United States
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-Q
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[X]
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2014
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[ ]
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _____ to _____
Commission File No. 1-32674
AOXING PHARMACEUTICAL COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
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Florida
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65-0636168
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer ID Number)
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444 Washington Blvd, Suite 3338, Jersey City, NJ 07310
(Address of Principal Executive Offices)
Issuer's Telephone Number: (646) 367-1747
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, 2014 the number of shares outstanding of the Registrant’s common stock was 66,264,930 with $.001 par value.
AOXING PHARMACEUTICALCOMPANY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2014
TABLE OF CONTENTS
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Page No
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Part I
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Financial Information
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Item 1.
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Financial Statements:
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Consolidated Balance Sheet – September 30, 2014 (unaudited) and June 30, 2014
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1
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Consolidated Statements of Operations and Other Comprehensive Income (Loss) – for the Three Months Ended September 30, 2014 and 2013 (Unaudited)
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2
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Consolidated Statements of Cash Flows – for the Three Months Ended September 30, 2014 and 2013 (Unaudited)
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3
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Notes to Consolidated Financial Statements (Unaudited)
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4
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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13
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Item 3
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Quantitative and Qualitative Disclosures about Market Risk
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17
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Item 4.
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Controls and Procedures
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17
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Part II
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Other Information
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Item 1A
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Risk Factors
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18
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Item 2
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Unregistered Sale of Securities and Use of Proceeds
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18
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Item 3
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Defaults Upon Senior Securities
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18
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Item 4
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Mine Safety Disclosures
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18
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Item 5
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Other Information
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18
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Item 6
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Exhibits
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19
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Signatures
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20
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AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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September 30,
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June 30,
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2014
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2014
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ASSETS
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(Unaudited)
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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2,343,822
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$
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2,329,660
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Accounts receivable, net of allowance for doubtful accounts of $1,380,016 and $1,562,109, respectively
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4,021,459
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3,890,550
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Inventories, net
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2,272,342
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2,195,274
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Prepaid expenses and other current assets
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3,410,258
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2,505,129
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TOTAL CURRENT ASSETS
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12,047,881
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10,920,613
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LONG-TERM ASSETS:
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Property and equipment, net of accumulated depreciation
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26,335,174
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26,418,842
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Other intangible assets, net
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530,378
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546,114
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Investment in joint venture
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163,240
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189,185
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TOTAL LONG-TERM ASSETS
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27,028,792
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27,154,141
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TOTAL ASSETS
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$
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39,076,673
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$
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38,074,754
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES:
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Short-term borrowings
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$
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5,281,696
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$
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11,398,464
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Accounts payable
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3,424,154
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3,883,198
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Loan payable – bank
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20,305,393
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3,247,966
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Current portion of loan payable - related parties
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396,956
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1,084,248
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Current portion of long-term bank loan
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-
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10,166,133
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Accrued expenses and other current liabilities
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3,409,690
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4,434,790
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TOTAL CURRENT LIABILITIES
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32,817,889
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34,214,799
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LONG-TERM LIABILITIES:
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Loan payable - related parties
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3,904,613
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6,146,803
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- others
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1,355,184
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1,354,810
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Deferred income
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367,122
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367,020
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TOTAL LONG-TERM LIABILITIES
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5,626,919
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7,868,633
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Common stock, par value $0.001, 100,000,000 shares authorized, 61,737,100 and 49,874,822 shares issued and outstanding on September 30, 2014 and June 30, 2014
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61,737
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49,875
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Additional paid in capital
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62,932,722
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58,315,446
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Accumulated deficit
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(63,857,552)
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(63,849,681
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)
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Accumulated other comprehensive income
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2,992,354
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2,979,235
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TOTAL SHAREHOLDERS' EQUITY OF THE COMPANY
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2,129,261
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(2,505,125)
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NONCONTROLLING INTEREST IN SUBSIDIARIES
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(1,497,396)
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(1,503,553
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)
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TOTAL EQUITY
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631,865
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(4,008,678)
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
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$
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39,076,673
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$
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38,074,754
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See accompanying notes to the consolidated financial statements
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AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
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(Unaudited)
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For the Three Months Ended
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September 30,
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2014
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2013
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SALES
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$
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4,565,081
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$
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3,577,108
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COST OF SALES
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1,387,534
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2,014,663
