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AXN > SEC Filings for AXN > Form 10-Q/A on 30-Nov-2012All Recent SEC Filings

Show all filings for AOXING PHARMACEUTICAL COMPANY, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q/A for AOXING PHARMACEUTICAL COMPANY, INC.


30-Nov-2012

Quarterly 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 represents management's assumptions based on information currently available to management. When used in this document, 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, 2012. We undertake no obligation and do not intend to update, revise or otherwise publicly release any revisions to our forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of any unanticipated events.

Outline of Our Business

Aoxing Pharmaceutical Company, Inc. (the "Company" or "Aoxing Pharma") is a Florida incorporated specialty pharmaceutical company with its main operations in China, specializing in research, development, manufacturing and distribution of a variety of narcotic, pain-management, and addiction treatment pharmaceutical products. We operate our business through our subsidiary, Hebei Aoxing. 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.

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 narcotic drug producers in China and we are one of them.

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. 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. 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.

On April 16, 2008, Hebei Aoxing completed the acquisition of 100% of the registered capital of LRT. LRT is engaged in the manufacture and distribution of Chinese traditional medicines focusing on pain management related therapeutics within China. All the LRT's businesses and operations have been fully integrated into Hebei Aoxing by the end of 2010.

In April 2010 Aoxing Pharma and Johnson Matthey Plc entered into an agreement to establish a joint venture through affiliated companies focused on research, development, manufacturing and marketing of active pharmaceutical ingredients ("API") for narcotics and neurological drugs for the Chinese market. The joint venture represents a significant new opportunity for both companies to expand their business in the rapidly growing pharmaceutical market in China.


Regulatory and Quality Control

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 one or more therapeutic indications. Our products are produced in various formulations, such as injection, tablets, capsules, pills, tincture, 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- Comparison of the Quarters ended September 30, 2012 and 2011

Revenues for the three months ended September 30, 2012 were $2,604,764, representing 70.2% increase over the revenues of $1,530,068 realized during the three months ended September 30, 2011. The increase in revenue was mainly attributable to the increase in sales of our main product, Zhongtongan. The revenue contribution from Zhongtongan increased by 78% when compared to the three months ended September 30, 2011, as we expanded our sales reach from the original pediatric and stomatological divisions to cover a new market at the gynecology and orthopaedics divisions in hospitals. However, the increase in sales of Zhongtongan was partially offset by a decline in revenue from certain low margin products, as the Company during the past fiscal year initiated a sales strategy of moving to high margin products.

Cost of sales was $1,014,245 for the three months ended September 30, 2012, which was 53.1% higher than the $662,550 in costs incurred during the three months ended September 30, 2011. The main reason for the increase in cost of sales was the increase in sales.

Gross profit was $1,590,519 during the three months ended September 30, 2012, 83.3% higher than the same period a year earlier, reflecting the combined effect of higher sales and higher gross margin. This improvement was primarily the result of our strategic decision to refocus the efforts of our sales staff away from the lower margin products, such as Shuanghuanglian, and focus our efforts on the sales of our higher margin core product, Zhongtongan. As a result of this strategic re-focus, our gross margin increased from 56.7% during the quarter ended September 30, 2011 to 61.1% during the quarter ended September 30, 2012. The improvement in gross margin was also due to a modest price increase for Zhongtongan and manufacturing efficiency enhancements.

Research and development expenses were $129,555 during the three months ended September 30, 2012, representing a 21.7% increase from $106,399 occurred during the three months ended September 30, 2011. R&D expenses could fluctuate significantly from one period to another, reflecting the progress and timing of our various development projects.

General and administrative expenses were $610,871 in the three months ended September 30, 2012, 18.1% lower than $746,243 in the three months ended September 30, 2011. The main reason for the decrease was Company's effort to reduce cost.

Selling expenses in the amount of $608,671 incurred during the three months ended September 30, 2012 were 67.5% higher than $363,293 spent on selling during the three months ended September 30, 2011. The increase was mainly due to increase in marketing efforts and promotional fee for core products.

As a result of the several factors discussed above, we recorded a modest income from operations of $87,478 for the quarter ended September 30, 2012 instead of a loss from operations of $495,957 for the same period last year.


