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, 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 had 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 ("JV") 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 JV represents a significant opportunity for both companies to expand their business in the rapidly growing pharmaceutical market in China. The JV is in the process of applying for registered number of approval and GMP Certification from SFDA before it could commence any operations.

On February 23, 2010, the Company and QRxPharma Limited, a publicly listed pharmaceutical company based in Australia, signed a strategic alliance to collaborate in the development of MoxDuoŽIV, an intravenous formulation of QRxPharma's patented morphine and oxycodone Dual-Opioid™ technology for the acute treatment of moderate to severe pain. Under the terms of the agreement, the Company agreed to fund the development of MoxDuoŽIV for the China market in exchange for exclusive marketing rights in China. Under similar terms, the Company also licensed the rights to the China market for MoxDuoŽIR, an immediate release capsule presently in pivotal Phase 3 studies in the United States under development by QRxPharma Limited. During December 2012, QRxPharma and Aoxing Pharmaceutical mutually agreed to terminate their strategic alliance in China. All related intellectual property rights revert to QRxPharma and both parties are free to pursue alternative opportunities in the Chinese pain management market.

Pharmaceutical Market in China

According to IMS Health, annual global spending on medicines will reach nearly $1.2 trillion by 2016. In the developed markets, including United States, Europe and Japan, spending will decline to 57% of the total global spending due to the expiring patents for a number of significant brand named drugs, slow increases in spending on branded products, and increased cost containment measures by players. Alternatively, the emerging markets will double their spending on pharmaceuticals, growing $150-160 billion by 2016, and driven by rising incomes, continued low cost for drugs, and government sponsored programs designed to increase access to medicines.

Based on the report issued by KPMG, China's booming economy and high GDP growth make its pharmaceutical market the fifth largest and one of most attractive in the world. With its volume and 20% annual growth projection, it is set to overtake Japan as the world second largest market by 2015. 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.

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

Revenues for the three and six months ended December 31, 2012 were $3,314,768 and $5,919,531, respectively, representing a 56% and a 62% increase, respectively, over the revenues realized in the comparable periods of fiscal year 2012. In both cases, the increase in revenue was mainly attributable to the increase in sales of our main product, Zhongtongan, which increased by 62% during the six months ended December 31, 2012 compared to the six months ended December 31, 2011. Sales of Zhongtongan were aided by our decision to expand our sales reach from the original pediatric and stomatological divisions to cover a new market in the gynecology and orthopaedics divisions in the hospitals. To support this new direction in sales, during the second quarter of fiscal 2013 we rebuilt the Company's sales force, adding 90 more sales personnel, expanded our marketing by holding medical conferences to promote our products, and implemented an advertising campaign, all of which led to a sharp increase in sales during the quarter.

Gross profit was $1,973,030 during the three months ended December 31, 2012 and $3,563,550 during the six months then ended, in each case representing a gross margin of 60%. Our second quarter gross margin was approximately equal to that recorded in the second quarter of fiscal 2012, as our cost of raw materials has been stable. Our gross margin for the first half of fiscal 2013, however, surpassed the 58% gross margin realized in the first half of fiscal 2012. 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. The improvement in gross margin was also due to modest pricing increase for Zhongtongan and manufacturing efficiency enhancements.

Despite the significant increase in our revenue, general and administrative ("G&A") expenses of $756,876 for the three months ended December 31, 2012 were approximately equal to G&A expenses incurred during the same period a year earlier, and the $1,367,747 in G&A expenses incurred during the six months ended December 31, 2012 were 9% lower than G&A expenses incurred in the first half of fiscal 2012. This improvement was due to the effective cost management and control procedures implemented during the period.

The completion of a $10.2 million financing at the end of September 2012 allowed us to make some crucial investments in the future of our business. Our operating expenses, therefore, were swelled during the second quarter of fiscal 2013 by two categories of targeted investment:

ˇ Research and development ("R&D") expenses were $1,090,104 during the three months ended December 31, 2012 and $1,219,659 during the six month period then ended, in both cases representing a several fold increase over R&D expense in fiscal 2012. The sharp increase in second quarter R&D expense was primarily comprised of payments to third parties for the continuing development of our R&D projects, in particular Buprenorphine Sublingual Tablet, Compound of Tilidine Capsule, Terazosin Hydrochloride Film and Nimodipine Injection.

ˇ Selling expenses in the amount of $1,706,202 incurred during the three months ended December 31, 2012 and $2,314,873 during the six months then ended were, in both cases, several fold higher than the selling expenses incurred during fiscal 2012. The increase in selling expenses was attributable to the addition of 90 sales personnel mentioned above, increases in travel expenses of $0.3 million and the expenses of the expanded advertising and marketing campaign. We expect selling expenses to remain at the current high level throughout calendar year 2013. During the three months ended December 31, 2012, the Company signed four advertising contracts totaling approximately $3.66 million with four different television stations. The period of advertisements is from January 2013 to December 2013.

