Attached files
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| EX-32 - RULE 13A-14(B) CERTIFICATION - AOXING PHARMACEUTICAL COMPANY, INC. | caxg10ka120090630ex32.htm |
| EX-31.2 - RULE 13A-14(A) CERTIFICATION - HONGYUE HAO - AOXING PHARMACEUTICAL COMPANY, INC. | caxg10ka120090630ex31-2.htm |
| EX-31.1 - RULE 13A-14(A) CERTIFICATION - ZHENJIANG YUE - AOXING PHARMACEUTICAL COMPANY, INC. | caxg10ka120090630ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-K /A
(Amendment No. 1)
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the
fiscal year ended June 30, 2009.
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
Commission
File No. 0-24185
CHINA
AOXING PHARMACEUTICAL COMPANY, INC.
(Exact
Name of Registrant as Specified in its Charter)
|
Florida
|
65-0636168
|
|
(State
or other jurisdiction
|
(I.R.S.
Employer ID Number)
|
|
of
incorporation or organization)
|
15 Exchange Place, Suite
500, Jersey City, NJ 07032
(Address
of principal executive offices)
Issuer's
Telephone Number, including Area Code: 646-367-1747
Securities
Registered Pursuant to Section 12(b) of the Act: None
Securities
Registered Pursuant to Section 12(g) of the Act:
Common
Stock, $.001 par value per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 406 of the Securities Act. Yes __ No √
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes __ No √
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 √
No __
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be
contained, to the best of
registrant's knowledge, in definitive proxy or
information statements incorporated by
reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [X]
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
Small 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 √
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the price at which the common equity
was sold, or the average bid and ask prices of such common equity, as of a
specified date within the past 60 days.
The
aggregate market value of the Registrant’s common stock, $.001 par value, held
by non-affiliates as of December 31, 2008 was $46,619,363 based on a market
price of $1.05 per share as of December 31, 2008..
As of
October 9, 2009 the number of shares outstanding of the Registrant’s common
stock was 91,669,562 shares, $.001 par value.
DOCUMENTS INCORPORATED BY
REFERENCE: None.
FORWARD-LOOKING STATEMENTS: NO
ASSURANCES INTENDED
In
addition to historical information, this Annual Report contains forward-looking
statements, which are generally identifiable by use of the words “believes,”
“expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or
similar expressions. These forward-looking statements represent Management’s
belief as to the future of China Aoxing Pharmaceutical. Whether those
beliefs become reality will depend on many factors that are not under
Management’s control. Many risks and uncertainties exist that could
cause actual results to differ materially from those reflected in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section headed “Item
1A: Risk Factors.” Readers are cautioned not to place undue reliance
on these forward-looking statements. We undertake no obligation to revise or
publicly release the results of any revision to these forward-looking
statements.
EXPLANATORY
NOTE
This Amendment No. 1 on Form 10-K
(the “Form 10-K/A”) amends the Annual Report on Form 10-K for the year ended
June 30, 2009 (the “2009 Annual Report”) filed by China Aoxing
Pharmaceutical Company, Inc. (the “Company”), which was originally filed with
the Securities and Exchange Commission on October 14,
2009.
In
connection with its review in late January 2010 of its 2009 Annual Report , the
Company determined that it should provide (1) additional discussion
of its intellectual properties and patent portfolio pursuant Item 101 ( c) (1)
(iv) of Regulation S-K; (2) additional information in Management’s Discussion
regarding bad debt expense; (3) reclassification of the impairment loss
recognized in the year ended June 30, 2009 from Other Expense to Operating
Expense during the same reporting period; (4) additional information in Note 13
to the Consolidated Financial Statements regarding accrued financing expense and
related accounting treatment; (5) additional discussion in Note 17 to the
Consolidated Financial Statements regarding the modification of exercise price
of warrants; and (6) additional information regarding executive and
director compensation in Item 11: Executive
Compensation. Note 18 to the Financial Statements sets forth
the material effect of the amendment on our financial statements for the year
ended June 30, 2009.
The only changes made to the original
filing are those summarized in this Explanatory Note. The remainder
of the disclosures in this Form 10-K/A has not been updated. For
current information regarding the Company, please see the recent Reports filed
by the Company with the SEC.
PART 1
Item
1. Business
China Aoxing Pharmaceutical (“China
Aoxing” or the “Company”) is a specialty pharmaceutical company located in China
specializing in research, development, manufacturing and distribution of a
variety of narcotics and pain-management products. Headquartered in Shijiazhuang
City, the pharmaceutical capital of China, outside of Beijing, China Aoxing 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
narcotics medicines. The Company is working closely with the Chinese government
and SFDA to assure the strictly regulated availability to medical professionals
of its narcotic drugs and pain medicines throughout China.
The Company has one operating
subsidiary, Hebei Aoxing Pharmaceutical Co., Inc. (“Hebei”), which at June 30,
2009 is 95% owned, and organized under the laws of the Peoples Republic of China
(“PRC”). Since 2002, Hebei has been engaged in developing narcotics and pain
management products, building its facilities and obtaining the requisite
licenses from the Chinese Government. During the year ended June 30,
2009, Hebei integrated into itself the business operations of Shijiazhuang
Lerentang Pharmaceutical Company, Ltd. (“LRT”), a specialty pharmaceutical
company focusing on pain related therapeutics which had been an operating
subsidiary acquired by Hebei in May 2008. The Company owns 95% of the
equity in Hebei.
The Company was incorporated in the
State of Florida on January 23, 1996 under the name “Central American Equities
Corp.” Until mid-2006, the Company was engaged in the business of
owning and operating hotels and restaurants and real property in Costa
Rica. On July 31, 2006, the Company’s hotel assets were sold to the
individuals who were the Company’s Board of Directors until April 18,
2006.
On April 18, 2006, Ostar
Pharmaceutical, Inc., a Delaware corporation, was merged into a wholly-owned
subsidiary of Central American Equities Corp. Ostar Pharmaceutical
owned 60% of Hebei Aoxing Pharmaceutical Group Co. Ltd (“Hebei
Aoxing”), which is organized under the laws of The People’s Republic of
China. As a result of the merger, the former stockholders of Ostar
Pharmaceutical became owners of a majority of the voting power of the Company,
and the Company became the owner of a 60% interest in 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.
1
On May 1,
2008 China Aoxing completed the acquisition of an additional 35% interest in
Hebei Aoxing from its Chairman and Chief Executive Officer, Mr. Zhenjiang
Yue. As a result of the acquisition, China Aoxing owns 95% of Hebei
Aoxing, and the remaining 5% of Hebei Aoxing is owned by our Chairman, Zhenjiang
Yue, and his family.
On April
15, 2008 China Aoxing entered into a Joint Strategic Alliance and Securities
Purchase Agreement with American Oriental Bioengineering, Inc. (“AOB”).
The agreement provides that China Aoxing and AOB will cooperate in the
development and marketing of several narcotic drugs. The agreement
also provided for the sale to AOB by China Aoxing of 30 million shares of its
common stock.
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. In exchange for transfer of ownership of LRT to Hebei
Aoxing, China Aoxing paid to the shareholders of LRT 80 million RMB and related
expenses (approximately $12.4 million in total) and issued 8 million shares of
common stock. As of June 30, 2009, LRT was completed integrated into
Hebei Aoxing.
Current
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 broad 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.
2
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.
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 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.
Naloxone SFDA Approval
Received for Marketing: In November 2006, Hebei Aoxing received GMP
certification for its Naloxone raw materials workshop from the China SFDA.
