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| CAXG.OB > SEC Filings for CAXG.OB > Form 10-K on 14-Oct-2009 | All Recent SEC Filings |
14-Oct-2009
Annual Report
Results of Operations
Sales during the year ended June 30, 2009 were $8,941,907, as compared to sales of $7,065,015 during the fiscal year ended June 30, 2008. The 27% increase as compared to our 2008 fiscal year was driven by our increased marketing efforts, improved brand recognition and effective pricing strategy. The primary contributors to revenue were Zhongtongan (40% of total sales), Naloxone Hydrochloride injectable (14%) and Shuanghuanlian capsules (13%).
Cost of sales was $5,135,661 for the year ended June 30, 2009. This represented an increase of 34% over the $3,834,982 cost of sales that we incurred in the year ended June 30, 2008. Our cost of sales increased at a greater rate than our sales due to increased raw material costs and certain inefficiencies that we experienced as we consolidated the operations of LRT with our Hebei operations. As a result, our gross profit increased only 18%, despite the 27% increase in sales. As revenue grows in future periods and we gain experience in operations, we expect our gross profit margin to gradually improve.
Research and development expenses were $722,567 for the 2009 fiscal year, compared to $700,202 in R&D expenses for the year ended June 30, 2008. The primary focus of our research programs was similar in both years - primarily our efforts in clinical programs evaluating Tilidine, Codeine Phosphate and other products.
Our general and administrative expenses decreased from $4,001,282 in fiscal year 2008 to $3,804,296 in fiscal year 2009. The decrease reflected the results of our efforts to reduce expenditures. We have reduced our staff from 465 employees at June 30, 2008 to our current roster of 360 employees. We have also reduced our non-cash expenses for stock compensation: in fiscal year 2008 we incurred a $1,695,898 expense for stock issued for services and interest; in fiscal 2009 we reduced that expense to $1,000,506. We incurred professional fees totaling $311,347 in fiscal year 2009, a 45% reduction from the $570,489 expense that we incurred in 2008. This last reduction reflected our efforts to control expenditures on legal, accounting, investor relations, and other professional services.
Despite the increase in our sales, selling expenses remained relatively unchanged: $1,480,118 in fiscal year 2009 compared to $1,449,909 in fiscal year 2008. We expect our sales and marketing expense to increase as additional products are approved by the China SFDA and enter the market over the next two years.
During the 2009 fiscal year we consolidated the operations of LRT with the operations of Hebei at Hebei's facility. In connection with that consolidation, we recorded an "impairment loss" of $2,345,420, primarily attributable to our revaluation of LRT's property and equipment. The impairment loss is classified as "Other Income/Expenses" on our Statements of Operations. The write-off, however, had the beneficial effect of causing our depreciation and amortization expense to decrease from $657,660 in fiscal year 2008 to $340,542 in fiscal year 2009, a decrease of 48%. Until we make significant capital improvements, the 2009 level of depreciation and amortization will be approximately replicated in future periods.
As a result of our periodic review of accounts receivable, we determined that at June 30, 2009 an increase in our bad debt reserve was appropriate, primarily due to the slow payment history of some of LRT's accounts. This revaluation led us to record a bad debt expense of $1,461,789 during the 2009 fiscal year. Primarily as a result of that expense, our loss from operations for the year ended June 30, 2009 exceeded the operating loss in fiscal year 2008 by $424,099, reaching $4,003,065.
The Company incurred interest expense in the amount of $1,919,143 in fiscal year 2009, compared to $2,514,840 in fiscal year 2008. The24% decrease was primarily due to the conversion of our 10% convertible debenture into common stock as of September 30, 2008. We anticipate that interest expense will continue to decrease in the coming years, as the Company works to improve its capital structure. The completion of a $5 million private placement of equity in the summer of 2009 was an important first step in that program.
The impairment loss that we recorded during fiscal year 2009 was offset in part by a one-time gain on forgiveness of debt that we recorded during the year. This gain, $1,461,299, arose from the terms under which we refinanced our bank debt.
