Quarterly Report (10-q)

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United States

Securities and Exchange Commission

Washington, D. C. 20549

FORM 10‑Q

[X]	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

[ ]	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

Commission File No. 1-32674

AOXING PHARMACEUTICAL COMPANY, INC.

(Exact Name of Registrant as Specified in its Charter)

Florida	65-0636168
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer ID Number)

1098 Foster City Blvd., Suite 106-810, Foster City, CA 94404

(Address of Principal Executive Offices)

Issuer's Telephone Number: [phone]

Indicate  by check mark  whether the  Registrant  (1) has filed all reports required to be filed by Sections 13 or 15(d) of the  Securities Exchange Act of 1934  during  the  preceding  12 months  (or for such shorter  period  that the Registrant was required to file such reports),  and (2) has been subject to such filing requirements for the past 90 days. Yes     X  No ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes    X    No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One)

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 CORPORATE ISSUERS:  Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:

As of May 16, 2016, the number of shares outstanding of the Registrant's common stock was 76,209,195 with $.001 par value.

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AOXING PHARMACEUTICAL COMPANY, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED MARCH 31, 2016

TABLE OF CONTENTS

 

		Page No
Part I	Financial Information
Item 1.	Financial Statements:
	Consolidated Balance Sheet – March 31, 2016 (unaudited) and June 30, 2015	1
	Consolidated Statements of Operations and Other Comprehensive Income (Loss) – for the Three and Nine Months Ended March 31, 2016 and 2015 (Unaudited)	2
	Consolidated Statements of Cash Flows – for the Nine Months Ended March 31, 2016 and 2015 (Unaudited)	3
	Notes to Consolidated Financial Statements (Unaudited)	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.	Controls and Procedures	18
Part II	Other Information
Item 1A	Risk Factors	18
Item 2	Unregistered Sale of Securities and Use of Proceeds	19
Item 3	Defaults Upon Senior Securities	19
Item 4	Mine Safety Disclosures	19
Item 5	Other Information	19
Item 6	Exhibits	19
Signatures		20

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AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		March 31,				June 30,
		2016				2015
ASSETS		(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents		$	6,046,327			$	5,371,545
Accounts receivable, net			9,003,401				5,764,738
Notes receivable, net			16,678				89,317
Inventories, net			3,761,697				3,240,026
Prepaid expenses and other current assets			10,490,462				6,630,407
TOTAL CURRENT ASSETS			29,318,565				21,096,033
LONG-TERM ASSETS:
Property and equipment, net of accumulated depreciation			26,589,023				28,651,717
Deferred income tax			1,087,218				2,711,610
Other intangible assets, net			1,905,169				484,857
Investment in joint venture			29,036				96,475
TOTAL LONG-TERM ASSETS			29,610,446				31,944,659
TOTAL ASSETS		$	58,929,011			$	53,040,692
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings		$	11,513,301			$	12,484,356
Accounts payable			2,566,203				3,625,139
Notes payable							1,631,641
Loan payable – bank			15,035,344				16,316,408
Current portion of loan payable - related parties			13,544				5,793
Current portion of loan payable – others			15,502				-
Accrued expenses and other current liabilities			8,884,490				7,176,325
TOTAL CURRENT LIABILITIES			38,028,384				41,239,662
LONG-TERM LIABILITIES:
Loan payable - related parties			-				8,158
Loan payable – others			-				1,361,199
Deferred income			350,344				368,751
TOTAL LONG-TERM LIABILITIES			350,344				1,738,108
Common stock, par value $0.001, 100,000,000 shares authorized, 76,209,195 and 69,839,259 shares issued and outstanding on March 31, 2016 and June 30, 2015			76,209				69,839
Additional paid in capital			73,582,257				66,457,250
Accumulated deficit			(54,395,676	)			(58,354,968	)
Accumulated other comprehensive income			2,257,488				3,066,026
TOTAL SHAREHOLDERS' EQUITY OF THE COMPANY			21,520,278				11,238,147
NONCONTROLLING INTEREST IN SUBSIDIARIES			(969,994	)			(1,175,225	)
TOTAL EQUITY			20,550,284				10,062,922
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	58,929,012			$	53,040,692

 

See accompanying notes to the consolidated financial statements

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AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
(Unaudited)
		For the three months ended								For the nine months ended
		March 31,								March 31,
		2016				2015				2016			2015
SALES		$	6,563,944				6,590,736				23,504,605				17,586,519
COST OF SALES			1,630,389				1,078,200				5,115,060				4,090,586
GROSS PROFIT			4,933,555				5,512,536				18,389,545				13,495,933
OPERATING EXPENSES:
Research and development expense			(35,743	)			73,970				1,171,668				277,117
General and administrative expenses			1,195,094				662,065				2,650,579				1,994,560
Selling expenses			2,125,771				2,548,848				6,109,982				5,527,281
Depreciation and amortization			121,723				135,973				381,379				416,049
TOTAL OPERATING EXPENSES			3,406,845				3,420,856				10,313,608				8,215,007
INCOME FROM OPERATIONS			1,526,710				2,091,680				8,075,937				5,280,926
OTHER INCOME (EXPENSE):
Interest expense, net of interest income			(600,572	)			(1,246,920	)			(2,509,508	)			(4,068,200	)
Gain on foreign currency transactions			(83,345	)			-				-				-
Equity in loss of joint venture, net			(24,286	)			(19,688	)			(63,051	)			(67,677	)
Subsidy income			(2,126	)			4,866				202,901				284,439
TOTAL OTHER EXPENSE			(710,329	)			(1,261,742	)			(2,369,658	)			(3,851,438	)
INCOME BEFORE INCOME TAXES			816,381				829,938				5,706,279				1,429,488
Income tax expense			146,005				-				1,499,201				-
NET INCOME			670,376				829,938				4,207,078				1,429,488
Net income attributed to non-controlling interest in subsidiaries			47,656				51,962				247,785				92,213
INCOME ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY			622,720				777,976				3,959,293				1,337,275
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment			572,478				14,766				(851,093	)			50,284
COMPREHENSIVE PROFIT			1,195,198				792,742				3,108,200		1,387,559
Other comprehensive income (loss) attributable to non-controlling interest			28,624				738				(42,555	)			2,514
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY		$	1,166,574				792,004				3,150,755				1,385,045
EARNINGS PER SHARE
Basic		$	0.01				0.01				0.05				0.02
Diluted		$	0.01				0.01				0.05				0.02
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic			75,670,953				67,638,657				72,863,479				60,907,137
Diluted			75,749,890				67,676,783				72,942,416				60,951,616