Hebei Aoxing started the production of the Naloxone raw materials in
December 2006. In January, 2007 the SFDA granted Hebei Aoxing the final
GMP certificate (H4107) for small volume injectables, which was a significant
milestone in our history. In February 2007, Hebei Aoxing initiated the
product launch of Naloxone Hydrochloride injectable in the Chinese market.
Currently Hebei Aoxing is authorize by the SFDA to manufacture Naloxone
Hydrochloride injectable in four dosage strengths: 0.4mg (1ml), 1mg (1ml),
2mg (2ml) and 4mg (10ml).
Tilidine under Clinical
Development: In April 2007, Hebei Aoxing received clearance
from the China SFDA for the clinical study of Tilidine Hydrochloride tablets and
capsules for the treatment of moderate to severe pain associated with cancer and
surgery, as well as other forms of pain. The Tilidine tablets and capsules
drug are not currently available in China. To the best of our
knowledge, Hebei Aoxing is currently the only authorized domestic manufacturer
to develop Tilidine tablets and capsules. Hebei Aoxing is currently
conducting clinical studies, which will include approximately four hundred
patients through several health centers in China. The purpose of the
study will be to confirm Tilidine's efficacy and safety in reducing pain levels
for Chinese patients.
3
In
November 2007, Hebei Aoxing was granted by the China SFDA the designated
manufacturer status to produce Tilidine tablet and capsules, a highly regulated
narcotic drug, in order to address significant unmet medical needs in cancer
pain management in China. Currently the Company is conducting
multi-center clinical studies to evaluate the clinical efficacy and safety of
Tilidine product among Chinese patients. Cancer has become a leading cause of
death in China, estimated at 1.5 million victims per year. The number of victims
is soaring especially in rural and western China. The Chinese
government and medical community are fully aware that China is woefully behind
the rest of world in cancer pain treatment.
Codeine Phosphate Compound
Oral Solution under Clinical Development: In June 2007, Hebei Aoxing
received formal approval from the SFDA for the clinical study of Codeine
Phosphate Compound Medicine for cold and flu treatment. While Codeine
Phosphate is widely used and considered effective in cold and flu treatment in
Western countries, it just became available in China in 2006. To the
best of our knowledge, Hebei Aoxing is one of only two drug makers developing
this medicine in China. The company is conducting clinical studies of the
Codeine Phosphate Compound Medicine to test efficacy and safety in China. The
clinical study is a multi-center randomized, double-blind, controlled trial,
involving approximately 300 patients in China.
In June
2009 the Company completed the registration trial with Codeine Phosphate, a
compound oral solution for the treatment of acute moderate to severe cough. This
registration trial is a randomized, multi-center, double-blind,
positive-controlled study designed to evaluate the efficacy and efficacy of
compound oral solution of codeine phosphate in 215 patient subjects with acute
moderate to severe cough. In early September 2009, the Company announced the
submission of its new drug application (NDA) of the product to the China
SFDA.
Buprenorphine/Naloxone under
Development: Also in November 2007, the China SFDA granted Hebei Aoxing
and its partner, the National Institute of Drug Dependence at Beijing
University, an important research and development license of
Buprenorphine/Naloxone sublingual combo tablet to treat opioid
dependence. This project has been a joint effort of scientists
from our Company and Beijing University since April 2005. This new combo therapy
is expressly designed to combine the proven effectiveness and tolerability of
buprenorphine with a lower potential for misuse, underlining our commitment to
this therapy area. There is much peer-reviewed evidence of superior
efficacy and safety profile for this therapy. Opioid dependence has
become a seriously medical and social challenge in China. As of 2006,
there were approximately 1.2 million registered individuals addicted to opioids
in China. This figure is estimated to grow at 10% per year
while the number of un-registered drug addicts could be significantly
higher.
Paracetamol and Caffeine
Tablets SFDA Approval received for Marketing: In December 2008, the
Company announced that Hebei Aoxing received a new production license from the
China SFDA for Paracetamol and Caffeine Tablets, a controlled substance
regulated by the SFDA. Paracetamol and Caffeine Tablets are used to
treat mild to moderate pain, such as headache, migraine, toothache, sore throat,
muscular and rheumatic pain, nerve pain (neuralgia), backache (lumbago) and
menstrual cramps. The tablets are also effective in relieving aches,
pains, sore throat and fever associated with colds and flu.
4
Primary Dysmenorrha Drug at
Phase II Clinical Trial: In May 2009 the Company acquired all rights to
Tong Jin Shu Le (“TJSL”), a novel drug at Phase II development stage to treat
primary dysmenorrhea (“”PD”), or menstrual pain, in adult women. TJSL
is a capsule form of selected herbal medicines at Phase II clinical development
under the protocol approved by the China SFDA. The prevalence rates
of PD among women are from 60 to 90 percent. It is estimated that 64% of women
in China purchase menstrual pain drugs on regular basis. The market
size of healthcare product to address menstrual pain is estimated at $3 billion
per year in China.
GMP Certification from SFDA:
In April 2009, the China SFDA granted the Good Manufacturing Practice
(GMP) certification for the Company’s newly opened tablet formulation and
packaging production facility. The certification allows the Company
to manufacture pharmaceutical products in tablet dosage form and to prepare for
the launch of several important narcotic drugs in tablet dosage form in
foreseeable future, including Tilidine, Oxycodone, Buprenorphine and others,
which provide well established medical benefit in treating cancer pain, moderate
to severe pain, or related chronic health problems. In addition, the
Company retains valid GMP certification for capsule, injectable, other finished
dosage products as well as active pharmaceutical ingredient (API)
production.
Intellectual Properties and
Patent Portfolio: We have accumulated a portfolio of patents that teach
and cover methods and compositions for specific pharmaceutical products and
applications. We believe that many classes of drug, such as pain
management, chemotherapeutic and cardiovascular drugs, could benefit from our
innovations and technology improvement to achieve maximum therapeutic effectives
and limited potential side effects. We have two domestic
patents granted by the China Patent Office for the territory of
China. Each has an expiration date in November 2025. One
such patent is related to the methods of preparation of our buprenorphine
formulation, and the other patent is related to herbal raw material extraction..
We also have seven domestic patents pending and currently under review by the
China Patent Office. These seven are related to compositions, methods
of use and improvements of drug delivery technology. We believe that there is
great value in our patented technologies; we are evaluating a strategy for the
utilization of these patents in the future, which may include pursuit of
licensing or development of other strategic opportunities with users of the
underlying technology. To date, the Company has not experienced any
disputes or litigation relating to our patent portfolio, existing products on
the China market or our pipeline products under development.
Products – Narcotics and
Pain Management
Global
consumption of narcotic analgesics for the treatment of moderate to severe pain
increased by
more than two and one half times during the past decade. However,
the increase in consumption occurred
mainly in countries in Europe and North America. 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 and stop
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.
5
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 this matter through the
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.
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, Buprenorphine, etc.
Naloxone
Series. As an opioid antagonist, Naloxone has curative effects
for pain, shock, alcoholism, and cerebral infarction, widely applied in clinical
treatment. Naloxone or Naloxone Hydrochloride is recommended by the
WHO (World Health Organization) to treat acute alcoholism and acute poisoning of
opioid and non-opioid drugs. The Company’s application for a license to develop
facilities to manufacture Naloxone was approved by China’s SFDA in January 2005
followed by the final production approval of the Naloxone
injectable. We introduced the product to the market in February
2007.
Naloxone
Hydrochloride was developed by the DuPont Company, and was introduced into the
US market in the 1970’s. Since then it has been introduced into the additional
markets of Britain, Germany, France and Italy. The Beijing Academy of
Military Medical Sciences first used Naloxone Hydrochloride as morphine
antagonist in China to ease the indication of breath suppression and awakening
after a morphine-based anesthesia.