Net interest expense was $512,789 for the three months ended September 30, 2012, a 22.6% increase from net interest expense of $418,431 for the three months ended September 30, 2011. The increase in interest expense was due to higher interest rates upon renewal of loans as a result of a nationwide credit tightening in China, as well as a currency exchange rate change.

Equity in loss of joint venture was $23,205 for the three months ended September 30, 2012, a 44.7% decrease from a loss of $41,936 for the three months ended September 30, 2011. The loss was related to the JV with Johnson Mathey Plc, which has no operation yet.

The Company realized a net loss of $448,516 for the three months ended September 30, 2012. However, because the Company owns only 95% of Hebei Aoxing, 5% of that company'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, 2012 was $433,335. In comparison, during the three months ended September 30, 2011, the net loss attributable to the Company's shareholders was $922,904, after deducting income attributable to the 5% non-controlling interest in Hebei Aoxing.

Liquidity and Capital Resources

Despite the improvements in our operating results, operations during the three months ended September 30, 2012 used $558,668 in cash, as compared to $352,926 used for operations during the three months ended September 30, 2011. The primary reasons for the increased use of cash during the recent quarter were the fact that we increased our prepaid expenses in anticipation of growth and reduced our accrued expenses and other current liabilities. In contrast, during the three months ended September 30, 2011 we significantly increased our accrued expenses.

Investing activities used $69,209 in cash during the three months ended September 30, 2012. During the three months ended September 30, 2011 investing activities used $24,762 in cash. The Company had no material additions of property and equipment during the last two years.

During the three months ended September 2012, the company entered into a refinancing agreement with Beijing International Trust Co., Ltd and obtained a new loan of $7,107,545 with a term of two years. The proceeds were used to repay the outstanding loan from China CITIC Bank of $3,948,636. The refinancing resulted in net cash from financing activities totaling $3,158,909. There was no significant financing activity during the three months ended September 2011.

As a result of the debt refinancing during the first quarter of fiscal year 2013, our debt service obligations on September 30, 2012 were:

Contractual                       Less than
Obligations        Total           1 Year         1-2 Years        2-3 Years       3-4 Years       4-5 Years       After 5 Years

Short-term
Borrowing       $  3,236,501     $ 3,236,501     $          -     $         -     $         -     $         -     $             -
Interest
Commitment
-Short term
Borrowing            473,634         473,634                -               -               -               -                   -
Bank              11,840,859       4,736,344        7,104,515               -               -               -                   -
Interest
Commitment -
Bank               1,619,830         341,017        1,278,813
Related Party      3,705,130         213,264        3,491,866               -               -               -                   -
Interest
Commitment -
Related Party        563,401          24,896          538,505
Others             1,800,758         114,304        1,664,035          22,419               -               -                   -
Interest
Commitment -
Others               322,242          20,575          297,632           4,035
TOTAL           $ 23,562,355     $ 9,160,535     $ 14,375,366     $    26,454     $        --     $         -     $            --


On September 30, 2012, we had $6,204,310 in cash compared to $3,682,743 on June 30, 2012. The increase was mainly because of the new loan from Beijing International Trust Co., Ltd. The Company's net working capital deficit was reduced to $2,109,492 on September 30, 2012 from $9,112,842 on June 30, 2012. The improvement in working capital was because of the replacement of short term bank loan by a two-year loan.

Presently, the Company does not anticipate large capital expenditure projects in the next 12 months. As a result, the Company will be able to operate at much lower cash burn rates, if needed, without major impact on its operations. The Company anticipates that its current cash position will be sufficient to support the Company's operations at current capacity for the next 12 month period. Meanwhile, the Company will also seek financing to fund expansion of our operations, extend our reach to broader markets, or to acquire additional entities. We may rely on additional 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 may raise such additional capital through the issuance of our equity securities, which may result in significant dilution to our current investors. Other options considered include issuance of convertible debt, a new bridge loan, or arrangement to out-license intellectual property. We are also exploring potential strategic partnerships, which could provide a capital infusion to the Company.

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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