An additional operating expense was incurred during the second quarter of fiscal 2012 when we determined that a number of the drug permits and licenses that we had capitalized were no longer likely to be useful to us. We recorded an impairment expense of $613,739 to remove these intangible assets from our balance sheet. As a result of this unplanned expense and the strategic expenses described above, we recorded losses from operations of $2,352,385 and $2,264,906 for the three and six month periods ended December 31, 2012, compared with losses from operations of $150,860 and $646,817 during the same periods a year earlier.

To our loss from operations we added two other elements of expense:

ˇ Net interest expense of $755,005 for the three months ended December 31, 2012 and $1,267,794 during the six months then ended represented increases of 80% and 51%, respectively, from net interest expense during the comparable periods of fiscal 2012. The Company's outstanding short and long term debt increased by $3,581,028 comparing December 31, 2011 to December 31, 2012, causing the increase in net interest expense.

ˇ Equity in loss of JV was $28,271 for the three months ended December 31, 2012 and $51,476 for the six months then ended, decreasing by 24% and 35% from the comparable prior periods. The losses related to the joint venture with Johnson Mathey Plc will continue at least until the joint venture commences operations.

The Company realized net losses of $3,135,661 for the three months ended December 31, 2012 and $3,584,176 for the six months ended December 31, 2012. However, because the Company owns only 95% of Hebei Aoxing, 5% of the Company's losses were attributed to the non-controlling interest. Therefore the net loss attributable to the shareholders of Aoxing Pharmaceutical for the three months ended December 31, 2012 was $ 2,990,650 and $3,423,984 for the six months ended December 31, 2012. In comparison, during the three and six months ended December 31, 2011, the net loss attributable to the Company's shareholders was $296,914 and $1,219,819, respectively, after deducting the 5% non-controlling interest in Hebei Aoxing.
Liquidity and Capital Resources

As discussed above, the completion of a $10.2 million financing in September 2012 made cash available that we utilized for strategic investments in marketing and research and development. In addition, we increased our prepaid expenses by $774,775 in anticipation of a higher level of sales in coming months. Primarily for these reasons, operations during the six months ended December 31, 2012 used $3,481,218 in cash, as compared to only $150,549 used for operations during the six months ended December 31, 2011.

In January 2013, the SFDA granted our application for a license to produce the API in Pholcodine. The award of that license will be followed by a GMP review of our facilities. In anticipation of that inspection, we invested $290,981 in additional property and equipment during the six months ended December 31, 2012. During the six months ended December 31, 2011 investing activities used $40,071 in cash.

During the six months ended December 31, 2012, the Company entered into a financing agreement and borrowed a total of $10,291,161 from Beijing International Trust Co., Ltd with a term of two years. The proceeds were used to repay the outstanding loan from China CITIC Bank of $3,959,305 on September 6, 2012 and Shijiazhuang Construction Investment Group Co. Ltd of $3,167,444 on December 4, 2012. The Company's net cash from financing activities was increased by $2,823,459 after the financing.

As a result of the debt refinancing, our debt service obligations on December 31, 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          $     79,163     $    79,163     $          -     $         -     $         -     $         -     $             -
Bank                 15,040,927       5,129,766        9,911,161               -               -               -
Interest
Commitment -
Bank                  2,146,894         341,983        1,804,911
Related Party         3,588,954         213,852        3,375,102               -             - -               -
Interest
Commitment -
Related Party           552,332          24,967          527,365
Others                1,588,639               0        1,588,639                             - -               -
Interest
Commitment -
Others                  284,055               0          280,008           4,047
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service
commitment            3,663,247       3,663,247
TOTAL              $ 26,944,211     $ 9,072,978     $ 17,867,186     $     4,047     $        --     $      -- -     $            --

On December 31, 2012, we had $2,737,235 in cash compared to $3,682,743 on June 30, 2012. The Company's net working capital deficit was reduced to $1,409,215 on December 31, 2012 compared to $9,112,842 on June 30, 2012. The decrease was mainly due tothe Company's ability to borrow $10,294,192 from Beijing International Trust Co. as long-term debt and pay down $7,126,749in short-term debt obligation with the funds.

Presently, the Company does not anticipate large capital expenditures in the next 12 months nor any significant increase in expenses other than the fees related to the Company's new advertising campaign and R&D expenses. During the three months ended December 31, 2012, the Company signed four master advertising agreements, cancellable if both parties agree, with television networks totaling $3.66 million to advertise from January 2013 through December 2013. Pursuant to the master agreements, the Company will prepay a monthly advertising fee at the beginning of the month and the Company can adjust total advertising spending during the contract period based on advertising results. The Company has shifted our operational strategy by ramping up our sales force in preparation for the launch of new products in 2013 and in order to increase sales of our current products. The Company believes the increase in revenue will partially offset the increase in selling expenses in the short-term and provide positive cash flows later during calendar year 2013. The Company plans to continue to improve its efficiencies and hopes to operate at much lower cash burn rate in the both the short-term and long-term future. The Company anticipates that its current cash position, increased revenues and reduced operating expenses will be sufficient to support the Company's operations for the next 12 month period.

Meanwhile, the Company may 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, and 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.