Oxycodone
Series. Oxycodone is a derivative of the semi-synthetic
opioid, alkaloid thebaine. Its pharmacological properties are similar to those
of morphine. It is an agonist of the opioid receptor, and is able to relieve
acute pain.
Global
manufacture of Oxycodone rose gradually during the 1990s, amounting to 11.5 tons
in 1998. Since 1999, the growth of manufacture has accelerated,
reaching the record level of 56.5 tons in 2005. The United States manufactured
40.3 tons in 2005 and accounted for 71 percent of the world total. The
manufacture of Oxycodone also grew steadily in the United Kingdom and France,
contributing 19 percent (10.9 tons) and 8 percent (4.4 tons) respectively to the
global total. Three other countries, Switzerland, Japan and Slovakia,
manufactured Oxycodone in smaller quantities of between 100 and 500
kg.
6
Global
consumption has also risen steadily, reflecting the increased use of
controlled-release preparations containing Oxycodone for the treatment of
moderate to severe pain. In 2005 global consumption reached the highest level
ever recorded, 42.3 tons, mainly as a result of increased consumption in the
United States, which continued to be the largest consumer of Oxycodone,
accounting for 80 per cent of the world total in 2006. Other major consumer
countries in 2005 (all reporting increased consumption) were Canada (3 tons),
Germany (1.6 tons), Australia (774 kg) and the United Kingdom (501 kg), together
accounting for 14 percent of global consumption. Consumption of Oxycodone has
spread to more than 50 other countries, including developing
countries.
In
1980’s, after the World Health Organization introduced the Three Step Principle
in Cancer Pain Treatment, the production and consumption of Oxycodone increased
quickly in the world. The effectiveness and safeness of Oxycodone in treating
cancer pain have been acknowledged by the Chinese medicine
community. But since China does not produce Oxycodone in bulk, the
clinical application of Oxycodone is still impossible. Although the
SFDA had granted import licenses for Oxycodone controlled-release tablets
(Oxycontin) and the composite capsule of Oxycodone and paracetamol (Tylox), most
patients in China cannot afford the imported drugs. Therefore the
Chinese government is heavily committed to producing Oxycodone pharmaceuticals
in bulk domestically.
Hebei
Aoxing recently submitted additional information to the SFDA and is currently
waiting for a clinical trial license to be issued by the SFDA.
Tilidine
Series. Tilidine is a leading opioid analgesic drug in Europe,
used in the treatment of moderate to severe pain associated with cancer, post
surgery, and other forms of pain. Tilidine is widely prescribed in
Europe, with Germany, Ireland, Switzerland and Belgium as major
users. Based on the “Narcotic Drugs” reported by the International
Narcotics Control Board in year 2006, global Tilidine manufacture followed a
generally increasing trend after 1993, from 8.2 tons in that year to a peak of
45.2 tons in 2004. Global consumption of Tilidine has continued to
increase, reaching its peak in 2005, with 28.9 tons.
Tilidine
is not currently manufactured in China. To the best of its knowledge,
the Company believes that it is currently the only government approved domestic
manufacturer to conducting clinical trials in order to bring Tilidine capsules
and tablets into China market.
Buprenorphine Series. Buprenorphine
is an opioid that has been used as an analgesic. The increasing consumption
of Buprenorphine in recent years is mainly the result of its use in
detoxification and substitution treatment of opioid dependence in a growing
number of countries.
Hebei
Aoxing is working on a sublingual tablet formulation of Buprenorphine combined
with Naloxone for drug abuse treatment. At present, more than 40
countries are importing Buprenorphine for that purpose. Since 1993,
total manufacture of the substance increased steadily and significantly. During
the period 2003-2005, average global manufacture amounted to nearly 2 tons,
double the amount manufactured in the late 1990s. The United Kingdom accounts
for 75 per cent of global manufactures and is also the world’s leading exporter
of Buprenorphine. France and Germany are the main importers of Buprenorphine,
accounting for 60 per cent of global imports. Both France and Germany utilize
Buprenorphine mainly for substitution treatment.
7
Codeine
Phosphate. This drug is an effective opioid cough
medicine in Western countries, which just became available in China in 2006.
China Aoxing is developing an oral solution consisting of Guaifenesin,
Pseudoephedrine Hydrochloride and Codeine Phosphate. Codeine Phosphate is widely
prescribed in continental Europe and other regions, including major markets like
Australia, New Zealand and Canada. It is also available without prescription in
combination preparations in limited doses in some countries. The Company has
submitted its NDA application to the China SFDA and expects to receive final
production approval in later 2010 assuming timely review process to be conducted
by the government agency. It is estimated that cold and flu medicines
account for approximately over USD$600 million in sales annually in
China.
Research and
Development
We have established in-house
state-of-art facility which allows its multiple-disciplinary team to conduct
pharmaceutical research and development. Our R&D team is
consisting of chemists, biologists, pharmacologists and other technical
expertise, and working on multiple projects arranging from early stage discovery
to advanced clinical studies. Our team is capable of performing
chemical synthesis, analytic analysis, pharmacology, toxicology as well as other
technical tasks related to pharmaceutical industry. During our fiscal
year 2009, we directly invested $722,567 in R&D efforts. Our
R&D expenditures during fiscal 2008 and 2007 were $700,202 and $270,720,
respectively. In addition, we rely on arrangements with universities,
our collaborators, contract research organizations and clinical research sites
for a significant portion of our product development efforts.
The
Market
Global consumption of opioid analgesics
for the treatment of moderate to severe pain (expressed in defined daily doses
for statistical purposes) increased by more than two and one half times during
the past decade. However, the increase in consumption occurred mainly in
countries in Europe and North America. In 2006, for example,
countries in those two regions together accounted for almost 96 per cent of
global consumption of fentanyl, 89 per cent of global consumption of morphine
and 97 per cent of global consumption of oxycodone. In 2006, the
United States accounted for 99 per cent of global consumption of hydrocodone and
80 per cent of global consumption of oxycodone. In the United States, the
consumption of hydrocodone increased by 70 per cent and the consumption of
oxycodone by 55 per cent during the past five years. Global consumption of
methadone has increased more than three times over the past decade. Methadone is
used in several countries for the treatment of pain, but the sharp upward trend
in its consumption is mainly attributable to its growing use in maintenance
treatment related to opioid dependency. In 2006, the countries using the largest
quantities of methadone were (in
descending order) the United States, Spain, Germany, the United Kingdom of Great
Britain and Northern Ireland, Italy, the Islamic Republic of Iran and Canada;
those countries together accounted for 83 per cent of global
consumption.
8
The low
levels of consumption of opioid analgesics for the treatment of pain in many
countries, in particular in developing countries, continue to be a matter of
serious concern. 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 2005, Chinese government had approved the
production of 11 varieties of analgesics. In the near future,
patients in China will find 30 varieties and over 80 specifications of different
types of analgesics.
For the
foreseeable future, Hebei Aoxing intends to focus its marketing efforts
exclusively in China. Because China is only now developing a domestic
supply of bulk analgesics, the market potential is sufficient to fully occupy
the Company’s efforts.
Employees
The
Company currently has 360 employees. There are 35 employees in middle and senior
management team, all having college degrees; 22 employees in the R&D
department, among whom 10 employees have Master’s degrees. There are 230 workers
at the production line and over half of them have at least a high school
diploma.
Item
1A Risk
Factors
Our business, financial condition,
operating results and prospects are subject to the following risks. Additional
risks and uncertainties not presently foreseeable to us may also impair our
business operations. If any of the following risks actually occurs, our
business, financial condition or operating results could be materially adversely
affected. In such case, the trading price of our common stock could decline, and
our stockholders may lose all or part of their investment in the shares of our
common stock. You should carefully consider the risks described below
before buying our common stock. If any of the risks described below
actually occurs, that event could cause the market value of our common stock to
decline, and you could lose all or part of your investment.
