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 September 30, 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 November 14, 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 SEPTEMBER 30, 2016

TABLE OF CONTENTS

 

 

		Page No
Part I	Financial Information
Item 1.	Financial Statements:
	Consolidated Balance Sheet – September 30, 2016 (unaudited) and June 30, 2016	1
	Consolidated Statements of Operations and Other Comprehensive Income (Loss) – for the Three Months Ended September 30, 2016 and 2015 (Unaudited)	2
	Consolidated Statements of Cash Flows – for the Three Months Ended September 30, 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	15
Item 3	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.	Controls and Procedures	18
Part II	Other Information
Item 1A	Risk Factors	19
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	20
Signatures		21

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AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		September 30,				June 30,
		2016				2016
ASSETS		(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents		$	7,055,974				6,912,100
Accounts receivable, net			12,767,133				10,435,101
Notes receivable, net			1,227,593				765,317
Inventories, net			2,433,301				2,841,690
Prepaid expenses and other current assets			6,619,058				5,912,555
TOTAL CURRENT ASSETS			30,103,059				26,866,763
LONG-TERM ASSETS:
Property and equipment, net of accumulated depreciation			25,277,267				25,603,734
Deferred income tax			1,532,500				1,878,595
Other intangible assets, net			1,862,139				1,878,299
Investment in joint venture			-				4,200
TOTAL LONG-TERM ASSETS			28,671,906				29,364,828
TOTAL ASSETS		$	58,774,965				56,231,591
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings		$	8,544,369				11,070,966
Accounts payable			3,137,060				2,709,819
Loan payable – bank			14,336,552				14,372,630
Current portion of loan payable - related parties			5,793				13,317
Current portion of loan payable – others			2,408,912				15,048
Accrued expenses and other current liabilities			11,406,652				9,633,750
TOTAL CURRENT LIABILITIES			39,839,338				37,815,530
LONG-TERM LIABILITIES:
Loan payable - related parties			7,495
Loan payable – others			89,941
Deferred income			322,967				340,089
TOTAL LONG-TERM LIABILITIES			420,403				340,089
Common stock, par value $0.001, 100,000,000 shares authorized, 76,209,195  shares issued and outstanding on September 30, 2016 and June 30, 2016			76,209				76,209
Additional paid in capital			73,638,151				73,629,751
Accumulated deficit			(55,947,665	)			(56,293,745	)
Accumulated other comprehensive income			1,764,235				1,723,740
TOTAL SHAREHOLDERS' EQUITY OF THE COMPANY			19,530,930				19,135,955
NONCONTROLLING INTEREST IN SUBSIDIARIES			(1,015,706	)			(1,059,983	)
TOTAL EQUITY			18,515,224				18,075,972
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	58,774,965				56,231,591

See accompanying notes to the consolidated financial statements

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AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
		For the Three Months Ended
		September 30,
		2016				2015
SALES		$	7,569,296			$	8,744,822
COST OF SALES			1,514,932				1,758,079
GROSS PROFIT			6,054,364				6,986,743
OPERATING EXPENSES:
Research and development expense			377,287				377,306
General and administrative expenses			1,276,720				944,358
Selling expenses			2,577,366				2,394,346
Depreciation and amortization			119,485				131,530
TOTAL OPERATING EXPENSES			4,350,858				3,847,540
INCOME FROM OPERATIONS			1,703,506				3,139,203
OTHER INCOME/(EXPENSE):
Interest expense, net of interest income			(656,486	)			(929,029	)
Gain on foreign currency transactions			-				58,593
Equity in loss of joint venture, net of tax			(4,186	)			(24,291	)
Subsidy income			-				47,760
TOTAL OTHER (EXPENSE)			(660,672	)			(846,967	)
INCOME BEFORE INCOME TAX			1,042,834				2,292,236
Income tax			651,077				943,803
NET INCOME			391,757				1,348,433
Net income attributed to non-controlling interest in subsidiaries			45,677				80,497
INCOME ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY			346,080				1,267,936
OTHER COMPREHENSIVE LOSS :
Foreign currency translation adjustment			(28,020	)			(669,991	)
COMPREHENSIVE INCOME			318,060				597,945
Other comprehensive income attributable to non-controlling interest			(1,401	)			(33,500	)
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY		$	319,461			$	631,445
BASIC AND DILUTED LOSS PER COMMON SHARE		$	0.00			$	0.02
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING			76,209,195				69,852,302