After deducting the net amount of our "Other Expenses," we realized a net loss before taxes of $5,976,109 for fiscal year 2009. In fiscal year 2008 we realized income before minority interest and taxes of $3,130,933. The 2008 income, however, included a gain of $8,547,374 attributable to the change in the value of our outstanding warrants and derivative liabilities that occurred when the market price of our common stock fell sharply. If the adjustments for "change in fair value of warrants and derivative liabilities" are removed from our financial results, the losses before minority interest and income tax are approximately equal in fiscal year 2008 and fiscal year 2009.
Our net loss in fiscal year 2009 was partially offset by a $3,281,059 income tax credit that we recorded during the year. This represented management's calculation of the tax benefit that the Company will realize in the future from its net operating loss. Realization of that benefit will depend, however, on the Company's ability to achieve taxable profits. The effect of the credit was to reduce our net loss for the year ended June 30, 2009 to $2,695,050, or $.03 per share. In the year ended June 30, 2008, we realized net income of $3,886,342, or $.08 per share.
Liquidity and Capital Resources
On April 15, 2008, the Company issued 30,000,000 shares of common stock to American Oriental Bioengineering, Inc.("AOB"). The shares were issued in connection with the execution of a Joint Strategic Alliance Agreement. The purchase price for the shares was $18,000,000 cash. Until recently, that cash has been our primary source of liquidity. We used the cash from AOB for the acquisition of LRT (approximately $10.8 million for the cash portion), research and development activities, sales and marketing of our products, other general corporate purposes and to service our indebtedness.
Our working capital deficit at June 30, 2009 was $13,173,235. Our cash balance at June 30, 2009 was $1,271,922, compared to $1,565,513 at June 30, 2008. Promptly after the end of the fiscal year, however, we received a cash infusion, as the Company, on August 6, 2009, completed a private placement of 5,263,158 shares of its common stock at a price of $.95 per share, for gross proceeds of $5 million.
Our working capital was further improved after June 30, 2009 by the agreement reached by the Company and AOB to satisfy the May 2008 note due to AOB plus accrued interest, an aggregate of 33 million RMB, or $4,830,847, by issuing 3,578,405 shares of our common stock to AOB, representing a per share price of $1.35.
After the satisfaction of the AOB note, our primary remaining debts are (1) a junior subordinated promissory note in the amount of RMB 24,000,000 (approximately $3.5MM USD), payable on December 31, 2011 to Zhenjiang Yue, our Chairman and CEO, and (2) our notes to the Bank of China in the aggregate amount of $6,094,428. The Bank of China debts have been restructured. The maturity date for a portion of the debt is still past. The maturity date for the remainder has been extended to December 31, 2009, but we remain in default with respect to the entire loan due to the past-due portion. The Company continues to work with the Bank of China on further restructuring of the bank debt.
Our operations during the year ended June 30, 2009 consumed $642,598 in cash. This represented an improvement from the $980,947 in cash that our operations used in the 2008 fiscal year. The improvement is primarily attributable to the increase in our gross profit from year to year.
To finance the capital improvements made during fiscal 2009 (an expenditure of $2,227,309) we relied on short-term borrowings of $2,752,971, most of which was obtained from AOB.
The improvements to our working capital in the summer of 2009 have improved the liquidity of the Company as we emerge from the development stage of our pharmaceutical products. We continue to explore various alternatives in order secure sources of financing and improve our financial position. Among the possibilities being considered are new credit facilities, a new equity raise, arrangements to license intellectual property, and a sale of selected property rights. At the present time we have no commitment from any source for additional funds.
Application of Critical Accounting Policies
In preparing our financial statements we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for fiscal year 2009, there were four estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results. These were:
· The determination, itemized in Note 1 to the Financial Statements, of the fair value of the assets of LRT, which the Company acquired in April 2008. The determination was made on the basis of appraised market values.
· The determination, described in Note 2 to the Financial Statements, that a bad debt allowance of $1,461,091 was appropriate. The determination was based on the results of our periodic review of receivables.
· The calculation, described in Notes 2 and 11 to the Financial Statements, of the implicit value of our outstanding warrants and derivative liabilities. The determination was based on comparison with market-valued derivative instruments.