9
The
audit report on our financial statements says that there is uncertainty
regarding our ability to continue as a going concern.
The
independent registered public accounting firm that audited our financial
statements for the year ended June 30, 2009 determined that there is uncertainty
regarding our ability to continue as a going concern. The auditors
based the uncertainty on our history of operating losses, and on the fact that
we had a substantial working capital deficit at June 30, 2009. In
order to alleviate that uncertainty, we will need to improve our balance sheet
and achieve profitable operations. If we fail to make those
improvements, our business will fail.
Our
sales revenue remains small and mainly derived from a few products and a
disruption in, or a compromise of, our manufacturing or sales operations, or
distribution channels related to any of these products could materially and
adversely affect our financial condition and results of operations.
We
started to book our product revenues in late 2006, and only reached a small size
of sales, including the contribution of our recently acquired LRT subsidiary for
the year ended June 30, 2009, mainly derived from a few products approved by the
China SFDA. We expect that these products will continue to account
for a majority of our sales in the near future. Because of our dependence on a
few products, any disruption in, or compromise of, our manufacturing operations,
sales operations or distribution channels, relating to any of these products
could result in our failure to meet shipping and delivery deadlines or meet
quality standards, which in turn could result in the cancellation of purchase
orders, refusal to accept deliveries or a reduction in purchase prices, any of
which could have a material adverse effect on our financial condition and
results of operations.
We
lack sufficient capital to fully carry out our business plan.
In order
to make our operations cost-efficient, it is necessary that we expand our
operations. At the present time, however, our capital resources are
sparse. We are exploring various alternatives to improve our
financial position and secure other sources of financing. Such
possibilities include a new credit facility, new equity raise, new arrangements
to license intellectual property, the sales of selected property
rights.
Intense
competition from existing and new companies may adversely affect our revenues
and profitability.
We
compete with other companies, many of whom are developing, or can be expected to
develop, products similar to ours. Some of our competitors are more established
than we are, have greater brand recognition of products that compete with ours,
have more financial, technical, marketing and other resources than we presently
possess and a larger customer base. These competitors may be able to respond
more quickly to new or changing opportunities and customer requirements and may
be able to undertake more extensive promotional activities, offer more
attractive terms to customers or adopt more aggressive pricing policies. Our
commercial opportunity will be reduced or eliminated if our competitors develop
and commercialize products that are safer, more effective, have fewer side
effects, are less expensive or have more attractive product characteristics than
our current products or products that we may develop in the future. We cannot
assure you that we will be able to compete effectively with current or future
competitors or that the competitive pressures we face will not harm our
business.
10
Most
of our pipeline products contain narcotic ingredients. As a result of reports of
misuse or abuse of prescription narcotics, the sale of such drugs may be subject
to new regulation, which may prove difficult or expensive to comply with, and we
and other pharmaceutical companies may face lawsuits.
Most of
our core pipeline products contain narcotic ingredients. Misuse or abuse of such
drugs can lead to physical or other harm. For example, in the past two years,
reportedly widespread misuse or abuse of OxyContin®, a product of Purdue Pharma
L.P., or Purdue, containing the narcotic oxycodone, resulted in the
strengthening of warnings on its labeling. In addition, we believe that Purdue,
the manufacturer of OxyContin®, faces or did face numerous lawsuits, including
class action lawsuits, related to OxyContin® misuse or abuse. We may be subject
to litigation similar to the OxyContin® suits related to our generic version of
oxycodone or any other narcotic containing product that we market.
The China
SFDA and Department of Health may impose new regulations concerning the research
and development, manufacture, storage, transportation and sale of prescription
narcotics. Such regulations may include new labeling requirements, the
development and implementation of formal risk minimization action plans,
restrictions on prescription and sale of these products. The Chinese
government and its agencies could require companies to formulate risk evaluation
and mitigation strategies to ensure a drug’s benefits outweigh its
risks. In addition, the government and its agencies have authority to
regulate distribution and may modify their regulations with respect to
prescription narcotics in an attempt to curb abuse. In either case, any such new
regulations or requirements may be difficult and expensive for us to comply
with, may delay our introduction of new products, may adversely affect our net
sales and may have a material adverse effect on our business, results of
operations and financial condition.
We
depend on our key management personnel and the loss of their services could
adversely affect our business.
Our
success depends in part on our continued ability to attract, retain and motivate
highly qualified management. We place substantial reliance upon the efforts and
abilities of our executive officers. The loss of services of any of these
individuals or one or more other members of our senior management could delay or
prevent the successful execution of our business objectives and could have a
material adverse effect on our operations.
Replacing
key employees may be difficult and costly and may take an extended period of
time because of the limited number of individuals in our industry with the
breadth of skills and experience required to develop and commercialize products
successfully. We do not maintain “key person” insurance policies on the lives of
these individuals or the lives of any of our other employees. The Company has
entered into Employment Agreements with these individuals. We will need to hire
additional personnel as we expand our commercial activities. We may not be able
to attract or retain qualified management on acceptable terms in the future due
to the intense competition for qualified personnel in our industry. If we are
not able to attract and retain the necessary personnel to accomplish our
business objectives, we may experience constraints that will impede these
objectives.
11
We
cannot assure you that we will be able to complete acquisitions or successfully
integrate new businesses into our own.
We intend
to pursue opportunities to grow our business by acquiring businesses, products
and technologies that are complementary or related to our existing product
lines. Successful completion of an acquisition depends on a number of factors
that are not entirely within our control, including our ability to negotiate
acceptable terms, conclude satisfactory agreements and obtain all necessary
regulatory approvals. We may not be able to locate suitable acquisition
candidates at prices that we consider appropriate. If we do identify an
appropriate acquisition candidate, we may face competition from other companies
interested in acquiring the target company that have greater financial and other
resources than we have. Acquisitions of businesses, products, technologies or
other material operations may require debt financing or additional equity
financing, resulting in leverage or dilution of ownership.
Even if
we complete one or more strategic transactions, we may be unable to integrate or
coordinate successfully the personnel and operations of a business. Integration
of acquired business operations could disrupt our business by diverting
management away from day-to-day operations. The difficulties of integration may
be increased by the necessity of coordinating geographically dispersed
organizations, integrating personnel with disparate business backgrounds and
combining different corporate cultures. We also may not be able to maintain key
employees or customers of an acquired business or realize cost efficiencies or
synergies or other benefits we anticipated when selecting our acquisition
candidates. In addition, we may incur non-recurring severance expenses,
restructuring charges and change of control payments and may need to record
write-downs from future impairments of intangible assets, which could reduce our
future reported earnings. At times, acquisition candidates may have liabilities
or adverse operating issues that we fail to discover through due diligence prior
to the acquisition.
In
addition to the above, acquisitions in China, including of state owned
businesses, will be required to comply with laws of the PRC, to the extent
applicable. There can be no assurance that any proposed acquisition will be able
to comply with PRC requirements, rules and/or regulations, or that we will
successfully obtain governmental approvals to the extent required, which may be
necessary to consummate such acquisitions.
We
may face difficulties in implementing our growth strategy.