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 Three Months Ended
		September 30,
		2016				2015
OPERATING ACTIVITIES:
Net income		$	346,080			$	1,348,433
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			244,544				268,349
Deferred income tax			339,004				885,210
Bad debts written off			87,770				67,736
Common stock issued for services			8,400				132,199
Equity in loss of joint venture, net of tax			4,185				24,291
Net loss attributable to non-controlling interests			45,678
Changes in operating assets and liabilities:
Accounts receivable			(2,926,652	)			(1,459,153	)
Inventories			397,607				(109,690	)
Prepaid expenses and other current assets			(662,830	)			(583,369	)
Accounts payable			437,908				(560,934	)
Accrued expenses and other current liabilities			1,829,062				377,073
Deferred income			(15,817	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			134,939				390,145
INVESTING ACTIVITIES:
Acquisition of property and equipment			(2,131	)			(81,502	)
NET CASH USED IN INVESTING ACTIVITIES			(2,131	)			(81,502	)
FINANCING ACTIVITIES:
Proceeds from/(Repayment of) bank loan			-				(477,608	)
Repayment of short – term borrowings			-				(670,899	)
Proceeds from loans from related party			-				1,375,511
Sale of common stock							2,739,000
NET CASH PROVIDED BY FINANCING ACTIVITIES			-				2,966,004
EFFECT OF EXCHANGE RATE ON CASH			11,066				(474,317	)
INCREASE IN CASH			143,874				2,800,330
CASH – BEGINNING OF PERIOD			6,912,100				5,371,545
CASH – END OF PERIOD		$	7,055,974			$	8,171,875
Supplemental disclosures of cash flow information:
Cash paid for interest		$	2,305,929			$	1,716,565
Cash paid for income taxes		$	-			$	-

 

See accompanying notes to the consolidated financial statements

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AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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, 2016 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year 2016. 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, 2016, filed on October 5, 2016.

 

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 September 30, 2016, the Company had one operating subsidiary: Hebei Aoxing Pharmaceutical Co., Inc. ("Hebei"), which is organized under the laws of the People's Republic of China ("PRC").  As of September 30, 2016, the Company owned 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 CFDA 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 90% 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. On March 10, 2010, the joint venture obtained a business license from the City Industry & Commercial Administrative Bureau. The Company accounts for its investment in the Joint Venture under the equity method of accounting.

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2                    BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Intangible assets

Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The Company evaluates the continuing value of the intangibles at each balance sheet date and records write-downs if the continuing value has become impaired. An impairment is determined to exist if the anticipated undiscounted future cash flow attributable to the asset is less than its carrying value. The asset is then reduced to the net present value of the anticipated future cash flow.

Definite lived intangible assets include the drug permits acquired in 2008 when the Company purchased LRT. Definite lived intangible assets are recorded at cost less accumulated amortization and any recognized impairment loss.  The drug permits are amortized over their estimated useful life of 15 years on a straight-line basis. In addition, the Company acquired the technologies for Lorcaserin Hydrochloride, caffeine tablets and caffeine buccal tablets, and buprenorphine/naloxone in January 2016 in exchange for shares of the Company's stock. These three technologies are not amortized as the technologies are determined to carry their value with no termination dates at this point.

An intangible asset that is subject to amortization shall be reviewed for impairment in accordance with Accounting Standards Codification ("ASC") Topic 360-10-5, "Impairment or Disposal of Long-Lived Assets", pursuant to which 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 September 30, 2016 and June 30, 2016 were $ 1,862,139  and $1,878,299 respectively. The intangible assets subject to amortization are listed in the following table:

Registration and Trademark
		September 30, 2016				June 30, 2016
Cost Basis		$	1,714,345			$	1,720,988
Less: accumulated amortization			1,342,206				1,332,689
			372,139				388,299
Software
		September 30, 2016				June 30, 2016
Cost Basis			12,838				12,887
Less: accumulated amortization			12,838				12,887
			0				0
Total intangibles, net		$	372,139			$	388,299

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2                    BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

For the above intangible assets that are subject to amortization, estimated amortization expense for each of the fiscal years are follows for the years ending June 30:

		Amount
2017		$	58,644
2018		58,444
2019		56,446
2020			56,246
2021 and thereafter		157,020
		$	386,800

For intangible assets not subject to amortization, the total amount is $1,490,000 as of September 30, 2016, which is related to the three technologies acquired in January, 2016.