 

See accompanying notes to the consolidated financial statements

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AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

		For the Nine Months Ended
		March 31,
		2016				2105
OPERATING ACTIVITIES:
Net income		$	3,959,293				1,337,275
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			779,065				813,636
Deferred income tax			1,499,201				-
Inventory markdown			-				(7,852	)
Bad debts written back/(written off)			148,141				(296,168	)
Common stock issued for services			241,283				30,150
Equity in loss of joint venture, net of tax			63,051				67,677
Net loss attributable to non-controlling interests			247,785				92,213
Changes in operating assets and liabilities:
Accounts receivable			(3,629,981	)			(2,512,353	)
Inventories			(688,065	)			240,017
Prepaid expenses and other current assets			(4,220,230	)			(846,157	)
Accounts payable			(2,444,751	)			3,811,731
Accrued expenses and other current liabilities			2,079,362				2,417,693
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			(1,965,846	)			5,147,862
INVESTING ACTIVITIES:
Acquisition of property and equipment			(96,447	)			(3,008,154	)
NET CASH USED IN INVESTING ACTIVITIES			(96,447	)			(3,008,154	)
FINANCING ACTIVITIES:
Proceeds from/(Repayment of) bank loan			(469,794	)			13,002,908
Repayment of short-term borrowings			(350,257	)			(2,060,018	)
Repayment of other borrowings			-				(10,174,775	)
Proceeds from/(Repayment of) loans from related party			1,348,510				(1,895,196	)
Sale of common stock			2,739,000				1,395,758
NET CASH PROVIDED BY FINANCING ACTIVITIES			3,267,459				268,677
EFFECT OF EXCHANGE RATE ON CASH			(530,385	)			48,785
INCREASE (DECREASE) IN CASH			674,781				2,457,170
CASH – BEGINNING OF PERIOD			5,371,545				2,329,660
CASH – END OF PERIOD		$	6,046,326				4,786,830
Supplemental disclosures of cash flow information:
Cash paid for interest		$	2,223,281				2,566,158
Cash paid for income taxes		$	-				-
Debt extinguishment using stock		$	2,662,597				4,866,288

 

See accompanying notes to the consolidated financial statements

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AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

 

 

  1             BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The consolidated balance sheet as of June 30, 2015 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year 2015. These interim financial statements should be read in conjunction with that report.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015 filed on October 13, 2015.

2                      BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

  

Aoxing Pharmaceutical Co., Inc. ("the Company" or "Aoxing Pharma") is a specialty pharmaceutical company specializing in research, development, manufacturing and distribution of a variety of narcotic, pain-management, and addiction treatment pharmaceutical products.

As of March 31, 2016, the Company had one operating subsidiary: Hebei Aoxing Pharmaceutical Co., Inc. ("Hebei" or "Hebei Aoxin"), which is organized under the laws of the People's Republic of China ("PRC").  The Company owns 95% of the issued and outstanding common stock of Hebei.

Since 2002, Hebei has been engaged in developing narcotic, pain management, and addiction treatment pharmaceutical products, building its facilities and obtaining the requisite licenses from the Chinese Government.  Headquartered in Shijiazhuang City, the pharmaceutical capital of China, outside of Beijing, Hebei now has China's largest and the most advanced manufacturing facility for highly regulated narcotic medicines, addressing a very under-served and fast-growing market in China. Its facility is one of the few GMP facilities licensed for manufacturing narcotics medicines. The Company is working closely with the Chinese government and SFDA to assure the strictly regulated availability to medical professionals throughout China of its narcotic drugs and pain medicines.

In April, 2008, Hebei completed the acquisition of 100% of the registered capital of Lerentang ("LRT").  LRT was engaged in the manufacture and distribution of Chinese traditional medicines focusing on pain management related therapeutics within China.  By 2011 the manufacturing operations of LRT had been completely integrated into Hebei.  Currently over 80% of the Company's revenues derive from one herbal extraction, obtained from the acquisition of LRT, which is used to alleviate oral/dental and bone pain.

Investment in Joint Venture ("JV")

On April 26, 2010, Aoxing Pharma and Johnson Matthey Plc ("JM") entered into an agreement to establish a joint venture focused on research, development, manufacturing and marketing of active pharmaceutical ingredients for narcotics and neurological drugs for the China market. The joint venture represents a significant new opportunity for both companies to expand their business in the rapidly growing pharmaceutical market in China.  Under the terms of the agreement, Macfarlan Smith Ltd, a wholly owned subsidiary of Johnson Matthey Plc, headquartered in the United Kingdom, will contribute technology expertise and capital to the joint venture. Hebei will contribute capital, fixed assets and related active pharmaceutical ingredients manufacturing licenses. The joint venture company is called Hebei Aoxing API Pharmaceutical Company, Ltd. ("API").  Hebei Aoxing has a 51% stake in API, while Macfarlan Smith (Hong Kong) Ltd (a wholly owned subsidiary of JM) holds 49%. Each company has equal representation on the board of directors that will oversee a management team responsible for corporate strategies and operations.  The new joint venture is located on the Hebei campus in Xinle City, 200 kilometers southwest of Beijing.  The Company accounts for its investment in the Joint Venture under the equity method of accounting.