· The determination, described in Note 14 to the Financial Statements, that the valuation allowance with respect to our net operating loss carryforward should be reduced and a credit taken. The determination was based on management's estimation that the Company would realize taxable profits within the period when the NOL is usable.
We made no material changes to our critical accounting policies in connection with the preparation of financial statements for fiscal year 2009.
Impact of Accounting Pronouncements
New accounting rules and disclosure requirements can significantly impact the comparability of our financial statements. However, there are no recent accounting pronouncements that have had a material effect on our financial statements.
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.
30
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Item 8. Financial Statements and Supplementary Data
Page
F-1 Report of Independent Registered Public Accounting Firm.
F-2 Consolidated Balance Sheets as of June 30, 2009 and
2008.
F-3 Consolidated Statements of Operations and Other
Comprehensive Loss for the Fiscal Years Ended June 30,
2009 and 2008.
F-4 Consolidated Statements of Changes in Stockholders'
Equity for the Fiscal Years Ended June 30, 2009 and
2008.
F-5 Consolidated Statements of Cash Flows for the Fiscal
Years Ended June 30, 2009 and 2008.
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F-6 to F-21 Notes to Consolidated Financial Statements.
Board of Directors
China Aoxing Pharmaceutical Co., Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of China Aoxing Pharmaceutical Co., Inc. and Subsidiaries as of June 30, 2009 and 2008 and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. At June 30, 2009 and after giving effect to the transactions referred to in note 17, the Company's current liabilities substantially exceeded its tangible current assets. In addition, the Company is in default of the repayment of note payable-bank of $6,094,428. The Company sustained a loss from operations of $4,003,065 for the year ended June 30, 2009. These circumstances raise substantial doubt about its ability to continue as a going concern. Management's plans with regard to these matters are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Aoxing Pharmaceutical Co., Inc. and Subsidiaries as of June 30, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
/s/ Paritz & Company, P.A.
Hackensack, New Jersey
September 28, 2009
CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
--------- June 30, ---------
2009 2008
ASSETS
CURRENT ASSETS:
Cash $ 1,271,922 $ 1,565,513
Accounts receivable, net of allowance for
doubtful accounts of $1,461,091 and $0 1,064,381 2,536,047
Inventory 712,521 848,959
Deposits with suppliers 261,780 78,052
Deferred tax assets 3,331,045 -
Prepaid exenses and sundry current assets 302,449 225,156
TOTAL CURRENT ASSETS 6,944,098 5,253,727
LONG - TERM ASSETS
Property and equipment, net of accummulated depreciation 29,324,362 30,331,143
Other intengible assets 1,549,497 1,635,375
Goodwill 18,926,527 18,904,845
TOTAL LONG-TERM ASSETS 49,800,386 50,871,363
TOTAL ASSETS $ 56,744,484 $ 56,125,090
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term borrowings $ 292,193 $ 291,800
Accounts payable 2,816,711 3,544,795
Deposit payable 3,871,552 -
Current portion of long term debt - other 144,635 380,070
Current portion of long term debt - stockholders 4,494,629 1,862,868
Accrued expenses and taxes payable and other sundry
current liabilities 2,403,185 4,851,314
Loan payable - Bank 6,094,428 7,545,239
TOTAL CURRENT LIABILITIES 20,117,333 18,476,086
LONG-TERM DEBT-- STOCKHOLDERS 4,104,201 4,098,687
-- OTHER 3,491,113 3,127,643
CONVERTIBLE DEBENTURES 1,023,733 1,098,362
WARRANT AND DERIVATIVE LIABILITIES 3,368,901 4,161,678
MINORITY INTEREST - 24,598