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.

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2                    BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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 September 30, 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 September 30, 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 May 2014, the FASB issued ASU No. 2014 -09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" ("ASU 2015-14") in August 2015. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.  Further to ASU 2014-09 and ASU 2015-14, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" ("ASU 2016-08") in March 2016, ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" ("ASU 2016-10") in April 2016, and ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" ("ASU 2016-12"), respectively.  The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers.  ASU 2016-10 clarifies guideline related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard.  The updates in ASU 2016-10 include targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders.  It seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis.  ASU 2016-12 addresses narrow-scope improvements to the guidance on collectibility, non-cash consideration, and completed contracts at transition.  Additionally, the amendments in this ASU provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.  The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 are the same as ASU 2014-09.  We are currently in the process of evaluating the impact of the adoption of ASU 2014-09, ASU 2016-08, ASU 2016-10 and ASU 2016-12 on our consolidated financial statements.

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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.

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.

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.  The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  We are currently evaluating the impact of the adoption of ASU 2016-15 on our consolidated financial statements.

 

3                     GOING CONCERN

We have incurred operating losses in the past and had an accumulated deficit of $55.9 million as of September 30, 2016. In addition, we had negative working capital of $9.7 million as of September 30, 2016, Compared to the negative working capital of $10.9 million as of June 30, 2016. 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.

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3                     GOING CONCERN (Continued)

The Company is able to operate with negative net working capital because of loans from banks and related parties that are rolled-over or replaced as needed. 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 market demand for its main product will recover 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 continue to improve during fiscal year 2017. 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.  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.

 

4                     INVENTORIES, NET

 

Inventories consist of the following:

 

	September 30,				June 30,
	2016				2016
Work in process		$	406,077			$	568,876
Raw materials			649,056				805,024
Finished goods			1,378,168				1,467,790
		$	2,433,301			$	2,841,690

  

The allowance for obsolete inventory as of September 30, 2016 and June 30, 2016 was $696,097 and $584,674, 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:

 

		September 30, 2016				June 30,  2016
Current assets		$	9,370			$	9,602
Noncurrent assets		640,406				654,213
Current liabilities		$	743,874			$	710,148
Noncurrent liabilities		-				-
Equity		$	(94,098	)		$	(46,333	)
		Quarter Ended
		September 30, 2016				September 30, 2015
Revenue			-				-
General and administrative expenses		$	47,967			$	166,229
Net loss		$	(47,967	)		$	(166,229	)

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6       ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and taxes consist of the following:

 

		September 30,				June 30,
		2016				2016
Accrued salaries and benefits		$	1,484,184			$	1,168,653
Accrued interest			2,956,169				2,602,674
Accrued taxes			3,269,320				2,619,533
Deposit payable			578,099				588,905
Due to employee			43,149				43,316
Advance from customers			334,405				413,848
Other accounts payable			713,906				572,013
Other accrued expenses and current liabilities			2,027,420				1,624,808
		$	11,406,652			$	9,633,750

7       SHORT-TERM BORROWING

Short-term borrowing consists of the following:

 

		September 30				June 30,
		2016				2016
Shijiazhuang Finance Bureau (a)		$	-			$	75,241
Shijiazhuang Construction Investment Group Co., Ltd (b)			4,796,839				4,815,426
Hebei Henghui Investment Management Co., Ltd (c)			-				2,117,283
TianJin Heng Xing Mirco Finance Bureau (d)			3,747,530				3,762,052
Xinle SASAC Office (e)			-				300,964
Total		$	8,544,369			$	11,070,966

(a) A non-interest bearing note payable to Shijiazhuang Finance Bureau, an agency of a local government, due on demand. This has been reclassified as current portion of loan payable – others since Shijiazhuang Finance Bureau is not a financial institution.

(b) A one-year loan from Shijiazhuang Construction Investment Group, disbursed through China Construction Bank. The notes bear an annual interest rate of 12%. $1,798,815 was due on October 25, 2015 and was extended to February 25, 2017. $2,998,024 was due on July 12, 2015 and was extended to February 28, 2017. The notes were secured by certain registered trademarks and renewal certificates relating to Aoxing's Zhongtong'an capsule.