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Intangible assets

Definite lived intangible assets include the three technology transfers for Lorcaserin Hydrochloride, caffeine tablets and caffeine buccal tablets, and buprenorphine/naloxone, as well as the drug permits recorded at cost less accumulated amortization and any recognized impairment loss. The technology transfers were completed in January with agreements for stocks. The drug permits were acquired in 2008 when the Company purchased LRT and are amortized over their estimated useful life of 15 years on a straight-line basis.  An intangible asset that is subject to amortization shall be reviewed for impairment in accordance with the Impairment or Disposal of Long-Lived Assets ASC 360-10.  In accordance with Accounting Standards Codification ("ASC") Topic 360-10-5, "Impairment or Disposal of Long-Lived Assets", the Company performs an intangible asset impairment test for its definite-lived intangibles whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  The intangible assets balance as of March 31, 2016 and June 30, 2015 are $1,905,169 and $484,857, respectively.

Use of estimates in the preparation of financial statements

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America 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 consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates reflected in the consolidated financial statements include, but are not limited to, the recoverability of the carrying amount and estimated useful lives of long-lived assets, allowance for accounts receivable, realizable values for inventories, fair value of purchase option derivative liability and warranty liability, valuation allowance of deferred tax assets, purchase price allocation of its acquisitions and share-based compensation expenses. Management makes these estimates using the best information available at the time the estimates are made; however, actual results when ultimately realized could differ significantly from those estimates.

Impairment of long lived assets

In accordance with the provisions of ASC Topic 360-10-5, "Impairment or Disposal of Long-Lived Assets," all long-lived assets such as property, plant and equipment, land use rights and intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated with the asset or company of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.  Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable.  Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.

  Fair value Measurements

The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.

The carrying amount of cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short term nature of these items and classified within Level 1 of the fair value hierarchy.

As of March 31, 2016, the Company does not have any assets or liabilities that are measured on a recurring basis at fair value. The Company's short-term borrowings, loans payable, related party notes payable and unrelated party notes payable are considered Level 2 financial instruments measured at fair value on a non-recurring basis as of March 31, 2016.

The carrying amount of the common stock warrants is recorded at fair value and is determined using the Black-Scholes option pricing model based on the Company's stock price at the measurement date, exercise price of the warrant, risk-free rate and historical volatility. The company also measures certain assets, including the long-term investments and intangible assets, at fair value on a nonrecurring basis when they are deemed to be impaired. The fair values of these investments and intangible assets are determined based on valuation techniques using the best information available, and may include management judgments, future performance projections, etc. The Company classified these instruments and assets as a Level 3 of the fair value hierarchy.

Recent accounting pronouncements

In September 2015, the FASB issued ASU No. 2015-16, "Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"). The amendments in this update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer is required to also record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in ASU 2015-16 should be applied prospectively to adjustments to provisional amounts that occur after the effective date of ASU 2015-16 with earlier application permitted for financial statements that have not been issued. We do not expect the adoption of ASU 2015-16 to have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17").  Topic 740, Income Taxes, requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position.  Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting.  Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference.  To simplify the presentation of deferred income taxes, the amendments in ASU 2015-17 require that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position.  For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  We do not expect the adoption of ASU 2015-17 to have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01").  The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee).  The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.  In addition the amendments in this update eliminate the requirement for to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public entities.  For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is not permitted.  We do not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial statements.

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In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02").  The amendments in this update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases.  Topic 842 specifies the accounting for leases.  The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease.  The main difference between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases under Topic 840.  Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP.  The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities.  Early application of the amendments in ASU 2016-02 is permitted.  We are currently in the process of evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.

 

3                 GOING CONCERN

We have incurred operating losses in the past and had an accumulated deficit of $54.4 million as of March 31, 2016. In addition, we had negative working capital of $8.7 million as of March 31, 2016, which is a significant improvement from the negative working capital of $20.1 million as of June 30, 2015. Currently and historically, the Company has managed to operate the business with negative net working capital. The Company's negative working capital is primarily due to our accumulated deficit, which we funded by short-term bank loans.

The Company is able to operate with negative net working capital because of loans from banks and related parties. The Company believes future positive operating cash flows, continued support from related parties, and the ability to continue to roll over short-term debt, taken together, provide adequate resources to fund ongoing operations in the foreseeable future. The Company may also seek equity financing to replace both short-term and long-term debts. The Company believes that the increased market demand for its main product in the near term and the sales from several new products in future years will produce substantial positive cash flow.

 

Management of the Company believes that the Company's large negative working capital will improve gradually during fiscal year 2016. Management expects the improvement to come from improved operating results, by extending short term into longer term loans, and by selling equity and converting debt to equity. Management anticipates that these improvements will enable the Company to reduce current high interest expenses and fund on-going operations. Currently, there are no firm commitments for debt or equity financing.

The management of the Company has taken a number of actions and will continue to address this situation in order to restore the Company to a sound financial position going forward.  In September 2015, the Company sold 2,352,941 shares of common stock and 1,764,706 common stock purchase warrants to an institutional investor and also issued warrants to purchase 141,176 shares of common stock to the placement agent and its affiliates. The company received a net proceed of $2,739,000. Each warrant will permit the holder to purchase one share of common stock from the Company at $1.74 per share.

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  4                  INVENTORIES, NET

Inventories consist of the following:

 

	March 31,				June 30,
	2016				2015
Work in process		$	410,118			$	383,950
Raw materials			617,744				676,590
Finished goods			2,733,835				2,179,486
		$	3,761,697			$	3,240,026

  

The allowance for obsolete inventory as of March 31, 2016 and June 30, 2015 was $602,303 and $465,828, respectively.

5              EQUITY-METHOD INVESTMENT IN JOINT VENTURE

The Company account for its investment in API (see Note 2), under the equity method of accounting.