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GROSS PROFIT
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3,177,547
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1,562,445
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OPERATING EXPENSES:
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Research and development expense
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107,550
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177,941
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General and administrative expenses
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511,486
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830,050
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Selling expenses
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1,202,509
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1,617,989
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Depreciation and amortization
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139,276
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181,426
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TOTAL OPERATING EXPENSES
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1,960,821
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2,807,406
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INCOME (LOSS) FROM OPERATIONS
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1,216,726
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(1,244,961)
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OTHER EXPENSE:
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Interest expense, net of interest income
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(1,193,160)
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(1,074,690)
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Equity in loss of joint venture, net of tax
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(25,971)
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(31,323)
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TOTAL OTHER EXPENSE
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(1,219,131)
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(1,106,013)
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LOSS BEFORE INCOME TAX
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(2,405
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)
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(2,350,974)
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Income tax
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-
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-
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NET LOSS
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(2,405
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)
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(2,350,974)
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Net income (loss) attributed to non-controlling interest in subsidiaries
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5,467
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(115,988)
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LOSS ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY
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(7,872
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)
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(2,234,986)
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OTHER COMPREHENSIVE INCOME :
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Foreign currency translation adjustment
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13,809
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20,870
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COMPREHENSIVE PROFIT/(LOSS)
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5,937
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(2,214,116)
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Other comprehensive income attributable to non-controlling interest
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690
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1,043
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COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
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$
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5,247
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$
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(2,215,159)
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|
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|
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|
|
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BASIC AND DILUTED LOSS PER COMMON SHARE
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$
|
-
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$
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(0.04)
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
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53,098,267
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49,814,822
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See accompanying notes to the consolidated financial statements
| AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES |
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
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For the Three Months Ended
|
|
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September 30,
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OPERATING ACTIVITIES:
|
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2014 |
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|
2013 |
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Net loss
|
|
$
|
(2,405
|
)
|
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$
|
(2,350,974)
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|
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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280,349
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|
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273,808
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Bad debts written back/(written off)
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(182,339
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)
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64,897
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Common stock issued for services
|
|
|
2,850
|
|
|
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3,900
|
|
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Equity in loss of joint venture, net of tax
|
|
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25,972
|
|
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31,323
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|
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Inventory markdown
|
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83,392
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|
|
|
|
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Changes in operating assets and liabilities:
|
|
|
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Accounts receivable
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52,636
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|
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(908,790)
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Inventories
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(159,776)
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|
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330,011
|
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Prepaid expenses and other current assets
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|
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(903,514)
|
|
|
|
48,677
|
|
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Accounts payable
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|
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(459,649)
|
|
|
|
(16,467)
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Accrued expenses and other current liabilities
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|
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(1,025,274)
|
|
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|
297,317
|
|
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NET CASH USED IN OPERATING ACTIVITIES
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|
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(2,287,758)
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|
|
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(2,226,298)
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|
|
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|
|
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INVESTING ACTIVITIES:
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|
|
|
|
|
|
|
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Acquisition of property and equipment
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|
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(173,606
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)
|
|
|
(11,475)
|
|
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NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(173,606
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)
|
|
|
(11,475)
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|
| |
|
|
|
|
|
|
|
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FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
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Proceeds from/(Repayment of) bank loan
|
|
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17,039,175
|
|
|
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(194,504)
|
|
|
Repayment of short – term borrowings
|
|
|
(6,113,689)
|
|
|
|
-
|
|
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Repayment of other borrowings
|
|
|
(10,158,594)
|
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
Repayment of loans from related party
|
|
|
1,703,598
|
|
|
|
(48,626)
|
|
|
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
|
|
2,470,490
|
|
|
|
(243,130)
|
|
| |
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH
|
|
|
5,036
|
|
|
|
16,582
|
|
| |
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH
|
|
|
14,162
|
|
|
|
(2,464,321)
|
|
|
CASH – BEGINNING OF PERIOD
|
|
|
2,329,660
|
|
|
|
4,007,823
|
|
|
CASH – END OF PERIOD
|
|
$
|
2,343,822
|
|
|
$
|
1,543,502
|
|
| |
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
936,445
|
|
|
$
|
939,511
|
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
See accompanying notes to the consolidated financial statements
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(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, 2014 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year 2014. 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, 2014 filed on September 29, 2014.
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, 2014, 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, 2014, 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 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.
Liquidity and Capital Resources
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 substantial short-term loans from banks. The Company is able to operate with a negative net working capital because of local governmental subsidies and loans from unrelated and related parties. The Company believes operating cash flows turning positive in the near-term, 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. In terms of sales, the Company’s previous sales process begins with the sales manager who ships the product to a third-party sales agent. The sales agent then sells the product directly to the customer. With the current sales process, the Company gradually terminates the sales agent contracts and sells the product directly to the customer. The product is delivered to the customer through a logistics company. The Company believes that the increased market demand for its main product in the near term and the change in sales distribution network will produce substantial positive cash flow. If the Company’s short-term cash flows decrease significantly and the Company is unable to pay its short-term liabilities, the Company’s business, financial condition and results of operations could be materially affected.