Many
obstacles to entering new markets exist, such as the costs associated with
entering new markets, recruiting and retaining adequate numbers of effective
sales and marketing personnel, developing and implementing effective marketing
efforts abroad, establishing and maintaining the appropriate regulatory
compliance and maintaining attractive foreign exchange ratios. However, there is
no assurance that we will be successful in implementing our strategies or that
our strategies, even if implemented, will lead to the successful achievement of
our objectives. Our business plan and growth strategy is based on currently
prevailing circumstances and the assumption that certain circumstances will or
will not occur, as well as the inherent risks and uncertainties involved in
various stages of development. We cannot, therefore, assure you that we will be
able to successfully overcome such difficulties and continue to grow our
business.
12
If
we fail to manage our growth and current operations, we may not achieve future
growth or our expected revenues.
In order
to maximize potential growth in our current and potential markets, we believe
that we must expand our manufacturing and marketing operations. To this end, we
are and expect to continue to substantially increase our employee headcount
which will place a significant strain on our management and on our operational,
accounting, and information systems. Our need to manage our operations and
growth effectively requires us to continue to expend funds to improve our
financial controls, operating procedures, management information systems,
reporting systems and procedures to manage our increased operations. If we are
unable to implement improvements to our management information and control
systems successfully in an efficient or timely manner, or if we encounter
deficiencies in our existing systems and controls, then management may receive
inadequate information to manage our day-to-day operations. We will also need to
effectively train, motivate and manage our employees. Our failure to manage our
growth could disrupt our operations and ultimately prevent us from generating
the revenues we expect.
We may be unable to secure the
government licenses that are necessary for us to engage in the sale of analgesic
pharmaceuticals.
The manufacture and marketing of
narcotic drugs is highly regulated in China. Prior to marketing any
of our products, we are required to satisfy several government protocols, and
receive several licenses from the national and local
governments. Obtaining these licenses can be expensive and it is
usually time consuming. If we are unable to obtain the necessary
licenses when we need to have them, our business plan will be
delayed. If the delays prevent us from generating positive cash flow
or introducing a significant number of products, our business may
fail.
We
may have difficulty defending our intellectual property rights from infringement
which may undermine our competitive position.
We have
been designing and developing new technology. We rely on a combination of
patents, trade secret laws, and restrictions on disclosure to protect our
intellectual property rights. Unauthorized use of our technology could damage
our ability to compete effectively. We regard our service marks,
trademarks, trade secrets, patents and similar intellectual property as critical
to our success. We rely on trademark, patent and trade secret law, as well as
confidentiality agreements to protect our proprietary rights. Certain of our
products have received trademark and patent protection in China. No assurance
can be given that such patents and licenses will not be challenged, invalidated,
infringed or circumvented, or that such intellectual property rights will
provide a competitive advantage to us. Our trade secrets may otherwise become
known or be independently discovered by our competitors. Policing the
unauthorized use of proprietary technology can be difficult and expensive. Also,
litigation may be necessary to enforce our intellectual property rights, protect
our trade secrets or determine the validity and scope of the proprietary rights
of others. The outcome of such potential litigation may not be in our favor and
any success in litigation may not be able to adequately protect our rights. Such
litigation may be costly and divert management attention away from our business.
An adverse determination in any such litigation would impair our intellectual
property rights and may harm our business, prospects and reputation. Enforcement
of judgments in China is uncertain and even if we are successful in such
litigation it may not provide us with an effective remedy. In addition, we have
no insurance coverage against litigation costs and would have to bear all costs
arising from such litigation to the extent we are unable to recover them from
other parties. The occurrence of any of the foregoing could have a material
adverse effect on our business, financial condition and results of operations.
In addition, there can be no assurance that we will be able to obtain licenses
from third-parties that we may need to conduct our business or that such
licenses can be obtained at a reasonable cost.
13
In
addition, third parties may file infringement claims against us asserting that
we are infringing on their patents or trademarks. In the event that such claims
are filed, regardless of the merit of such a claim, we may incur substantial
costs and diversion of management as a result of our involvement in such
proceedings.
We
currently sell our products in China. China will remain our primary market for
the foreseeable future. If we expand into additional countries, our risk of
intellectual property infringement may be heightened. Laws and enforcement
mechanisms in other countries may not protect proprietary rights to the same
extent as China. The measures we take to protect our proprietary
rights may be inadequate, and we cannot give you any assurance that our
competitors will not independently develop formulations and processes that are
substantially equivalent or superior to our own or copy our
products.
We
are dependent on third parties to supply all raw materials used in our products
and to provide services for certain core aspects of our business. Any
interruption or failure by these suppliers, distributors and collaboration
partners to meet their obligations pursuant to various agreements with us could
have a material adverse effect on our business, results of operations and
financial condition.
We rely
on third parties to supply all raw materials used in our products. In addition,
we rely on third party suppliers, distributors and collaboration partners to
provide services for certain core aspects of our business, including
manufacturing, warehousing, distribution, customer service support, medical
affairs services, clinical studies, sales and other technical and financial
services. All third party suppliers and contractors are subject to the China
SFDA, and government agency requirements. Our business and financial viability
are dependent on the regulatory compliance of these third parties, and on the
strength, validity and terms of our various contracts with these third party
manufacturers, distributors and collaboration partners. Any interruption or
failure by these suppliers, distributors and collaboration partners to meet
their obligations pursuant to various agreements with us could have a material
adverse effect on our business, financial condition and results of
operations.
We are
dependent upon third parties to provide us with various estimates as a basis for
our financial reporting. While we undertake certain procedures to review the
reasonability of this information, we cannot obtain absolute assurance over the
accounting methods and controls over the information provided to us by third
parties. As a result we are at risk of them providing us with erroneous data
which could have a material adverse impact on our business.
The
government limits the availability of the active ingredients used in many of our
current products and products in development and, as a result, our procurement
quota may not be sufficient to meet commercial demand or complete clinical
trials.
The
Chinese government and SFDA regulate the access and supplies of chemical
compounds in some of our current products and products in development, including
oxycodone, codeine, buprenorphine, Tilidine. Consequently, their manufacture,
shipment, storage, sale and use are subject to a high degree of
regulation.
14
Furthermore,
the government limits the availability of the active ingredients used in many of
our current products and products in development and, as a result, our
procurement quota of these active ingredients may not be sufficient to meet
commercial demand or complete clinical trials. We must annually apply to the
government agencies for procurement quota in order to obtain these substances.
Any delay or refusal by the agencies in establishing our procurement quota for
controlled substances could delay or stop our clinical trials, product launches
or could cause trade inventory disruptions for those products that have already
been launched, which could have a material adverse effect on our business,
financial position and results of operations.
Timing
and results of clinical trials to demonstrate the safety and efficacy of
products as well as the SFDA’s approval of products are uncertain.
Before
obtaining regulatory approvals for the sale of our products, , we must
demonstrate through preclinical studies and clinical trials that the product is
safe and effective for each intended use. Preclinical and clinical studies may
fail to demonstrate the safety and effectiveness of a product. A failure to
demonstrate safety and efficacy would result in our failure to obtain regulatory
approvals.
The rate
of patient enrollment sometimes delays completion of clinical studies. There is
substantial competition to enroll patients in clinical, and such competition has
delayed clinical development of our products in the past. Delays in planned
patient enrollment can result in increased development costs and delays in
regulatory approval. In addition, we rely on collaboration partners that may
control or make changes in trial protocol and design enhancements that may also
delay clinical trials. We cannot assure you that we will not experience delays
or undesired results in these or any other of our clinical trials.
We cannot
assure you that the SFDA or other regulatory agencies will approve any products
developed by us, on a timely basis, if at all, or, if granted, that such
approval will not subject the marketing of our products to certain limits on
indicated use. Any limitation on use imposed by the SFDA or delay in or failure
to obtain SFDA approvals of products developed by us would adversely affect the
marketing of these products and our ability to generate product revenue, as well
as adversely affect the price of our common stock.