(c) 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 February 22, 2017. This has been reclassified as current portion of loan payable – others since Hebei Henghui Investment Management Co., Ltd. is not a financial institution.

(d) 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 February 17, 2017.

(e) 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 was from January 25, 2016 to June 25, 2016 and was extended to March 31, 2017. This has been reclassified as current portion of loan payable – others since Xinle State-Owned Assets Supervision and Administration Commission is not a financial institution.

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8       LOAN PAYABLE - BANK

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

 

		September 30,				June 30,
		2016				2016
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 January 14, 2017		$	4,497,037			$	4,514,462
Bank Note in the amount of 25.7 million RMB with Postal Savings Bank bearing an annual interest rate of 6.09%, made on July 22, 2014 for one year maturing on July 21, 2015 and was extended toApril 6, 2017.			3,844,966				3,859,865
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 and extended to April 4, 2017.		$	2,998,024			$	2,991,584
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.			2,996,525				3,006,719
		$	14,336,552			$	14,372,630

9                     LOAN PAYABLE – RELATED PARTIES

 

Loan payable – related parties bears interest at an average rate of 10.0% per annum as of September 30, 2016 and June 30, 2016.

 

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 September 30, 2016 and June 30, 2016.

 

11                   ISSUANCE OF COMMON STOCK

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.

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11    ISSUANCE OF COMMON STOCK (Continued)

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 quarter ended September 30, 2016
		Investor
Stock price		$	0.80
Exercise price		$	0.64
Expected life in years		$	5.00
Annualized Volatility			139.66	%
Annual Rate of Quarterly Dividends			0
Discount Rate - Bond Equivalent Yield			1.73

 

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.

 

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, for $0.66 per each stock, (b) issued 500,000 shares of common stock and paid $77,000 to acquire certain technology relating to the formulation of caffeine tablets, for $0.66 per each stock, and (c) issued 500,000 shares of common stock and paid $77,000 to acquire certain technology relating to the formulation of Buprenorphine/Naloxone, for $0.71 per each stock. The share price was determined by the Company's stock price at the issuance date.

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, for $0.66 per each stock based on the Company's stock price at the issuance date.

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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 Company's Chinese subsidiaries have a favorable statutory tax rate of 15% due to its high-tech enterprise status.

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

		Three months Ended September 30,
		2016				2015
Tax at U.S. Statutory rate		$	364,992			$	802,282
Tax rate difference between China and U.S.			(186,443	)			(604,938	)
Change in Valuation Allowance			130,583				(239,774	)
Net operating loss expired			-				-
Stock and option compensation			2,940				42,148
Impairment loss on goodwill			-
Effective tax rate		$	312,072			$	-

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

		Three months Ended September 30,
		2016				2015
Current		$	312,072			$
Deferred - U.S.			(143,296	)
Deferred – China			351,718				1,183,295
Valuation allowance - U.S.			143,296
Valuation allowance – China			(12,713	)			(239,492	)
Total		$	651,077			$	943,803

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

		Three months Ended September 30,
		2016				2015
Net operating loss carryforward - China		$	0			$	106 , 396
Net operating loss carryforward - US			2,562,206				1,907,037
Allowance for doubtful accounts and inventory			489,536				692,605
Others			1,042,963				958,106
			4,094,705				3,664,144
Less: valuation allowance- U.S.			-2,562,206				-1,907,037
valuation allowance- China.			0				-22,091
Deferred tax assets			1,532,499				1,735,016

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12                   TAXES (Continued)

As of September 30, 2016, the Company has a full valuation allowance for its deferred tax asset balance related to China and the US. The Company restated the prior year financial statements to provide a full valuation allowance for deferred tax assets. The Company's loss carry forwards for the past 5 years already have no influence on the deferred tax assets and due to certain negative indicators that were present as of September 30, 2016, the Company determined it was appropriate under US GAAP to restate the prior year financial statements and provide a 100% valuation allowance for the deferred tax assets.

For the three month ended September 30, 2016 and 2015, the Company did not have any interest and penalties associated with tax positions. As of September 30, 2016 and 2015, the Company did not have any significant unrecognized uncertain tax positions.