We have incurred recurring operating losses and had an accumulated deficit of $63.9 million as of September 30, 2014. In addition, we had negative working capital of $20.8 million as of September 30, 2014. Our history of operating losses and lack of binding financing commitments raise substantial doubt as to our ability to continue as a going concern. Despite negative operating cash flow positions, our management anticipates that we will generate sufficient cash flows to fund our operations in fiscal year 2015 by increasing revenues and profit margins of our core product sales and continued support from our lenders to rollover debt when it becomes due. If future sales do not meet our forecasts, we may be required to fund operations by raising additional capital or seek external financing. As such, our ability to achieve our business plan is primarily dependent upon our ability to grow our planned level of operations and/or obtain sufficient additional capital at acceptable costs. With respect to these objectives, we cannot provide any assurance that we will succeed. If events or circumstances occur such that we are unable to or do not meet our operating plan as expected and/or do not secure additional financing, we may be required to significantly curtail or cease operations.
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.
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, 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 measurement
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.
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, 2014, 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 that are considered Level 2 financial instruments measured at fair value on a non-recurring basis as of September 30, 2014.
The Company does not have any level 3 financial instruments. The Company uses the discounted cash flow approach when determining fair values of its non-recurring fair value measurements when required. We determine the fair value of our goodwill for purposes of comparing to the carrying value on at least an annual basis. Our goodwill would be adjusted to fair value if it is deemed to be impaired Certain unobservable units for these assets are offered quotes, lack of marketability, long-term revenue growth rates and discounts rates. For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a significantly lower or higher fair value measurement.
Recent accounting pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
In April 2014, the FASB issued ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset company was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entity's operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance is effective for periods beginning after December 15, 2014. The Company currently does not have operations that are reported as discontinued operations and does not expect the adoption of this guidance to have a material effect the Company’s financial position, results of operations, or cash flows.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (ASU 2014-12). The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management's plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
3 GOING CONCERN
The Company incurred a net loss of $2,405 and had $2,287,758 negative cash flow from operations during the year ended September 30, 2014. As of September 30, 2014, the Company’s current liabilities exceeded its current assets by $20,770,008. The Company had cash and cash equivalents of $2,343,822 as of September 30, 2014. The Company’s ability to continue as a going concern is dependent on many events outside of its direct control, including, among other things, the amount of working capital that the Company has available. The Company’s inability to generate cash flows from operations to meet its obligations and the uncertainty of raising the funds required for operations on reasonable terms, among other factors, raises substantial doubt as to the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Management of the Company believes that the Company's large negative working capital will improve gradually during fiscal year 2015. Management expects the improvement to come from conversion of debt into equity, equity fund raising and improved operating results. Management anticipates that these improvements will enable the Company to sustain continuing 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 with an appropriate business strategy going forward. During the period ended September 30, 2014, the Company obtained a short term borrowing of $3.2 million from Shijiazhuang Construction Investment Corporation for 12 months, and the due date is November 11, 2014. The Company further obtained a $4.9 million bank loan from Postal Savings Bank, a $4.1 million bank loan from China MinSheng Bank, a $8.1 million loan from Rural credit cooperative of ShiJiaZhuang, and a $1.9 million loan from HeBei ChuangYu Investment Group Co., Ltd. during the period ended September 30, 2014.
In July 2014, six creditors agreed to convert $4.6 million in debt to shares at a conversion rate of $0.39 per share which was the six-month average share price. In addition, the Company is reviewing possible adjustments to the sales team and marketing policies to make the sales profitable in a faster manner.
Considering that revenue for the quarter ended September 30, 2014 was higher than revenue during 1st quarter of the prior year, management believes operating cash flows will turn positive in the near-term. The Company anticipates the average price of its products will increase substantially through the change in sales distribution network. The Company’s previous sales process begins with the sales manager who ships the product to a third-party sales agent. The sales agent then sells the product directly to the customer. With the current sales process, the Company gradually terminates the sales agent contracts and sells the product directly to the customer through a local distributor. Management also believes that the increased market demand for its main product in the near term and a reduction in cost and usage of raw materials will be sufficient to offset the selling and administrative expenses and generate substantial positive operating cash flows. Management also believes that the Company will have continued support from related parties, and will have the ability to continue to roll over short-term debt. Lastly, the Company also started the process of securing additional funds and adopted various cost-saving strategies.