Before
obtaining regulatory approvals for certain generic products, we must conduct
limited clinical or other trials to show comparability to the branded products.
A failure to obtain satisfactory results in these trials would prevent us from
obtaining required regulatory approvals.
We
do not have adequate product liability insurance and we could be exposed to
substantial liability.
We face
an inherent business risk of exposure to product liability claims in the event
that the use of our products is alleged to have resulted in adverse side
effects. Adverse side effects, marketing or manufacturing problems pertaining to
any of our products could result in:
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decreased
demand for our products;
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adverse
publicity resulting in injury to our
reputation;
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product
liability claims and significant litigation
costs;
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substantial
monetary awards to or costly settlements with
consumers;
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product
recalls;
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loss
of revenues; or
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the
inability to commercialize future
products.
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15
These
risks will exist for those products in clinical development and with respect to
those products that have received regulatory approval for commercial sale or any
product we may acquire. To date, we have not experienced any product liability
claims. However, that does not mean that we will not have any such claims with
respect to our products in the future. We do not carry product liability
insurance. The lack of product liability insurance exposes us to risks
associated with potential product liability claims, which can be
significant.
We
have significant goodwill and other intangible assets. Consequently, potential
impairment of goodwill and other intangibles may significantly impact our
profitability.
Goodwill
and other intangibles represent a significant portion of our assets and
stockholders’ equity. As of June 30, 2008, goodwill and other intangibles
comprised approximately 36% of our total assets. Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets,
prescribes a two-step method for determining goodwill impairment. In the first
step, we determine the fair value of our one reporting unit. If the net book
value of our reporting unit exceeds the fair value, we would then perform the
second step of the impairment test which requires allocation of our reporting
unit’s fair value to all of its assets and liabilities in a manner similar to a
purchase price allocation, with any residual fair value being allocated to
goodwill. An impairment charge will be recognized only when the implied fair
value of our reporting unit’s goodwill is less than its carrying amount. Our
other intangible assets, consisting of licenses and patents, are assessed for
impairment, in accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
whenever events or changes in circumstances indicate the carrying amount of the
asset may not be recoverable. The impairment testing involves comparing the
carrying amount of the asset to the forecasted undiscounted future cash flows of
the product. In the event the carrying value of the asset exceeds the
undiscounted future cash flows of the product and the carrying value is not
considered recoverable, impairment exists. An impairment loss is measured as the
excess of the asset’s carrying value over its fair value, calculated using a
discounted future cash flow method. An impairment loss would be recognized in
net income in the period that the impairment occurs.
Events
giving rise to impairment are an inherent risk in the pharmaceutical industry
and cannot be predicted. As a result of the significance of goodwill and other
intangible assets, our results of operations and financial position in a future
period could be negatively impacted should an impairment of goodwill or other
intangible assets occur.
Our
international operations require us to comply with a number of U.S. and
international regulations.
We need
to comply with a number of international regulations in countries outside of the
United States. In addition, we must comply with the Foreign Corrupt Practices
Act, or FCPA, which prohibits U.S. companies or their agents and employees from
providing anything of value to a foreign official for the purposes of
influencing any act or decision of these individuals in their official capacity
to help obtain or retain business, direct business to any person or corporate
entity or obtain any unfair advantage. Any failure by us to adopt appropriate
compliance procedures and ensure that our employees and agents comply with the
FCPA and applicable laws and regulations in foreign jurisdictions could result
in substantial penalties or restrictions on our ability to conduct business in
certain foreign jurisdictions. The U.S. Department of The Treasury’s Office of
Foreign Asset Control, or OFAC, administers and enforces economic and trade
sanctions against targeted foreign countries, entities and individuals based on
U.S. foreign policy and national security goals. As a result, we are restricted
from entering into transactions with certain targeted foreign countries,
entities and individuals except as permitted by OFAC which may reduce our future
growth.
16
We
may incur significant costs to ensure compliance with U.S. corporate governance
and accounting requirements.
We may
incur significant costs associated with our public company reporting
requirements, costs associated with newly applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002, or
Sarbanes-Oxley, and other rules implemented by the Securities and Exchange
Commission. We expect all of these applicable rules and regulations to increase
our legal and financial compliance costs and to make some activities more
time-consuming and costly. We also expect that these applicable rules and
regulations may make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified individuals to serve on our board of directors, on
committees of our board of directors or as executive officers.
As a
public company, we are required to comply with rules and regulations of the SEC,
including expanded disclosure, accelerated reporting requirements and more
complex accounting rules. This will continue to require additional
cost management resources. We will need to continue to implement additional
finance and accounting systems, procedures and controls as we grow to satisfy
these reporting requirements. In addition, we may need to hire additional legal
and accounting staff with appropriate experience and technical knowledge, and we
cannot assure you that if additional staffing is necessary that we will be able
to do so in a timely fashion. If we are unable to complete the required annual
assessment as to the adequacy of our internal reporting or if our independent
registered public accounting firm is unable to provide us with an unqualified
report as to the effectiveness of our internal controls over financial reporting
in the future, we could incur significant costs to become
compliant.
We
continuously evaluate and monitor developments with respect to Section 404
of Sarbanes-Oxley and other applicable rules, however, we cannot predict or
estimate the amount of additional costs we may incur or the timing of such
costs.
There
could be changes in government regulations in China toward the pharmaceutical
industries that may adversely affect our business.
The
manufacture and sale of pharmaceutical products in China is heavily regulated by
many state, provincial and local authorities. These regulations significantly
increase the difficulty and costs involved in obtaining and maintaining
regulatory approvals for marketing new and existing products. Our future growth
and profitability depend to a large extent on our ability to obtain regulatory
approvals. Additionally, the law could change so as to prohibit the use of
certain pharmaceuticals. If one of our products becomes prohibited, this change
would cease the productivity of that product. The China National Development and
Reform Commission, or CNDRC, has recently implemented price adjustments on many
marketed pharmaceutical products. We have no control over such governmental
policies, which may impact the pricing and profitability of our
products.
17
The State
Food and Drug Administration of China requires pharmaceutical manufacturers to
obtain Good Manufacturing Practices, or GMP, certifications. We have received
our certifications. However, should we fail to receive or maintain the GMP
certifications in the future, we would no longer be able to manufacture
pharmaceuticals in China, and our businesses would be materially and adversely
affected. Moreover, the laws and regulations regarding
acquisitions in the pharmaceutical industry in China may change, which could
significantly impact our ability to grow through acquisitions.
Certain
political and economic considerations relating to China could adversely affect
our company.
China is
transitioning from a planned economy to a market economy. While the PRC
government has pursued economic reforms since its adoption of the open-door
policy in 1978, a large portion of the Chinese economy is still operating under
five-year plans and annual state plans. Through these plans and other economic
measures, such as control on foreign exchange, taxation and restrictions on
foreign participation in the domestic market of various industries, the PRC
government exerts considerable direct and indirect influence on the economy.
Many of the economic reforms carried out by the PRC government are unprecedented
or experimental, and are expected to be refined and improved. Other political,
economic and social factors can also lead to further readjustment of such
reforms. This refining and readjustment process may not necessarily have a
positive effect on our operations or future business development. Our operating
results may be adversely affected by changes in China’s economic and social
conditions as well as by changes in the policies of the PRC government, such as
changes in laws and regulations, or the official interpretation thereof, which
may be introduced to control inflation, changes in the interest rate or method
of taxation, and the imposition of additional restrictions on currency
conversion.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
The
pharmaceutical industry is heavily regulated, which creates uncertainty about
our ability to bring new products to market and imposes substantial compliance
costs on our business.