Summarized financial information for our investment in API assuming a 100% ownership interest is as follows:

 

	For nine months				For the year
	ended				ended
	March 31, 2016				June 30,  2015
Current assets		$	9,917			$	11,767
Noncurrent assets	685,625				758,649
Current liabilities		$	694,822			$	640,416
Noncurrent liabilities	-				-
Equity		$	720			$	130,000
Revenue			-				-
General and administrative expenses		$	123,629			$	183,044
Net loss		$	(123,629	)		$	(183,044	)

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6                  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and taxes consist of the following:

 

		March 31,				June 30,
		2016				2015
Accrued salaries and benefits		$	981,208			$	1,616,963
Accrued interest			1,964,016				2,073,073
Accrued taxes			2,156,580				1,281,704
Deposit payable			563,409				572,105
Due to employee			44,622				46,967
Advance from customers			404,014				291,005
Other accounts payable			483,611				241,512
Other accrued expenses and current liabilities			2,287,030				1,052,996
		$	8,884,490			$	7,176,325

7                  SHORT-TERM BORROWING

Short-term borrowing consists of the following:

 

		March 31				June 30,
		2016				2015
Shijiazhuang Finance Bureau (a)		$	77,510			$	81,582
Shijiazhuang Construction Investment Group Co., Ltd (b)			4,960,625				5,058,086
Mr. Li Hui (c)			-				2,304
Hebei Henghui Investment Management Co., Ltd (d)			2,196,627				3,263,282
TianJin Heng Xing Mirco Finance Bureau (e)			3,875,488				4,079,102
Xinle SASAC Office (f)			403,051				1,860,234
Total		$	11,513,301			$	12,484,356

(a) A non-interest bearing note payable to Shijiazhuang Finance Bureau, an agency of a local government, due on demand.

(b) A one-year loan from Shijiazhuang Construction Investment Group, disbursed through China Construction Bank. The notes bear an annual interest rate of 12%. $1,860,234 was due on October 25, 2015 and was extended to October 23, 2016. $3,100,391 was due on July 12, 2015 and was extended to October 25, 2015 and then further extended to October 25, 2016. The notes were secured by certain registered trademarks and renewal certificates relating to Aoxing's Zhongtong'an capsule.

(c) The balance of $2,304 as at June 30, 2015 represents unpaid portion of interest which was already repaid in fiscal 2016.

(d) A six-month term loan from Hebei Henghui Investment Management Co., Ltd. The note bears an annual interest rate of 10% and has been extended to October 20, 2016.

(e) A short term loan from TianJin Heng Xing Mirco Finance Bureau. The note bears an annual interest rate of 20.04%, and was extended to November 18, 2016.

 

(f) A short term loan from Xinle State-Owned Assets Supervision and Administration Commission. This loan bears an annual interest rate of 9.6%. The term is from January 25, 2016 to June 25, 2016.

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  8               LOAN PAYABLE - BANK

Loan payable – bank consist of the following loans collateralized by assets of the company:

 

		March 31,				June 30,
		2016				2015
Bank Note in the amount of 30 million RMB with Shijiazhuang Huirong Rural Cooperative Bank bearing an annual interest rate of 10% made on September 23, 2014. The note matured on November 22, 2014 and was extended to September 15, 2016		$	4,650,586			$	4,894,922
Bank Note in the amount of 27 million RMB with Postal Savings Bank bearing an annual interest rate of 7.08%, made on July 22, 2014 for one year maturing on July 21, 2015 and was extended to April 6, 2017.			4,185,527				4,894,922
Bank Note in the amount of 20 million RMB with China Merchant Bank bearing an annual floating rate of 5.98%, initially made on December 27, 2013, renewed on January 13, 2015 for one year maturing on April 4, 2017.			3,100,391				3,263,282
Bank Note in the amount of 19.9 million RMB with China Everbright Bank bearing 5.655% interest per annum made on January 16, 2015 for one year maturing on January 15, 2016 and was extended to February 24, 2017.			3,098,840				3,263,282
		$	15,035,344			$	16,316,408

   9         LOAN PAYABLE – RELATED PARTIES

Loan payable – related parties bears interest at an average rate of 10.0% per annum as of March 31, 2016 and June 30, 2015. Loans will mature as follows:

		March 31,				June 30,
		2016				2015
Within one year		$	13,544			$	5,793
1 – 2 years			-				8,158
2 – 3 years			-				-
Total			13,544				13,951
Less current portion			(13,544	)			(5,793	)
		$	-			$	8,158

10              LOAN PAYABLE – OTHER

Loan payable – other consist of loans from unrelated third-parties, bearing interest at an average rate of 10.0% per annum as of March 31, 2016 and June 30, 2015. Loans will mature as following:

 

		March 31,				June 30,
		2016				2015
Within one year		$	15,502			$	-
1 – 2 years			-				1,361,199
2 – 3 years			-				-
3 – 4 years			-				-
Total			15,502				1,361,199
Less current portion			(15,502	)			-
		$	-			$	1,361,199

On November 4, 2015, the Company reached agreement with the creditors to convert the debt into shares of common stock. The conversion was completed on November 23, 2015, which caused the balances of other loan payable declined significantly thereafter.

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11               ISSUANCE OF COMMON STOCK AND WARRANTS

During the period ended September 30, 2014, the Company issued 11,862,278 shares of common stock in satisfaction of $4.6 million in debt at $0.39 per share. Paid in capital was increased by $4,614,426 as a result of the exchange.

 

On November 5, 2014 the Company sold to 22 of its employees a total of 4,527,832 shares of common stock for a total of $1,177,236 or $0.26 per share.

 

On September 10, 2015, the Company issued 60,000 shares of common stock to independent directors at $2.01 per share for services rendered by them.