4 INVENTORIES, NET
Inventories consist of the following:
| |
|
September 30,
|
|
|
June 30,
|
|
| |
|
2014
|
|
|
2014
|
|
|
Work in process
|
|
$ |
444,349 |
|
|
$ |
642,842 |
|
|
Raw materials
|
|
|
580.910 |
|
|
|
669,880 |
|
|
Finished goods
|
|
|
1,247,083 |
|
|
|
882,552 |
|
| |
|
$ |
2,272,342 |
|
|
$ |
2,195,274 |
|
The allowance for obsolete inventory as of September 30, 2014 and June 30, 2014 was $471,617 and $471,487, 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 the Quarter
|
|
|
For the Year
|
|
|
|
|
Ended
|
|
|
Ended
|
|
| |
|
September 30,
2014
|
|
|
June 30,
2014
|
|
|
Current assets
|
|
$ |
17,410 |
|
|
$ |
23,144 |
|
|
Noncurrent assets
|
|
|
784,061 |
|
|
|
795,273 |
|
|
Current liabilities
|
|
$ |
540,298 |
|
|
$ |
506,534 |
|
|
Noncurrent liabilities
|
|
|
- |
|
|
|
- |
|
|
Equity
|
|
$ |
261,173 |
|
|
$ |
312,063 |
|
|
Revenue
|
|
|
- |
|
|
|
- |
|
|
General and administrative expenses
|
|
$ |
(50,924 |
) |
|
$ |
(205,323 |
) |
|
Net loss
|
|
$ |
(50,924 |
) |
|
$ |
(205,323 |
) |
6 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and taxes consist of the following:
| |
|
September 30,
|
|
|
June 30,
|
|
| |
|
2014
|
|
|
2014
|
|
|
Accrued salaries and benefits
|
|
$ |
708,695 |
|
|
$ |
817,306 |
|
|
Accrued interest
|
|
|
634,724 |
|
|
|
1,294,934 |
|
|
Accrued taxes
|
|
|
636,467 |
|
|
|
418,485 |
|
|
Deposit payable
|
|
|
605,297 |
|
|
|
605,130 |
|
|
Due to employee
|
|
|
46,759 |
|
|
|
46,746 |
|
|
Advance from customers
|
|
|
237,968 |
|
|
|
733,144 |
|
|
Other accounts payable
|
|
|
204,321 |
|
|
|
286,376 |
|
|
Other accrued expenses and current liabilities
|
|
|
335,459 |
|
|
|
232,669 |
|
| |
|
$ |
3,409,690 |
|
|
$ |
4,434,790 |
|
7 SHORT-TERM BORROWING
Short-term borrowing consists of the following:
| |
September 30 June 30,
|
|
| |
2014
|
|
2014
|
|
|
Shijiazhuang Finance Bureau (a)
|
|
$
|
81,221
|
|
|
$
|
81,199
|
|
|
Shijiazhuang Construction Investment Group Co., Ltd (b)
|
|
|
3,248,863
|
|
|
|
3,247,966
|
|
|
Hebei Chuangyu Investment Group Co., Ltd (c)
|
|
|
1,949,318
|
|
|
|
1,948,780
|
|
|
Hebei Hengrui Sunshine Pharmacy Co., Ltd
|
|
|
-
|
|
|
|
3,247,966
|
|
|
Mr. Liu Shujun
|
|
|
-
|
-
|
|
|
260,519
|
|
|
Mr. Li Hui (d)
|
|
|
2,294
|
|
|
|
538,208
|
|
|
Shijiazhuang Red Property Management Co., Ltd
|
|
|
|
-
|
|
|
2,073,826
|
|
|
Total
|
|
$
|
5,281,696
|
|
|
$
|
11,398,464
|
|
(a) A non-interest bearing note payable to Shijiazhuang Finance Bureau, an agency of a local government, due on demand.
(b) A one-year term loan from Shijiazhuang Construction Investment Group, disbursed through China Construction Bank. The note bears an annual interest rate of 15% and was due on August 3, 2013, at which time it was rolled-over for 3 months until November 3, 2013 and further extended to November 11, 2014. The note was secured by certain registered trademarks and renewal certificates relating to Aoxing’s Zhongtongan capsule.
(c) A four months term loan from Hebei Chuangyu Investment Group Co., Ltd. The note bears an annual interest rate of 15% and is due on November 22, 2014.
