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| CAXG.OB > SEC Filings for CAXG.OB > Form 10-Q on 23-Nov-2009 | All Recent SEC Filings |
23-Nov-2009
Quarterly Report
This quarterly report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "China Aoxing believes," "management believes" and similar language. The forward-looking statements are based on the current expectations of China Aoxing and are subject to certain risks, uncertainties and assumptions, including those set forth in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009 under Item 1A: "Risk Factors." Actual results may differ materially from results anticipated in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.
Outline of Our Business
We are a specialized pharmaceutical company focusing on research, development, manufacturing and marketing of a broad range of narcotics and pain management pharmaceutical products. Our product line is comprised of prescription and over-the-counter pharmaceutical products. Our pharmaceutical products have been approved by the Chinese State Food and Drug Administration, or SFDA, based on demonstrated safety and efficacy. We sell our products primarily to hospitals, clinics, pharmacies and retail in most of the provinces of China, including rural areas and major cities.
Pharmaceutical Industry in China: According to a recent ISI Emerging Markets Report, the pharmaceutical industry in China was approximately $27.7 billion in 2005 and China is forecast to become the world's fifth largest pharmaceutical market by 2010. This growth is being driven by several factors, including improving standards of living?an increase in disposable income fueled by the growing economy, the aging population, the increasing participation in the State Basic Medical Insurance System, as well as the increase in government spending on public health care. The Chinese government pledged $4 billion for healthcare spending in 2007, an 81% increase from the $2.2 billion in 2006.
In August, 2009, the Ministry of Health (MoH) of China released an Essential Drug List of 300 drugs to be sold at controlled prices as part of its US$124 billion health care reform. The EDL includes both Western and Chinese medicines, targeting common antibiotics, pain relievers, high blood pressure, and etc. Thirty one products of our company are listed on the EDL. The Company, therefore, expects sales to MoH-related agencies to represent a significant source of revenue growth in future periods. The Company is working closely and negotiating with related government agencies on the product supply and purchase in the next several years.
Narcotics Industry in China: Currently, 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 the narcotic drug producers in China.
Each of our pharmaceutical products has certain medicinal functions and has demonstrated safety and efficacy in accordance with the China SFDA requirements for the treatment of at least one or more therapeutic indications. Our products are produced in various formulations, such as injection, tablets, capsules, oral solution and powders. Our manufacturing facility in China is GMP certified, fully integrated with manufacturing support systems including quality assurance, quality control and regulatory compliance. We have developed our own independent quality control systems in accordance with SFDA regulations. Our quality assurance team devotes significant attention to quality control for designing, manufacturing and testing our products, and is also responsible for ensuring that we are in compliance with all applicable national and local regulations and standards, as well as our internal policies. Our senior management team is also actively involved in setting quality assurance policies and managing internal and external quality performance. These support systems enable us to maintain high standards of quality for our products and deliver reliable products to our customers on a timely basis.
Results of Operations
Revenues for the three months ended September 30, 2009 were $1,446,663, a 60% decrease from the revenues of $3,598,065 realized during the three months ended September 30, 2008. The decrease in revenue was caused by the impact of our relocation of the LRT manufacturing facility in the summer of 2009. The consolidation of the LRT facility with our own necessitated that we obtain GMP re-certification of six formulations at the new facility. This has delayed our fulfillment of certain purchase orders. During the three months ended September 30, 2009, our new facility successfully passed the GMP re-certification on capsule, tablet, granule and oral solution formulations. We expect that sales of pill and tincture formulations will continue to be adversely affected by the GMP re-certification process until June 2010.
Our cost of sales was $450,143 for three months ended September 30, 2009, which was 77% less than the $1,937,345 in costs incurred during the three month ended September 30, 2008. The gross margin ratio was increased from 46% in the three months ended September 30, 2008 to 69% in the three months ended September 30, 2009. The primary reason for the improvement in gross margin was that Zhongtongan, our leading product for dental pain in the market, became a much more significant contributor to our revenue. Zhongtongan has a much higher gross margin compared to some other products.
During the three months ended September 30, 2009, gross profit was $996,520, which was 40% lower than the $1,660,720 gross profit realized during the three months ended September 30, 2008. This drop reflected less net sales as a result of temporarily low production output caused by the relocation of our manufacturing function.
Research and development expenses decreased from $266,329 during the three months ended September 30, 2008 to $113,303 during the three months ended September 30, 2008, a 57% decrease. Our R&D expenses will tend to fluctuate from period to period, reflecting the progress of our various development projects.