 

On September 30, 2015 the Company issued 2,352,941 shares of common stock and 1,764,706 common stock purchases warrants pursuant to a securities purchase agreement dated as of September 24, 2015. The purchaser was an institutional investor. Each warrant will permit the holder to purchase one share of common stock from the Company for a price of $1.74 per share. The warrants will be exercisable from March 31, 2016 until March 31, 2021. Cashless exercise of the warrants is permitted only if there is no effective registration statement permitting resale of the common shares underlying the warrants.

 

The proceeds from the offerings were $2,739,000, net of issuance costs of $261,000 paid to the placement agent. The warrants were classified as equity at the date of issuance. They contained no provision that would require liability classification, and can be exercised on a cashless basis. Accordingly, they were classified as equity at the date of issuance. The proceeds were allocated between common stock and warrant, based on relative fair value. The issuance cost was recorded as a reduction of additional paid in capital.

 

In connection with the aforesaid sale, the Company issued to the placement agent and its affiliates warrants to purchase 141,176 shares of common stock. The warrants issued to the placement agent and its affiliates are substantially identical to the warrants sold to the institutional investor. The fair value of these warrants, which amounted to $175,150, was classified as equity at the date of issuance and recorded as an offset to the proceeds from the issuance of the shares and warrants.

 

The fair value of the warrants issued was estimated by using the Black-Scholes-Merton Option Pricing Model with the following assumptions:

 

		For the nine months ended March 31, 2016
		Investor
Stock price			0.66
Exercise price			1.74
Expected life in years			4.5
Annualized Volatility			117.21	%
Annual Rate of Quarterly Dividends			1.65
Discount Rate - Bond Equivalent Yield			1.21

The Company applied its best judgment to estimate key assumptions in determining the fair value of the warrants on the date of issuance. The Company used historical data to estimate stock volatilities. The risk-free rates are consistent with the terms of the warrants and are based on the United States Treasury yield curve in effect at the time of issuance.

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The weighted average fair value of warrants granted for the period ended September 30, 2015 was $1.24 per share. No warrants were exercised, cancelled or expired during the period ended December 31, 2015.

 

On November 4, 2015, the Company reached agreement with three of its creditors to convert $2.66 million high interest bearing debt into 2,046,995 shares of common stock. The shares were valued at $1.30 per share and will be restricted under Rule 144.

On January 5, 2016 the Board of Directors approved three technology acquisition agreements made by the Company during December 2015. Pursuant to the agreements, the Company (a) issued 800,000 shares of common stock and paid $123,000 to acquire technology relating to the formulation of Lorcaserin Hydrochloride, (b) issued 500,000 shares of common stock and paid $77,000 to acquire certain technology relating to the formulation of caffeine tablets, and (c) issued 500,000 shares of common stock and paid $77,000 to acquire certain technology relating to the formulation of Buprenorphine/Naloxone.

On January 5, 2016, the Board of Directors granted options for a total of 590,000 shares of common stock to 25 employees of the Company. The options are exercisable at a price of $.64 per share, which was the closing price for the common stock on January 4, 2016. Each option has a term of five years. The options will not vest until they have been approved by the shareholders of the Company.

On January 5, 2016 the Board of Directors approved two consulting agreements pursuant to which a total of 110,000 shares of common stock were issued in exchange for media and investor relations consulting services.

 12              TAXES

 

The Company's Chinese subsidiaries are governed by the Income Tax Law of the People's Republic of China concerning private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

The reconciliation of income tax at the U.S. statutory rate to the Company's effective tax rate is as follows:

 

		For the nine months ended March 31,
		2016				2015
Tax at U.S. Statutory rate		$	285,734			$	500,320
Tax rate difference between China and U.S.			(452,530	)			(2,655,633	)
Change in Valuation Allowance			111,879				2,155,314
Net operating loss expired			-				-
Stock and option compensation			54,917				-
Effective tax rate		$	-			$	-

The provisions of income taxes (credit) are summarized as follows:

 

		For the nine months ended March 31,
		2016				2015
Current		$	-			$	-
Deferred - U.S.			(341,107	)			(38,113	)
Deferred - China			1,728,429				(2,617,521	)
Valuation allowance - U.S.			341,107				38,113
Valuation allowance - China.			(229,228	)			2,117,201
Total		$	1,499,201			$	-

 

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The tax effects of temporary differences that give rise to the Company's net deferred tax asset as of March 31, 2016 and June 30, 2015 are as follows: 

 

		March 31, 2016				June 30, 2015
Net operating loss carryforward - China		$	108,050			$	1,342,696
Net operating loss carryforward - US			2,182,243				1,935,121
Allowance for doubtful accounts			548,100				823,190
Others			452,896				808,334
			3,291,289				4,909,341
Less: valuation allowance- U.S.			(2,182,244	)			(1,935,121	)
Valuation allowance- China.			(21,827	)			(262,610	)
Deferred tax assets		$	1,087,218			$	2,711,610

  13                 CONCENTRATIONS

Sales to two major customers accounted for 12% and 7% of total sales for the three months ended March 31, 2016. Sales to two major customers accounted for 6% and 6% of total sales for the three months ended March 31, 2015. As of March 31, 2016, two major customers accounted for 8% and 6% of Company's accounts receivable balance. As of March 31, 2015, two major customers accounted for 3% and 0% of Company's accounts receivable balance.

Sales of two major products represented approximately 78% and 16% of total sales for the three months ended March 31, 2016. Sales of two major products represented approximately 96% and 1% of total sales for the three months ended March 31, 2015. 

 

14               SUBSEQUENT EVENTS

In accordance with ASC 855, "Subsequent Events", the Company has evaluated subsequent events that have occurred through the date of issuance of these financial statements and has determined that there was no material event that occurred after the date of the balance sheets included in this report.

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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q (including the section regarding Management's Discussion and Analysis) contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, as well as information relating to Aoxing Pharmaceutical Company, Inc. that is based on management's exercise of business judgment and assumptions made by and information currently available to management. When used in this document and other documents, releases and reports released by us, the words "anticipate," "believe," "estimate," "expect," "intend," "the facts suggest" and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. You should read the following discussion and analysis in conjunction with our unaudited financial statements contained in this report, as well as the audited financial statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Risk Factors" contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015. 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 occurring after the date hereof or to reflect the occurrence of any unanticipated events.