Common stock, par value $0.001, 100,000,000 shares
authorized, 82,827,999 and 81,089,919 shares issued and
outstanding at June 30,2009 and 2008, respectively 82,828 81,090
Preferred stock, par value $0.001 300,000 shares
authorized 277,018 shares issued and outstanding at June
30,2009 and 2008, respectively 277 277
Additional paid in capital 39,104,309 36,749,956
Accumulated deficit (15,009,228 ) (12,314,178 )
Other compensive income 461,017 620,891
TOTAL STOCKHOLDERS' EQUITY 24,639,203 25,138,036
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,744,484 $ 56,125,090
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CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
Year ended June 30,
2009 2008
SALES $ 8,941,907 $ 7,065,015
COST OF SALES 5,135,661 3,834,982
GROSS PROFIT 3,806,246 3,230,033
COSTS AND EXPENSES:
Research and development expense 722,567 700,202
General and administrative expenses 3,804,296 4,001,282
Bad Debt expenses 1,461,789 -
Selling expenses 1,480,118 1,449,909
Depreciation and amortization 340,541 657,606
TOTAL COSTS AND EXPENSES 7,809,311 6,808,999
LOSS FROM OPERATIONS (4,003,065 ) (3,578,966 )
OTHER INCOME (EXPENSE):
Interest expense (1,919,143 ) (2,514,840 )
Change in fair value of warrant and derivative liabilities 627,183 8,547,374
Gain on foreign currency transactions 203,037 677,365
Impairment loss (2,345,420 ) -
Forgiveness of debt 1,461,299 -
TOTAL OTHER INCOME (EXPENSE) (1,973,044 ) 6,709,899
INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES (5,976,109 ) 3,130,933
Minority interest in (income) losses of subsidiary - 515,926
INCOME (LOSS) BEFORE INCOME TAXES (5,976,109 ) 3,646,859
Income taxes (credit) 3,281,059 -
NET INCOME ( LOSS) (2,695,050 ) 3,646,859
OTHER COMPREHENSIVE INCOME ( LOSS) :
Foreign currency translation adjustment (159,874 ) 239,483
COMPREHENSIVE INCOME (LOSS) $ (2,854,924 ) $ 3,886,342
BASIC AND DILUTED EARNINGS (LOSSES) PER COMMON SHARE $ (0.03 ) $ 0.08
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 82,402,736 49,242,639
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CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON PREFERRED ADDITIONAL OTHER TOTAL
STOCK STOCK PAID-IN (ACCUMULATED COMPREHENSIVE STOCKOLDERS'
SHARES VALUE SHARES VALUE CAPITAL DEFICIT ) INCOME EQUITY
Balance - June 30, 2007 40,205,256 $ 40,205 277,018 $ 277 $ 4,823,698 $ (15,961,037 ) $ 381,408 $ (10,715,449 )
Common stock issued for services 1,637,290 1,637 - - 2,525,861 - - 2,527,498
Common stock issued for debt conversion 1,229,713 1,230 - - 1,507,770 - - 1,509,000
Common stock issued for interest payment 17,660 18 - - 37,561 - - 37,579
Reclassification of warrant and
derivative liabilities associated with
debt conversions - - - - 1,144,666 - - 1,144,666
Sale of common stock, net of costs 30,000,000 30,000 - - 16,238,400 - - 16,268,400
Common stock issued for acquisition 8,000,000 8,000 - - 10,472,000 - - 10,480,000
Translation adjustments - - - - - - 239,483 239,483
Net Income - - - - - 3,646,859 - 3,646,859
Balance - June 30, 2008 81,089,919 81,090 277,018 277 36,749,956 (12,314,178 ) 620,891 25,138,036
Common stock issued for services 1,303,444 1,303 - - 1,254,697 - - 1,256,000
Common stock issued for debt conversion 425,320 426 - - 289,574 - - 290,000
Common stock issued for interest payment 9,316 9 - - 25,578 - - 25,587
Unamortized compensation for services (281,090 ) - - (281,090 )
Reverse prior accrued financing cost on
sale of common stock - - - - 900,000 - - 900,000
Derivative liability affected by
conversion - - - - 165,594 - - 165,594
Translation adjustments - - - - - - (159,874 ) (159,874 )
Net loss - - - - - (2,695,050 ) - (2,695,050 )
Balance - June 30, 2009 82,827,999 82,828 277,018 277 39,104,309 (15,009,228 ) 461,017 24,639,203
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