(d) On December 21, 2012, the Company obtained an RMB 2,000,000 (approximately $324,797) term loan from Mr. Li Hui. The note bears an annual interest rate of 27.6% and is due on December 31, 2014. On March 1, 2013, the Company further obtained RMB 1,314,120 (approximately $213,411) term loan from Mr. Li Hui. The note bears an annual interest rate of 20% and is due on February 28, 2015.They company converted debt-to-equity swaps RMB 3, 300,000 (approximately $ 535,914) for Mr. Li Hui during this quarter.
8 LOAN PAYABLE - BANK
Loan payable – bank consist of the following loans collateralized by assets of the company:
| |
|
|
|
|
|
|
|
Bank note in the amount of 25 million RMB with China Minsheng Bank bearing an annual floating rate of 7.8% interest per annum, made on June 18, 2014 for one year maturing on June 17, 2015
|
|
$ |
4,061,079 |
|
|
$ |
- |
|
|
Bank note in the amount of 20 million RMB with China Merchant Bank bearing an annual floating rate of 7.8% initially made on 30 December, 2013, for one year maturing on 26 December, 2014
|
|
|
3,248,863 |
|
|
|
3,247,966 |
|
|
Bank Note in the amount of 30 million RMB with Postal Savings Bank bearing an 7.8%interest per annum, made on July 21, 2014 for one year maturing on July 20, 2015
|
|
|
4,873,294 |
|
|
|
- |
|
|
Bank Note in the amount of 50 million RMB with China HuiRong Co., Ltd bearing an 7.2% interest per annum, made on June 18, 2014 for one year maturing on June 17, 2015
|
|
|
8,122,157 |
|
|
|
- |
|
| |
|
$ |
20,305,393 |
|
|
$ |
3,247,966 |
|
9 LOAN PAYABLE – RELATED PARTIES
Loan payable – related parties consists of loans from shareholders, officers, and other related parties, bearing interest at an average rate of 16% and 15.33% per annum as of September 30, 2014 and June 30, 2014 respectively. Loans will mature as follows:
| |
|
September 30,
|
|
|
June 30,
|
|
| |
|
2014
|
|
|
2014
|
|
|
Within one year
|
|
$ |
396,956 |
|
|
$ |
1,084,248 |
|
|
1 – 2 years
|
|
|
- |
|
|
|
- |
|
|
2 – 3 years
|
|
|
3,904,613 |
|
|
|
6,146,803 |
|
|
Total
|
|
|
4,301,569 |
|
|
|
7,231,051 |
|
|
Less current portion
|
|
|
(396,956 |
) |
|
|
(1,084,248 |
) |
| |
|
$ |
3,904,613 |
|
|
$ |
6,146,803 |
|
10 LOAN PAYABLE – OTHER
Loan payable – other consist of loans from unrelated third-parties, bearing interest at an average rate of 13.69% and 17.57% per annum as of September 30, 2014 and June 30, 2014 respectively. Loans will mature as following:
| |
|
September 30,
|
|
|
June 30,
|
|
| |
|
2014
|
|
|
2014
|
|
|
Within one year
|
|
$ |
- |
|
|
$ |
- |
|
|
1 – 2 years
|
|
|
- |
|
|
|
- |
|
|
2 – 3 years
|
|
|
1,355,184 |
|
|
|
1,354,810 |
|
|
Total
|
|
|
1,355,184 |
|
|
|
1,354,810 |
|
|
Less current portion
|
|
|
- |
|
|
|
- |
|
| |
|
$ |
1,355,184 |
|
|
$ |
1,354,810 |
|
11 ISSUANCE OF COMMON STOCK
During the three months ended September 30, 2014, the Company issued 11,862,278 shares of common stock in satisfaction of $4.6 million in debt. The shares were valued at $0.39 per share, which exceeded the six-month average share price as well as the market price at time of issuance. Paid in capital was increased by $4,614,426 as a result of the exchange.
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 generallysubject 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 Quarter ended September 30,
|
|
| |
|
2014
|
|
|
2013
|
|
|
Tax at U.S. Statutory rate
|
|
$ |
(842 |
) |
|
$ |
(822,841 |
) |
|
Tax rate difference between China and U.S.
|
|
|
(3,083,941 |
) |
|
|
(276,425 |
) |
|
Change in Valuation Allowance
|
|
|
3,084,783 |
|
|
|
1,099,266 |
|
|
Effective tax rate
|
|
$ |
- |
|
|
$ |
- |
|
The provisions of income taxes (credit) are summarized as follows:
| |
|
For the Quarter ended September 30,
|
|
| |
|
2014
|
|
|
2013
|
|
|
Current
|
|
$ |
- |
|
|
$ |
- |
|
|
Deferred - U.S.
|
|
|
(38,113 |
) |
|
|
(9,557 |
) |
|
Deferred - China
|
|
|
(3,046,670 |
) |
|
|
(1,089,709 |
) |
|
Valuation allowance - U.S.
|
|
|
38,113 |
|
|
|
9,557 |
|
|
Valuation allowance - China.
|
|
|
3,046,670 |
|
|
|
1,089,709 |
|
|
Total
|
|
$ |
- |
|
|
$ |
- |
|
The deferred tax assets are substantially related to loss carry forwards for the past 5 years under Chinese tax law. The Company determined a full valuation allowance was necessary as of September 30, 2013 and 2014.
