Revenue for 9 months ended September 30, 2012.

Compared to the same period in 2011, BSPM's total sales declined approximately $31.9 million or 48% for the nine months ended September 30, 2012.

We can compare revenue and cash received from customers for the 1 year period (from October 1, 2011 to September 30, 2012) with those for the 1 year period before (from October 1, 2010 to September 30, 2011):

Revenue for 1 year ended September 30, 2012 (BSPM's revenue for 9 months ending September 30, 2012 + BSPM's revenue for 3 months ending 31/12/2011): $ 60.02M. Change in accounts receivable: $ 28.82M (as of 2012-09-30) - $ 32.47M (as of 2011-09-30) = - 3.65 (in millions of USD). Advances from Customer: -.

Cash Received from customers: $60.02M + $3.65M = $63.67M

We can see that the cash the company received from its customers during the period October 1, 2011 - September 30, 2012, exceed revenue. This is a good sign to us.

Revenue for 1 year ended September 30, 2011 (BSPM's revenue for 9 months ending September 30, 2011 + BSPM's revenue for 3 months ending 31/12/2010): $94.25M. Change in accounts receivable: $32.47M (as of 2011-09-30) - $22.03M (as of 2010-09-30) = + 10.44 (in millions of USD). Advances from Customer: -.

Cash Received from customers: $94.25 - $10.44 = $83.81M

We can observe that revenue decreased 36.3 % and cash received from customers decreased 24.03 % in 12 months. So the decline of cash received from customers was not so drastic as the decline of sales.

The revenue decline was caused by the suspension of sales of gel capsule products in PRC because as reported by PRC State Food and Drug Administration (SFDA) authorities, they were found to have high chromium levels after a nationwide inspection.

CONCLUSION: Excluding that revenue growth until 2011 has been determined by temporary factors (the acquisition of Shaanxi Weinan Products contribuited of 0.9% to the total sales for FY 2011), we have no reason to think that BSPM's sales are without the resulting cash and that the revenues do not begin to grow again now that the Company is taking a number of steps to restart sales of gel capsule drugs immediately following the SFDA approval. The steps includes, among others, engaging its employees to work overtime, adding a second shift, launching an aggressive advertising campaign to help improve consumer confidence, establishing incentives for the sales force in all of the distribution offices nationwide, and launching a B2C call center to take order and provide hands-on sales support.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Avocet Mining PLC operates as a gold mining and exploration company in west Africa. It owns 90% interest in Inata gold mine in Burkina Faso; and have a pipeline of exploration projects in Burkina Faso and Guinea. The company’s exploration licenses at Bélahouro in Burkina Faso cover approximately 1,660 square kilometers; and at Tri-K in Guinea cover approximately 986 square kilometers. Avocet Mining PLC is based in London, the United Kingdom. (source: http://finance.yahoo.com/q/pr?s=AVM.L+Profile)

The company experienced a 52 week low price on January the 25th when the market price closed at 59.00 GBP (about USD 93.31381).¹ Book Value per Share (mrq²): $1.96 (yahoo finance).

The company sustained a loss in 2009 and in the third quarter of 2012.

1GBP = 1.58159 USD avg bid price on January 25, 2013 (source: oanda.com).

2Most Recent Quarter (as of Sep 30, 2012)

Total liabilities is less than 100% of TCE

P/E (ttm): $11.58

EPS: GBP 0.05 ($0.0790795 as of 1GBP = 1.58159 USD avg bid price on January 25, 2013 [source: oanda.com])

(source: google finance)

Yield Corporate Bonds 20yr AAA: 3.98% as of January 25, 2013 (source: yahoo finance).

Avocet Mining plc's Earnings yield: 8.64%

AVM.L's Earnings yield is more than twice the yield on US Corporate Bonds 20yr AAA

1Revenue for 3 months ending 2011-12-31

2Cost of Revenue, Total for 3 months ending 2011-12-31

Biostar Pharmaceuticals, Inc. 1 year from October 1, 2011 to September 30, 2012

DIO (days inventory outstanding) = USD 1.40 / (USD 21.61 / 365 days) = 23.65 days

DSO (days sales outstanding = USD 30.64 / (USD 60.02 / 365 days) = 186.33 days

DPO (days payable outstanding) = USD 4.89 / (USD 21.61 / 365 days) = 82.59 days

CCC (cash conversion cycle) = 24 + 186 - 83 = 127 days

This means that BSPM's cycle is 127 days for the last 12 months ended September 30, 2012.

Biostar's Cost of Sales (COGS) is about USD 13.38 millions for 9 months ending September 30, 2012 and about USD 21.61 millions for 1 year.¹ About 59.21 thousands of USD per day (USD 21.61 millions / 365 days). Since BSPM's CCC is 127 days, the company funds its working capital needs to the tune of about USD 7.52 millions per year (USD 59.21 thousands x 127 days). The working capital must be financed either with equity and/or loan.

If we assume that the interest on this debit is 8%², then the cost of this financing is about USD 0.60 millions (USD 601,600) per year (USD 7.52 millions x 8%). If the CCC declines then the amount needed to finance the working capital needs of the company and the cost of the same funding will reduce as well. This should not be neglected if the company is financing its working capital with a loan, but fortunately Biostar can fund its business from its free cash flow³.

1Assuming that the year begin the 1st of october 2011 and end the 30th of September 2012.

2 On March 21, 2011, the Company was granted RMB3,000,000 (approximately $474,000) one year short-term bank loan from a local bank in the PRC, with annual interest rate at 7.88%, for working capital purpose. On May 25, 2011, the Company was granted another RMB2,000,000 (approximately $316,000) one year short-term bank loan with annual interest rate at 8.20% from the same local bank in the PRC. The loan is secured by (1) personal guarantee executed by a major shareholder of the Company and (ii) pledge of the Company's real property and land use right with carrying amount of approximately $2.7 million as of March 31, 2012. The Company paid off both the RMB 3,000,000 and RMB 2,000,000 loans during the second quarter of the year (see 10-Q3 2012, Note 5 - SHORT-TERM BANK LOAN, F-9)

3Biostar Pharmaceuticals' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.