The China
SFDA as well as Department of Health impose substantial requirements on the
development, manufacture, labeling, sale, distribution, marketing, advertising,
promotion and introduction of therapeutic narcotic pharmaceutical products
through lengthy and detailed laboratory and clinical testing and other costly
and time-consuming procedures. The submission of a drug application alone does
not guarantee that the SFDA will grant approval to market the
product. Satisfaction of SFDA requirements typically takes a number
of years, varies substantially based upon the type, complexity and novelty of
the pharmaceutical product and is subject to uncertainty. The drug approval
process varies in time, could take several years from the date of application.
The timing for the approval process is difficult to estimate and can vary
significantly.
18
The
current SFDA standards of approving pharmaceutical products are more stringent
than those that were applied in the past. These standards were not applied to
many established products currently on the market, including certain narcotics
products. We cannot assure you that the SFDA or other regulatory agencies will
approve any products developed by us, on a timely basis, if at all, or, if
granted, that approval will not entail limiting the indicated uses for which we
may market the product, which could limit the potential market for any of these
products.
The
recent nature and uncertain application of many PRC laws applicable to us create
an uncertain environment for business operations and they could have a negative
effect on us.
The PRC
legal system is a civil law system. Unlike the common law system, the civil law
system is based on written statutes in which decided legal cases have little
value as precedents. In 1979, the PRC government began to promulgate a
comprehensive system of laws and has since introduced many laws and regulations
to provide general guidance on economic and business practices in China and to
regulate foreign investment. Progress has been made in the promulgation of laws
and regulations dealing with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. The promulgation
of new laws, changes of existing laws and the abrogation of local regulations by
national laws could have a negative impact on our business and business
prospects. In addition, as these laws, regulations and legal requirements are
relatively recent, their interpretation and enforcement involve significant
uncertainty.
Currency
conversion and exchange rate volatility could adversely affect our financial
condition and the value of our common stock.
The PRC
government imposes control over the conversion of Renminbi, or RMB, into foreign
currencies. Under the current unified floating exchange rate system, the
People’s Bank of China publishes an exchange rate, which we refer to as the PBOC
exchange rate, based on the previous day’s dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.
Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which
came into effect on July 1, 1996, regarding foreign exchange control,
conversion of RMB into foreign exchange by Foreign Investment Enterprises, or
FIEs, for use on current account items, including the distribution of dividends
and profits to foreign investors, is permissible. FIEs are permitted to convert
their after-tax dividends and profits to foreign exchange and remit such foreign
exchange to their foreign exchange bank accounts in China. Conversion of RMB
into foreign currencies for capital account items, including direct investment,
loans, and security investment, is still under certain restrictions. On
January 14, 1997, the State Council amended the Foreign Exchange Control
Regulations and added, among other things, an important provision, which
provides that the PRC government shall not impose restrictions on recurring
international payments and transfers under current account items.
19
Enterprises
in China, including FIEs, which require foreign exchange for transactions
relating to current account items, if within a certain limited amount may,
without approval of the State Administration of Foreign Exchange, or SAFE,
effect payment from their foreign exchange account or convert and pay at the
designated foreign exchange banks by providing valid receipts and
proofs.
Convertibility
of foreign exchange in respect of capital account items, such as direct
investment and capital contribution, is still subject to certain restrictions,
and prior approval from the SAFE or its relevant branches must be
sought.
Between
1994 and 2004, the exchange rate for RMB against the U.S. dollar remained
relatively stable, most of the time in the region of approximately RMB8.28 to
US$1.00. However, in 2005, the Chinese government announced that it would begin
pegging the exchange rate of the RMB against a number of currencies, rather than
just the U.S. dollar. As our operations are primarily in China, any significant
revaluation of the RMB may materially and adversely affect our cash flows,
revenues, financial condition and the value of our common stock. For example, to
the extent that we need to convert U.S. dollars into RMB for our operations,
appreciation of this currency against the U.S. dollar could have a material
adverse effect on our business, financial condition, results of operations and
the value of our common stock. Conversely, if we decide to convert our Renminbi
into U.S. dollars for the purpose of declaring dividends on our common stock or
for other business purposes and the U.S. dollar appreciates against the RMB, the
U.S. dollar equivalent of our earnings from our subsidiaries in China would be
reduced.
Future inflation in China may inhibit
our ability to conduct business in China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. During the past ten years, the rate of inflation in China
has been as high as 20.7% and as low as 2.2%. These factors have led to the
adoption by the PRC government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth and
contain inflation. While inflation has been more moderate since 1995, high
inflation may in the future cause the PRC government to impose controls on
credit or prices, or to take other action, which could inhibit economic activity
in China, and thereby harm the market for our products.
It may be difficult to effect service
of process and enforcement of legal judgments upon us and our officers and
certain of our directors because they reside outside the United
States.
As our
operations are presently based in China and our officers and certain of our
directors reside in China, service of process on us and our officers and certain
directors may be difficult to effect within the United States. Also, our main
assets are located in China and any judgment obtained in the United States
against us may not be enforceable outside the United States.
Any
future outbreak of avian influenza, or the Asian bird flu, or any other epidemic
in China could have a material adverse effect on our business operations,
financial condition and results of operations.
20
Since
mid-December 2003, a growing number of Asian countries have reported outbreaks
of highly pathogenic avian influenza in chickens and ducks. Since all of our
operations are in China, an outbreak of the Asian Bird Flu in China in the
future may disrupt our business operations and have a material adverse effect on
our financial condition and results of operations. For example, a new outbreak
of Asian Bird Flu, or any other epidemic, may reduce the level of economic
activity in affected areas, which may lead to a reduction in our revenue if our
clients cancel existing contracts or defer future expenditures. In addition,
health or other government regulations may require temporary closure of our
offices, or the offices of our customers or partners, which will severely
disrupt our business operations and have a material adverse effect on our
financial condition and results of operations.
Our
business may be affected by unexpected changes in regulatory requirements in the
jurisdictions in which we operate.
We are
subject to many general regulations governing business entities and their
behavior in China and in other jurisdictions in which we have operations. In
particular, we are subject to laws and regulations covering food, dietary
supplements and pharmaceutical products. Such regulations typically deal with
licensing, approvals and permits. Any change in product licensing may make our
products more or less available on the market. Such changes may have a positive
or negative impact on the sale of our products and may directly impact the
associated costs in compliance and our operational and financial viability. Such
regulatory environment also covers any existing or potential trade barriers in
the form of import tariffs and taxes that may make it difficult for us to import
our products to certain countries and regions, such as Japan, South Korea and
Hong Kong, which would limit our international expansion.
Most
of our assets are located in China, any dividends or proceeds from liquidation
are subject to the approval of the relevant Chinese government
agencies.
Our
assets are predominantly located inside China. Under the laws governing FIEs in
China, dividend distribution and liquidation are allowed but subject to special
procedures under the relevant laws and rules. Any dividend payment will be
subject to the decision of the board of directors and subject to foreign
exchange rules governing such repatriation. Any liquidation is subject to both
the relevant government agency’s approval and supervision as well the foreign
exchange control. This may generate additional risk for our investors in case of
dividend payment or liquidation.
There
have been recent incidents in which patients have experienced severe adverse
reactions following the use of pharmaceutical products manufactured in
China.
There
have been recent incidents reported in the Chinese media of a significant number
of patients experiencing severe adverse health consequences following their use
of pharmaceutical products manufactured by certain pharmaceutical companies in
China. A number of patients have become ill and a number of fatalities have been
reported. For example, several deaths were caused by drugs sold by the Second
Pharmaceutical Factory of Qiqihaer, a Chinese drug manufacturer, in May 2006.