Outline of Our Business

The Company was incorporated in the State of Florida on January 23, 1996. In 2006 the Company liquidated its previous business assets and acquired 60% of Hebei Aoxing. On May 1, 2008 the Company completed the acquisition of an additional 35% interest in Hebei Aoxing from Zhenjiang Yue, our Chief Executive Officer. Currently, the Company owns 95% of Hebei Aoxing.

On April 16, 2008, Hebei Aoxing completed the acquisition of 100% of the registered capital of Shijiazhuang Lerentang Pharmaceutical Company Limited ("LRT"). LRT was engaged in the manufacture and distribution of Chinese traditional medicines focusing on pain management related therapeutics within China. In exchange for transfer of ownership of LRT to Hebei Aoxing, the Company paid to the shareholders of LRT 80 million Renminbi and related expenses (approximately $12.4 million in total) and issued 4 million shares of common stock. Subsequently the Company undertook the integration of LRT's business and operations into Hebei Aoxing, which resulted in a requirement that our manufacturing facilities be relicensed by the government.  In April 2011, the combined Hebei Aoxing and LRT manufacturing facility received GMP certification from the Chinese State Food and Drug Administration (CFDA) for its production lines.  The certification marked the completion of the integration of LRT into Hebei Aoxing. LRT's business is currently operated under Hebei Aoxing.

On April 26, 2010, Aoxing Pharma and Johnson Matthey Plc entered into an agreement to establish a joint venture focused on research, development, manufacturing and marketing of active pharmaceutical ingredients ("API') for narcotics and neurological drugs for the China market. Under the terms of the agreement, Macfarlan Smith Ltd, a wholly owned subsidiary of Johnson Matthey Plc, headquartered in the United Kingdom, will contribute technology expertise and capital to the joint venture. Hebei Aoxing will contribute capital, fixed assets and related API manufacturing licenses. The joint venture company is called Hebei Aoxing API Pharmaceutical Company, Ltd. Hebei Aoxing has a 51% stake in the joint venture, while Macfarlan Smith (Hong Kong) Ltd (a wholly owned subsidiary of Johnson Matthey Pacific Ltd) holds 49%. Each joint venture has equal representation on a board of directors that will oversee a management team responsible for corporate strategies and operations.  The joint venture is located on the Hebei Aoxing campus in Xinle City, 200 kilometers southwest of Beijing. The total capital investment was projected to be approximately $15 million during the first five years at the time of establishment. Approximately $1 million of capital resources had been invested in the joint venture as of March 31, 2016.The slower than planned investment has been mainly resulted from the delays in securing API manufacturing licenses and the Company's focus on its core business.

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Pharmaceutical Market in China

The market for pharmaceutical products in China has been growing dramatically during the past decade.  The growth in the Chinese pharmaceutical market is driven by several factors including improving standards of living and an increase in disposable income fueled by the growing economy, the aging population, the increasing participation in the State Basic Medical Insurance System and the increase in government spending on public health care.  Nevertheless, the pharmaceutical market in China is highly fragmented. We believe there are over 3,000 small enterprises currently engaged in the development, manufacture and sale of pharmaceutical products, and we expect significant consolidation of pharmaceutical business, products and technologies in China in near future.  However, based on recent statistics provided by the China SFDA, there are only 13 pharmaceutical companies designated by the China SFDA as narcotic drug producers in China, and we are one of them.

Narcotics and Pain Management

Since its inception in 2002, Hebei Aoxing has been focusing on research, development, manufacturing and distribution of a variety of narcotics and pain management pharmaceutical products in China. A significant portion of its facility is dedicated to conducting the narcotic drug business with GMP manufacturing capability for drugs in tablet, capsule, injectable, oral solution and granulated formulations - the remainder of the facility is dedicated to the herbal pharmaceutical products acquired from LRT. Over the years, the company has developed a compelling pipeline in narcotics and pain management drugs including Oxycodone, Tilidine/Naloxone and Buprenorphine. In June 2015, the Company received licenses to produce Tilidine Hydrochloride tablets ("Tilidine HCL")

Narcotics, also known as opioids, are chemical substances that have a morphine-like action in the body.  They are prescribed when other pain medications and therapies fail to work. Opioids are used mostly for their analgesic properties to treat severe pain (fentanyl, hydromorphone, methadone, morphine and pethidine), moderate to severe pain (buprenorphine18 and oxycodone) and mild to moderate pain (codeine, dihydrocodeine and dextropropoxyphene), as well as to induce or supplement anaesthesia (fentanyl and fentanyl analogues such as alfentanil and remifentanil). They are also used as cough suppressants (codeine, dihydrocodeine and, to a lesser extent, pholcodine and ethylmorphine), to treat gastrointestinal disorders, mainly diarrhoea (codeine and diphenoxylate), and in the treatment of addiction to opioids (buprenorphine and methadone). Certain analgesic opioids, such as hydrocodone or oxycodone, are compounded in mixtures with non-opiate drugs to provide analgesic action (analgesic-antipyretic preparations).  These drugs are often used in combination with other medications such as antidepressants, anticonvulsants, and non-narcotic pain relievers.  Opioids are the strongest pain medicines available and may become addictive if used on a long-term basis.

Scientific research suggests that opioids relieve pain in two ways. First, they attach to opioid receptors, which are specific proteins on the surface of cells in the brain, spinal cord and gastrointestinal tract. These drugs interfere with the transmission of pain messages to the brain. Second, they work in the brain to alter the sensation of pain. These drugs do not take the pain away, but they do reduce and alter the patient's perception of the pain.  There are four broad classes of narcotics: (1) endogenous opioid peptides (opioids produced naturally in the body); (2) opiates, such as the naturally occurring alkaloids, morphine, codeine, thebaine, papaverine, and the non-alkaloid heroin (processed morphine); (3) semi-synthetic opioids, created from the natural opioids, such as hydromorphone, hydrocodone, and oxycodone; and (4) fully synthetic opioids, such as fentanyl, pethidine, methadone, and propoxyphene.