13 CONCENTRATIONS
Sales to three major customers accounted for 17%, 6% and 4% of total sales for the three months ended September 30, 2014. Sales to three major customers accounted for 7%, 6% and 5% of total sales for the three months ended September 30, 2013. As of September 30, 2014, three major customers accounted for 11%, 4% and 4% of Company’s accounts receivable balance. As of September 30, 2013, no customer accounted for more than 2% of company accounts receivable balance.
Sales of two major products represented approximately 96% and 2% of total sales for the three months ended September 30, 2014. Sales of two major products represented approximately 93% and 3% of total sales for the three months ended September 30, 2013.
14 SUBSEQUENT EVENTS
On November 5, 2014 the Registrant sold to 22 of its employees a total of 4,527,830 shares of common stock for a total of $1,177,235.77 or $0.26 per share, which exceeded the market price on October 4, 2014, when the contract of sale was made.
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 other material event that occurred after the date of the balance sheets included in this report.
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, 2014. 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.
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 July 6, 2006, the Company changed its name to “China Aoxing Pharmaceutical Company, Inc.” to better reflect the nature of its business. On May 1, 2008 the Company completed the acquisition of an additional 35% interest in Hebei Aoxing from its Chairman and Chief Executive Officer, Mr. Zhenjiang Yue.
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 RMB 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 (SFDA) for its pre-treatment, extraction, tincture, and pill workshops. The certification marked the completion of the integration of LRT into Hebei Aoxing.
On April 14, 2010, Aoxing Pharma’s common stock began trading on the NYSE Amex, a subsidiary of NYSE Euronext, under the ticker symbol "AXN." In anticipation of the listing, on March 29, 2010 the Company changed the name of the corporation to "Aoxing Pharmaceutical Company, Inc.," to better reflect its global brand extension, and effected a one-for-two reverse split of its common stock.
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 venturer has equal representation on a board of directors that will oversee a management team responsible for corporate strategies and operations. The new joint venture is located on the Hebei Aoxing campus in Xinle City, 200 kilometers southwest of Beijing.
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 Naloxone, Oxycodone, Tilidine, Codeine Phosphate, Pholcodine, and Buprenorphine.
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.
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 average 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 find 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- Comparison of the quarters ended September 30, 2014 and 2013
Revenue for the three months ended September 30, 2014 was $4,565,081, representing a 28% increase over the revenue of $3,577,108 realized during the three months ended September 30, 2013. The increase in revenue was primarily attributable to the increase in sales price of our main product. The Company’s previous sales process begins with the sales manager who ships the product to a third-party sales agent. The sales agent then sells the product directly to the customer. With the current sales process, the Company has gradually terminated the sales agent contracts and now sells the product directly to the customer through a logistics company. The sales price to direct customers is higher than the price to sales agencies, which has led to an increase in average price of the products.
Cost of sales was $1,387,534 for the three months ended September 30, 2014, which was 31% lower than the $2,014,663 in costs incurred during the three months ended September 30, 2013. A bad harvest in 2013 led to a sharp increase in the market price of raw materials, which has only recently begun to return to their prior level. As a result, gross margin was 70% during the three months ended September 30, 2014 compared to 43.7% in the same period of last year. The increase in gross margin, combined with increased revenue, led to gross profit of $3,177,547 during the three months ended September 30, 2014, 103% higher than the same period a year earlier. .
Operating expenses fell by 30% from the first quarter of fiscal 2014 to the first quarter of fiscal 2015, as reductions were recorded in all categories of operating expense:
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Research and development expenses were $107,550 during the three months ended September 30, 2014, representing a 40% decrease from $177,941 recorded during the three months ended September 30, 2013. R&D expenses often fluctuate significantly from one period to another, reflecting the progress and timing of our various development projects.
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General and administrative expenses were $511,486 in the three months ended September 30, 2014, 38% lower than $830,050 in the three months ended September 30, 2013. The decrease was primarily due to the reversal of $182,339 in previously recorded bad debt as a result of collection efforts during three months ended September 30, 2014.