General and administrative expenses decreased from $1,192,892 in the three months ended September 30, 2008 to $877,484 during the three months ended September 30, 2009, a 26% decrease, reflecting our continuous efforts in cost control.. During the three months ended September 30, 2009, stock-based compensation for services decreased to $202,227 from $399,423 during the three months ended September 30, 2008.
Selling expenses in the amount of $260,894 during the three months ended September 30, 2009 were a 62% decrease from the $631,018 spent on selling during the three months ended September 30, 2008. The decrease was primarily due to the consolidation of LRT's selling expenses with ours and general cost control measures undertaken by our company.
Depreciation and amortization expense decreased from $144,458 in three months ended September 30, 2008 to $109,217 in three months ended September 30, 2009, or a decrease of 24%, partially due to divesture of fixed assets of LRT during the last reporting period.
Our loss from operations decreased to $364,378 during the three months ended September 30, 2009 from $573,977 during the three months ended September 30, 2008. The 37% decrease in the loss was primarily due to the improvement of operation efficiency as well as greater control of operational expenditures.
Our net loss for the three months ended September 30, 2009 was $2,294,609. This included, however, an expense of $2,142,159 attributable to the increase in the fair value of our outstanding financial derivatives. In comparison, during the three months ended September 30, 2008, the Company achieved net income in the amount of $626,119. This, however, included a $1,459,751 forgiveness of debt by the Bank of China and a $147,727 gain on the fair value of financial derivatives. We expect that the change of fair value of financial derivatives could continue to significantly impact our net income or loss over the next 24 months, depending on the volatility of the market price for our common stock.
Liquidity and Capital Resources
Our operations during the three months ended September 30, 2009 consumed $242,976 in cash, which reflected significant improvement as compared to a negative cash flow from operations in the amount of $620,492 during the three months ended September 30, 2008. However, we continued to incur negative cash flow from operations as the gross profit from our product sales is not sufficient to offset the cash demands of our ongoing business expansion.
Our cash flows from investing activities amounted to $657,608 during the three months ended September 30, 2009. We received $950,626 in cash from our sale of the real estate previously owned by LRT - the sale had been recorded on our financial statements for the quarter ended June 30, 2009. On the other hand, we used $293,018 to purchase additional property and equipment.
Our cash flows from financing activities amounted to $4,788,622 during the three months ended September 30, 2009. During that period, we completed a private placement with a total of fifteen institutional and other accredited investors of 5,263,158 of shares of the Company's common stock at a purchase price of $0.95 per share, for gross proceeds of $5 million.
During the three months ended September 30, 2009, we significantly improved our working capital position. At September 30, 2009, we had working capital of $1,426,064 as compared to a working capital deficit of $13,173,235 at June 30, 2009. The improvement of our working capital condition was attributable to (1) the $5 million private placement in August 2009; (2) conversion to common stock of $4,830,847 owed on account of a note that we issued to American Oriental Bioengineering, and (3) cash realization through the divesture of the land and building of LRT. We expect to continue to improve our liquidity as well as our capital structure in the coming year.
In October 2009, the Company reached a restructuring agreement with Eastern Asset Management Company "("EAMC"), a nationwide investment company based in China which acquired the ownership of the loan from Bank of China. Prior to the restructuring, the outstanding balance of the debt was 54,092,916 RMB including 41,715,142 RMB of principal and 12,377,774 RMB of accrued interest. Under the restructuring agreement, the Company received the forgiveness from EAMC in the amount of 24,892,316 RMB (approximately $3,640,505), including 12,514,542RMB of principal and 12,377,774 RMB of accrued interest. The total outstanding balance of the debt was reduced to 29,200,600 RMB (approximately $4,270,592) as of October 1, 2009. The Company paid off this debt in October 2009 after it refinanced with a 36-month bridge loan.
In order to restructure the Bank of China loans, on October 1, 2009 the Company obtained a bridge loan in the principal amount of 32 million RMB (approximately $4.68 million) from a group of seven individuals. The maturity date of the loan is September 30, 2012. The loan bears interest at 12% for the six month period ended March 31, 2010, then interest is reduced to 9.6% per annum until the maturity date of September 30, 2012. The Company has the option to pay part or the entirety of the loan prior to the maturity date without penalty. The loan is collateralized by two buildings at Hebei Aoxing's facility.
The capital injection and restructuring efforts over the last three months greatly improved the liquidity of the Company as we continue to develop our pharmaceutical products. Nevertheless, we will continue to explore various alternatives to improve our financial position and secure sources of financing. Among the possibilities being explored are new credit facilities, a new equity raise, new 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.
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.
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