 

13                   CONCENTRATIONS

 

Sales to two major customers accounted for 9.5% and 9.0% of total sales for the three months ended September 30, 2016. Sales to two major customers accounted for 9% and 6% of total sales for the three months ended September 30, 2015. As of September 30, 2016, two major customers accounted for 6.0% and 4.9% of Company's accounts receivable balance. As of September 30, 2015, two major customers accounted for 7% and 5% of Company's accounts receivable balance.

Sales of two major products represented approximately 92.8% and 2.5% of total sales for the three months ended September 30, 2016. Sales of two major products represented approximately 88.1% and 6.9% of total sales for the three months ended September 30, 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, 2016. 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 September 30, 2016.The slower than planned investment has 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 September, 2016 was $7,569,296, down 13% year-over-year from the revenue of $8,744,822 realized during the three months ended September 30, 2015. Stated in the local currency (RMB), revenue in the fiscal first quarter decreased 8.1% 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. The year-over-year revenue decline was mainly due to lower sales for Zhongtong'an product, which represented 92.8% of total sales during the first quarter of fiscal 2017. Sales of Zhongtong'an product have been under pressure as inventories in the pipeline remain low. Our Tilidine product has not yet contributed to sales.

Cost of sales was $1,514,932 for the three months ended September 30, 2016, which was 14% lower than the costs incurred during the three months ended September 30, 2015. This is in line with the change in the revenue and the gross margins for both periods were 80%.

Operating expenses increased 13% year-over-year during the first quarter of fiscal 2017, due primarily to higher G&A and selling expenses. During the first quarter of fiscal 2017, general and administrative expenses were $1,276,720 in the three months ended September 30, 2016, up from $944,358 in the three months ended September 30, 2015.  Selling expenses in the amount of $2,577,366 incurred during the three months ended September 30, 2016 were 8% higher than $2,394,346 spent on selling during the three months ended September 30, 2015. Research and development expenses were $377,287, compared to $377,306 a year ago. Depreciation and amortization expenses were $119,485 for the fiscal first quarter 2017, down from $131,530 a year ago.

Income from operations during the first quarter of fiscal 2017 was $1,703,506, down from the operating income of $3,139,203 during the first quarter of fiscal 2016, mainly due to lower sales and higher operating expenses.

Net interest expense was $656,486 for the three months ended September 30, 2016, a decrease of 29% from net interest expense for the three months ended September 30, 2015. The decrease in net interest expenses was mainly due to lower net debt year-over-year.

The Company realized a net profit of $391,757 for the three ended September 30, 2016. Excluding net profit attributed to non-controlling interest in subsidiaries, net income attributable to the shareholders of Aoxing Pharmaceutical for the three months ended September 30, 2016 was $346,080 (or $0.00 per share), compared to $1,267,936 (or $0.02 per share) for the three months ended September 30, 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 September 30, 2016 was $7,055,974, compared to $6,912,100 as of June 30, 2016. Operations during the three month period ended September 30, 2016 provided $134,939 in cash, as compared to $390,145 cash provided by operations during the three month period ended September 30, 2015. During this reporting period, we did not make any major investment.

During the quarter ended September 30, 2016 we had no major financing activities, whereas during the quarter ended September 30, 2015 we completed a public offering of stock and warrants for net proceeds of $2,739,000 and borrowed $1,375,511 from related parties, a portion of which we used to satisfy $1,148,507 in short-term debt.  On the balance sheet, the decline in short-term borrowing and the increase in accrued expenses and other current liabilities were mainly the result of accounting reclassification, as explained in the Note 7 Short-Term Borrowing to the consolidated financial statements above.

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Our working capital deficit on September 30, 2016 was $9,736,279, compared to $10,948,767 as of June 30, 2016. 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 that are rolled-over or refinanced as needed. 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 market demand for its main product will recover 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 continue to improve during fiscal year 2017. 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.  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.

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.

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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, 2016.

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 September 30, 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 first quarter of fiscal year 2017.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item5. Other Information

None

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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: November 14, 2016	By: /s/ Zhenjiang Yue
	Zhenjiang Yue, Chief Executive Officer
	(Principal Executive Officer)
Date: November 14, 2016	By: /s/ Zheng James Chen
	Zheng James Chen, Chief Financial Officer
	(Principal Accounting and Financial Officer)

 

 

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