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Selling expenses in the amount of $1,202,509 incurred during the three months ended September 30, 2014 were 26% lower than $1,617,989 spent on selling during the three months ended September 30, 2013. In 2013 we engaged a group of temporary sales personnel in an effort to boost sales of XiaoPiLing. The recent reduction in selling expenses was mainly due to the termination of that program.
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Depreciation and amortization expense fell by 23% from $181,426 to $139,276. The reduction occurred primarily because some of the equipment we are using has become fully depreciated..
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We recorded income from operations of $1,216,726 for the quarter ended September 30, 2014 instead of a loss from operations of $1,244,961 the same period last year. This quarter’s income from operations was mainly attributed to the increase in revenue and the reduction in cost of sales and selling expenses.
Net interest expense was $1,193,160 for the three months ended September 30, 2014, increased 11% from net interest expense of $1,074,690 for the three months ended September 30, 2013. The increment in interest expense was due to the increase in bank loans.
Equity in loss of joint venture was $25,971 for the three months ended September 30, 2014, a decrease of 17% from a loss of $31,323 recorded during the three months ended September 30, 2013. The loss was attributable to our share of the joint venture with Johnson Mathey Plc, which has no operations yet.
The Company realized a net loss of $2,405 for the three months ended September 30, 2014. Because the Company owns only 95% of Hebei Aoxing, 5% of Hebei Aoxing's income was attributed to the non-controlling interest. Therefore the net loss attributable to the shareholders of Aoxing Pharmaceutical for the three months ended September 30, 2014 was $7,872. In comparison, during the three months ended September 30, 2013, the net loss attributable to the Company’s shareholders was $2,234,986, after deducting income attributable to the 5% non-controlling interest in Hebei Aoxing.
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, 2014 was $2,343,822 compared to $2,329,660 as of June 30, 2014. The cash balance remained stable because the $2,287,758 in net cash used in operating activities during the quarter and $173,606 cash used for property and equipment was matched by $2,470,490 in net proceeds of our financing activities.
Operations during the period ended September 30, 2014 used $2,287,758 in cash, as compared to $2,226,298 used for the period ended September 30, 2013. The cash used in operations during the period ended September 30, 2014 is mainly attributed to increase in prepaid expenses and other current assets.
Our investing activities during the period ended September 30, 2014 consisted of $173,606 cash used to purchase additional property and equipment.
Our financing activities consisted of $2,470,490 net cash proceeds from bank loan and sale of common stock. During the period ended September 30, 2014, the Company issued $4.6 million value of common stock and obtain $17.0 million of bank loan in satisfaction of $6.1 million short-term borrowings from unrelated parties, $10.2 million other loan payable and $2.9 million loans from related parties.
Our working capital deficit on September 30, 2014 was $20,770,008, which was $2,524,180 less than the working capital deficit of $23,294,186 on June 30, 2013. The improvement in working capital occurred because in August we issued 11,862,278 shares of common stock to satisfy $4,626,289 in debt.
As a result of several debts refinancing during the period ended September 30, 2014, our debt service obligations on September 30, 2014 were as following:
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Less than
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After 5
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Contractual Obligations
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Total
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1 Year
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1-2 Years
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2-3 Years
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3-4 Years
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4-5 Years
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Years
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Banks
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$
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20,305,393
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$
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20,305,393
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-
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-
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-
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-
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-
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Affiliates
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4,301,569
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|
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396,956
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$
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3,904,613
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|
-
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-
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-
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Short-term borrowings
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5,281,696
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|
|
|
5,281,696
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|
|
-
|
|
|
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-
|
|
-
|
-
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-
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Others
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1,355,184
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|
|
-
|
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-
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|
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1,355,184
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-
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-
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TOTAL
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$
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31,243,842
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$
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25,984,045
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-
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$
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5,259,797
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-
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-
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-
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For the next 12 months, management anticipates cash use from operations will decrease, because of increased product sales and efforts to 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. As a result, the Company will be able to operate at lower cost, without any major impact on its operations.
In November 2014 we raised $1,177,235and provided an employee incentive by selling 4,527,830 shares of common stock to 22 of our employees. The Company may also take additional loans from related parties, if necessary. Furthermore, the Company will continue to seek financing to fund expansion of our operations, extend our reach to broader markets, or to acquire additional entities. We may rely on bank borrowing as well as capital raises. We are actively exploring various proposals and alternatives in order to secure sources of financing and improve our financial position. We are also exploring potential strategic partnerships, which could provide a capital infusion to the Company.