Opioid drugs have been associated with illicit drug abuse and drug related crime since the onset of their medical use. The United Nations and its member states coordinate responses to this problem through international drug control conventions.  Over 95 per cent of the Member States of the United Nations are now parties to the international drug control conventions, or the "Single Convention on Narcotic Drugs, 1961," organized by International Narcotics Control Board ("INCB"). The conventions contain the basic legal structure, obligations, tools and guidance that are needed for all States to achieve the main aims of the international drug control system: controlled universal availability of narcotic drugs and psychotropic substances for medical and scientific purposes only; prevention of drug abuse, drug trafficking and other forms of drug-related crime; and the undertaking of effective remedial action when prevention does not fully succeed. As such, the conventions constitute the world's agreed proportionate response to the global problems of illicit drug abuse and trafficking and the world's agreed legal framework for international drug control.  

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China entered the "Single Convention on Narcotic Drugs, 1961" in 1985, which resulted in the gradual loosening of government policy toward the control of analgesic supplies.  Before 2000, the per capita consumption of analgesics in China was less than 1% of the consumption in industrialized countries. There were only six varieties of analgesics available in production.  By 2010, Chinese government had approved the production of 25 varieties of analgesics.  In the near future, patients in China will have available 30 varieties and over 80 specifications of different types of analgesics.  Worldwide, there are about 123 varieties of narcotics and pain medicines.

Results of Operations

Revenue for the three months ended March 31, 2016 was $6,563,944, a modest decline of 0.4% year-over-year from the revenue of $6,590,736 realized during the three months ended March 31, 2015. Stated in the local currency (RMB), revenue in the fiscal third quarter increased 6.5% year-over-year. The discrepancy between the revenue comparison in dollars and the revenue comparison in RMB occurred because the Chinese government devalued the RMB in August 2015 and again in January 2016.  Revenue for the nine months ended March 31, 2016 was $23,504,605, representing a 33% increase over the revenue of $17,586,519 realized during the nine months ended March 31, 2015. The increase in year-to-date revenue was primarily attributable to the increase in number of customers and changes in our marketing program. Fiscal third quarter is a relatively slow quarter, mainly due to reduced sales activities during the Chinese New Year holidays, which typically happen during January and February.

Cost of sales was $1,630,389 and $5,115,060 for the three and nine months ended March 31, 2016, which was 51% and 25% higher, respectively, than the costs incurred during the three and nine months ended March 31, 2015. The increase in the cost of sales during the fiscal third quarter this year was mainly due to a shift in our product mix, as we have seen a significant increase in sales of products other than our Zhongtong'an product, including Yiqiqiangqiangshen, Qingkewan, Xiongjushangshangqing. The margins for Zhongtong'an have been quite stable while the margins for these other products are typically much lower than Zhongtong'an. Collectively sales of these other products were five times greater year-over-year during fiscal third quarter 2016.

Operating expenses decreased slightly by 0.4% year-over-year during the third quarter of fiscal 2016. For the first nine months of fiscal 2016, the operating expenses increased by 25.5% year-over-year, due primarily to a large increase in research and development expenses as well as higher G&A and selling expenses. The categories of operating expenses were:

·	During the third quarter of fiscal 2016, the reported research and development expenses had a positive earnings contribution mainly because the leftover of a key raw material, previously expensed for R&D purpose, was transferred to the manufacturing inventory as we are preparing the production of Tilidine tablet.  Excluding this item in $123,658, research and development expenses were $87,915, up 19% year-over-year.
·	General and administrative expenses were $1,195,094 in the three months ended March 31, 2016, compared to $662,065 in the three months ended March 31, 2015.  General and administrative expenses for the first nine months of fiscal 2016 were $2,650,579, compared to $1,994,560 reported for the first nine months of fiscal 2015.
·	Selling expenses in the amount of $2,125,771 incurred during the three months ended March 31, 2016 were 16% lower than $2,548,848 spent on selling during the three months ended March 31, 2015. Selling expenses of $6,109,982 incurred during the nine months ended March 31, 2016 were 10% higher than in the first nine months of fiscal 2015, reflecting the 34% period-to-period increase in revenue.
·	Depreciation and amortization expense fell by 10% from $135,973 to $121,723 and by 8% from $416,049 to $381,379 in the three and nine months ended March 31, 2016. The reduction occurred primarily because some of the equipment we are using has become fully depreciated.

Income from operations during the third quarter of fiscal 2016 was $1,526,710, 27% lower year-over-year due partly to lower gross margin this quarter. For the first nine months of fiscal 2016, income from operations was $8,075,937, up 53% year-over-year from $5,280,926 reported for the first nine months of fiscal 2015.

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Net interest expense was $600,572 and $2,509,508 for the three and nine months ended March 31, 2016, a decrease of 52% and 38% from net interest expense for the three and nine months ended March 31, 2015.  The decrease in interest expense was mainly due to a reduction in loans from related parties.

The Company realized a net profit of $670,376 and $4,207,078 for the three and nine months ended March 31, 2016. Because the Company owns only 95% of Hebei Aoxing, its operating subsidiary, 5% of Hebei Aoxing's income was attributed to the non-controlling interest. Therefore the net income attributable to the shareholders of Aoxing Pharmaceutical for the three months ended March 31, 2016 was $622,720 (or $0.01 per share), compared to $777,976 (or $0.01 per share) for the three months ended March 31, 2015, and net income attributable to the shareholders of Aoxing Pharmaceutical for the nine months ended March 31, 2016 was $3,959,293 (or $0.05 per share), compared to $1,337,275 (or $0.02 per share) during the nine months ended March 31, 2015.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis.