We have incurred recurring operating losses and had an accumulated deficit of $63.9 million as of September 30, 2014. In addition, we had negative working capital of $20.8 million as of September 30, 2014. Our history of operating losses and lack of binding financing commitments raise substantial doubt as to our ability to continue as a going concern. Despite recent negative operating cash flow positions, our management anticipates that we will generate sufficient cash flows to fund our operations for the next twelve months by increasing revenues and profit margins of our core product sales and continued support from our lenders to rollover debt when it becomes due. If future sales do not meet our forecasts, we may be required to fund operations by raising additional capital or seek external financing. As such, our ability to achieve our business plan is primarily dependent upon our ability to achieve our planned level of operations and/or obtain sufficient additional capital at acceptable costs. With respect to these objectives, we cannot provide any assurance that we will succeed. If events or circumstances occur such that we are unable to or do not meet our operating plan as expected and/or do not secure additional financing, we may be required to significantly curtail or cease operations.
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.
Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), we carried out an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2014. The term “Disclosure controls and procedures” means controls and other procedures that are designed to insure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time limits specified in the Commission’s rules. That evaluation revealed the following material weakness in our internal control over financial reporting: the Company's accounting personnel are relatively inexperienced with certain complexities within US GAAP and SEC reporting causing a material weakness in internal controls, Based on the results of these self-assessments, our principal executive officer and principal financial officer concluded that Aoxing Pharma’s system of disclosure controls and procedures was not effective as of September 30, 2014 for the purposes described in this paragraph.
To remediate the weakness, the Company plans to continue to train our internal accountants in US GAAP and SEC reporting and potentially engage a 3rd party consultant. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted by the PRC, management has determined they require additional training for US GAAP and SEC reporting. We plan for the above to be remediated, which we hope will provide for much greater credibility and consistency in the financial statements.
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, 2014.
Item 2. Unregistered Sale of Securities and Use of Proceeds
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(a)
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Unregistered sales of equity securities
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The Company did not make any unregistered sales of equity securities during the first quarter of fiscal year 2015
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(c)
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Purchases of equity securities
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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 2015.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
Item 6. Exhibits
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the SOX of 2002.
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the SOX of 2002.
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32.1
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Certificate of Chief Executive Officer pursuant to 18 U.S.C.ss.1350.
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32.2
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Certificate of Chief Financial Officer pursuant to 18 U.S.C.ss.1350.
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101 INS
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XBRL Instance Document*
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101 SCH
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XBRL Schema Document*
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101 CAL
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XBRL Calculation Linkbase Document*
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101 DEF
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XBRL Definition Linkbase Document*
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101 LAB
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XBRL Labels Linkbase Document*
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101 PRE
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XBRL Presentation Linkbase Document*
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* 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.
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.
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AOXING PHARMACEUTICAL COMPANY, INC.
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Date: November 14, 2014
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By: /s/ Zhenjiang Yue
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Zhenjiang Yue, Chief Executive Officer
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(Principal Executive Officer)
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Date: November 14, 2014
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By: /s/ Guoan Zhang
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Guoan Zhang, Acting Chief Financial Officer
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(Principal Accounting and Financial Officer)
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20
Certification
I, Zhenjiang Yue, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aoxing Pharmaceutical Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal controls over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
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Date: November 14, 2014
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/s/ Zhenjiang Yue |
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Zhenjiang Yue, Chief Executive Officer
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(Principal Executive Officer)
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Certification
I, Guoan Zhang, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aoxing Pharmaceutical Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal controls over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
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Date: November 14, 2014
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/s/ Guoan Zhang
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Guoan Zhang, Acting Chief Financial Officer
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(Principal Accounting and Financial Officer)
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CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. §1350
In connection with the Quarterly Report on Form 10-Q of Aoxing Pharmaceutical Company, Inc. (the “Company”) for the fiscal period ended September 30, 2014 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Zhenjiang Yue, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for said period.
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November 14, 2014
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/s/ Zhenjiang Yue
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Zhenjiang Yue, Chief Executive Officer
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A signed original of this written statement has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION
OF
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. §1350
In connection with the Quarterly Report on Form 10-Q of Aoxing Pharmaceutical Company, Inc. (the “Company”) for the fiscal period ended September 30, 2014 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Guoan Zhang, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for said period.
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November 14, 2014
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/s/ Guoan Zhang
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Guoan Zhang, Acting Chief Financial Officer
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A signed original of this written statement has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
Aoxing Pharmaceutical Company New (delisted) (AMEX:AXN)
Graphique Historique de l'Action
De Oct 2024 à Nov 2024
Aoxing Pharmaceutical Company New (delisted) (AMEX:AXN)
Graphique Historique de l'Action
De Nov 2023 à Nov 2024