 Our cash balance as of March 31, 2016 was $6,046,327 compared to $5,371,545 as of June 30, 2015. The cash balance increased mainly due to the net cash provided by financing activities as a result of the public sale of equity in September 2015.

Operations during the nine month period ended March 31, 2016 used $1,965,846 in cash, as compared to $5,147,862 cash provided by operation during the nine month period ended March 31, 2015. The cash used in operations during the period ended March 31, 2016 is mainly attributable to payments for raw materials, prepaid expenses and other current assets, as we prepare for an increase in sales. In addition, our accounts receivable balance increased by $2,444,751 during the first nine months of fiscal 2016.

Our investing activities during the nine months ended March 31, 2016 used $96,447 cash to purchase additional property and equipment, modest in comparison to the $3,008,154 expended on equipment in the first nine months of fiscal 2015

Our cash provided by financing activities was $3,267,459 during the nine month period ended March 31, 2016 as compared to $268,677 cash provided by financing activities during the same period last year. During the nine month period ended March 31, 2016,   the Company sold 2,352,941 shares of common stock and 1,764,706 common stock purchase warrants to an institutional investor and received net proceeds of approximately $2.7 million. The Company also obtained $1.3 million loans from related parties. During the same period, the Company repaid bank loans and short-term borrowings of approximately $0.8 million. Cash from financing activities for the same period last year was the net proceeds from loans.

Our working capital deficit on March 31, 2016 was $8,709,820, which was a significant decrease from the working capital deficit of $20,143,629 on June 30, 2015. The improvement in working capital occurred primarily because we used cash flow from operations to reduce short-term loans, converted $2.66 million in short-term loans into equity, and obtained $2.66 million from a public offering of our equity.

As a result of several debts refinancing and debt-to-equity conversion over the first nine months in fiscal 2016, our debt service obligations on March 31, 2016 were as following:

 

Contractual						Less than																				After 5
Obligations		Total				1 Year				1-2 Years				2-3 Years				3-4 Years				4-5 Years				Years
Short-term Borrowing		$	11,513,301			$	11,513,301				-			$	-				-				-				-
Banks			15,035,344				15,035,344				-				-				-				-				-
Affiliates			13,544				13,544				-			$	-				-				-				-
Others			15,502				15,502				-				-				-				-
TOTAL		$	26,577,691			$	26,577,691				-			$	-				-				-				-

     

 We had an accumulated deficit of $54.4 million as of March 31, 2016. In addition, we had negative working capital of $8.7 million as of March 31, 2016, although that is a significant improvement from the negative working capital of $20.1 million as of June 30, 2015, as we have generated net profit and operating cash flow over the last nine months.  Our management anticipates that we will generate sufficient cash flows to fund our operations for the next twelve months by increasing revenues from our core products and continued support from our lenders. We will continue our efforts to control operating costs and preserve cash, such as suspending non-essential research and development projects. Additionally, management does not expect any large capital expenditure projects in the next 12 months.

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We have taken a number of actions and will continue to address our liquidity situation in order to bring the Company to a sound financial position going forward. In September 2015, we sold 2,352,941 shares of common stock and 1,764,706 common stock purchase warrants to an institutional investor . The company received net proceeds of $2.7 million. On November 4, 2015, the Company reached agreement with three of its creditors to convert $2.66 million high interest bearing debt into 2,046,995 shares of common stock. The conversion was completed on November 23, 2015. We may also take additional loans from related parties, if necessary. We are actively exploring various proposals and alternatives in order to secure sources of financing and improve our financial position.

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures .

We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to provide reasonable assurance that information required by Aoxing Pharma in the reports that it files with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time limits specified in the Commission's rules.  "Disclosure controls and procedures" include, without limitation, controls and procedures designed to insure that information Aoxing Pharma is required to disclose in the reports it files with the Commission is accumulated and communicated to our Certifying Officers as appropriate to allow timely decisions regarding required disclosure.

The Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report (the "Evaluation Date"). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective.

Changes in Internal Control over Financial Reporting .

There was no change in internal controls over financial reporting during our most recently completed fiscal quarter that has materially affected or is reasonably likely to materially affect Aoxing Pharmaceutical's internal control over financial reporting.

 

PART II - OTHER INFORMATION

Item 1A. Risk Factors.

There have been no material changes from the risk factors included in the Annual Report on Form 10-K for the year ended June 30, 2015.

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Item 2. Unregistered Sale of Securities and Use of Proceeds

(a)

Unregistered sales of equity securities

The Company did not effect any unregistered sales of equity securities during the quarter ended March 31, 2016.

(c)

Purchases of equity securities

The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the third quarter of fiscal year 2016.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item5. Other Information

None

Item 6. Exhibits

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the SOX of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the SOX of 2002.
32.1	Certificate of Chief Executive Officer pursuant to 18 U.S.C.ss.1350.
32.2	Certificate of Chief Financial Officer pursuant to 18 U.S.C.ss.1350.
101 INS	XBRL Instance Document*
101 SCH	XBRL Schema Document*
101 CAL	XBRL Calculation Linkbase Document*
101 DEF	XBRL Definition Linkbase Document*
101 LAB	XBRL Labels Linkbase Document*
101 PRE	XBRL Presentation Linkbase Document*

*              The XBRL related information in Exhibit 101 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

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SIGNATURES

Pursuant to the  requirements of the Securities  Exchange Act of 1934, the Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the undersigned thereunto duly authorized.

		AOXING PHARMACEUTICAL COMPANY, INC.
Date: May 16, 2016		By: /s/ Zhenjiang Yue
		Zhenjiang Yue, Chief Executive Officer
		(Principal Executive Officer)
Date: May 16, 2016		By: /s/ Zheng James Chen
		Zheng James Chen, Chief Financial Officer
		(Principal Accounting and Financial Officer)

 

 

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