Concerns over the safety of pharmaceutical products manufactured in China could
have an adverse effect on the sale of such products, including products
manufactured by us. If in the future we become involved in incidents of the type
described above, such problems could severely and adversely impact our product
sales and reputation.
21
Anti-corruption
measures taken by the government to correct corruptive practices in the
pharmaceutical industry could adversely affect our sales and
reputation.
The
government has recently taken anti-corruption measures to correct corrupt
practices. In the pharmaceutical industry, such practices include, among others,
acceptance of kickbacks, bribery or other illegal gains or benefits by the
hospitals and medical practitioners from pharmaceutical distributors in
connection with the prescription of a certain drug. Substantially all of our
sales to our ultimate customers are conducted through third-party distributors.
We have no control over our third-party distributors, who may engage in corrupt
practices to promote our products. While we maintain strict anti-corruption
policies applicable to our internal sales force and third-party distributors,
these policies may not be effective. If any of our third-party distributors
engage in such practices and the government takes enforcement action, our
products may be seized and our own practices, and involvement in the
distributors’ practices may be investigated. If this occurs, our sales and
reputation may be materially and adversely affected.
Our
common stock price may be extremely volatile, and you may not be able to resell
your shares at or above the price you paid for the stock.
Our
common stock price has experienced large fluctuations. In addition, the trading
prices of stocks for companies in our industry in general have experienced
extreme price fluctuations in recent years. Any negative change in the public’s
perception of the prospects of companies in our industry could depress our stock
price regardless of our results of operations. Other broad market and industry
factors may decrease the trading price of our common stock, regardless of our
performance. Market fluctuations, as well as general political and economic
conditions such as terrorism, military conflict, recession or interest rate or
currency rate fluctuations, may also decrease the trading price of our common
stock. In addition, our stock price could be subject to wide fluctuations in
response to various factors, including:
|
•
|
changes
in laws or regulations applicable to our
products;
|
|
•
|
period
to period fluctuations in our operating
results;
|
|
•
|
announcements
of new technological innovations or new products by us or our
competitors;
|
|
•
|
changes
in financial estimates or recommendations by securities
analysts;
|
|
•
|
conditions
or trends in our industry;
|
|
•
|
changes
in the market valuations of other companies in our
industry;
|
|
•
|
developments
in domestic and international governmental policy or
regulations;
|
|
•
|
announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
•
|
additions
or departures of key personnel;
|
|
•
|
disputes
or other developments relating to proprietary rights, including patents,
litigation matters and our ability to obtain patent protection for our
technologies;
|
|
•
|
additional
sales of our common stock by us;
and
|
|
•
|
sales
and distributions of our common stock by our
stockholders.
|
22
In the
past, stockholders have often instituted securities class action litigation
after periods of volatility in the market price of a company’s securities. If a
stockholder files a securities class action suit against us, we would incur
substantial legal fees and our management’s attention and resources would be
diverted from operating our business in order to respond to the
litigation.
We may have difficulty establishing
adequate management and financial controls in China.
The People’s Republic of China has only
recently begun to adopt the management and financial reporting concepts and
practices with which investors in the United States are familiar. We
may have difficulty in hiring and retaining employees in China who have the
experience necessary to implement the kind of management and financial controls
that are expected of a United States public company. If we cannot
establish such controls, we may experience difficulty in collecting financial
data and preparing financial statements, books of account and corporate records
and instituting business practices that meet U.S. standards.
We
may never pay any dividends to our stockholders.
We have
not paid any cash dividends on shares of our common stock. We currently intend
to retain all available funds and future earnings, if any, to support our
operations and finance the growth and development of our business. Our board of
directors does not intend to distribute dividends in the foreseeable future. The
declaration, payment and amount of any future dividends, if any, will be made at
the discretion of the board of directors, and will depend upon, among other
things, the results of our operations, cash flows and financial condition,
operating and capital requirements, and other factors the board of directors
considers relevant. There is no assurance that future dividends will be paid,
and if dividends are paid, there is no assurance with respect to the amount of
any such dividend.
Capital outflow policies in China
may hamper our ability to pay dividends to shareholders in the United
States.
The People’s Republic of China has
adopted currency and capital transfer regulations. These regulations require
that we comply with complex regulations for the movement of capital. Although
Chinese governmental policies were introduced in 1996 to allow the
convertibility of RMB into foreign currency for current account items,
conversion of RMB into foreign exchange for capital items, such as foreign
direct investment, loans or securities, requires the approval of the State
Administration of Foreign Exchange. We may be unable to obtain all of the
required conversion approvals for our operations, and Chinese regulatory
authorities may impose greater restrictions on the convertibility of the RMB in
the future. Because most of our future revenues will be in RMB, any inability to
obtain the requisite approvals or any future restrictions on currency exchanges
will limit our ability to fund our business activities outside China or to pay
dividends to our shareholders.
23
Our business development would be
hindered if we lost the services of our Chairman.
Zhenjiang Yue is the Chief Executive
Officer of China Aoxing and of its operating subsidiary, Hebei Aoxing
Pharmaceutical Group. Mr. Yue is responsible for strategizing not
only our business plan but also the means of financing it. If Mr. Yue
were to leave Hebei Aoxing or become unable to fulfill his responsibilities, our
business would be imperiled. At the very least, there would be a
delay in the development of Hebei Aoxing until a suitable replacement for Mr.
Yue could be retained.
China Aoxing is not likely to hold
annual shareholder meetings in the next few years.
Management does not expect to hold
annual meetings of shareholders in the next few years, due to the expense
involved. The current members of the Board of Directors were
appointed to that position by the previous directors. If other
directors are added to the Board in the future, it is likely that the current
directors will appoint them. As a result, the shareholders of China
Aoxing will have no effective means of exercising control over the operations of
the Company.
Item
1B. Unresolved
Staff Comments
Not Applicable.
Item
2.
Properties
The
Company’s facilities are located in Xinle City, Shijiazhuang, Hebei province,
about 143 miles from Beijing. We have land use rights that are
granted and allocated to us by the People’s Republic of China (“PRC”) government
to the land on which our manufacturing facilities are located. According to
Chinese law, the government owns all the land in China and companies or
individuals are authorized to use the land only through land use rights granted
or allocated by, or leased from, the PRC government.
The
headquarters of Hebei Aoxing currently cover 29.6 acres of the 49.4 leased by
Hebei Aoxing. The land lease expires in 2053. On that
land, the Company has located a building complex that offers an aggregate of
32,268 m2 in
floor space. The complex includes office facilities, research
facilities, 13,000 m2 in
factory space, and a five story residential facility for employees.
The Company’s technology center is the
4600 m2
Aoxing Special Medicine Research Center. The Research Center is equipped with
advanced pharmaceutical research facilities, including troche testing
equipment, capsule testing equipment, injection testing equipment, composition
testing equipment, chemical analysis equipment, and Chinese traditional medicine
extraction testing equipment. The Center is equipped to conduct the research and
pilot experimental production of new medicines. The central laboratory of the
Research Center includes a precision instrument room, normal instrument room,
heating chamber laboratory, chemical reagent room, bacteria inspection room,
culture room, specimen room, and observation room. The facility is capable of
conducting the entire quality-control supervision and inspection process of raw
material, supplementary materials, crude and finished product. The employee
training center located in the Research Center has advanced teaching facilities,
and is capable of long-distance training and education. The Company
has also established close relationships with the Beijing Medical University,
the Academy of Military Medical Science, and the Shanghai Medical
University.
24
The Company’s factories are equipped
with capsule filling machinery manufactured by the Bosch Group of Germany and
automatic box filling equipment manufactured by the Uhlmann Company in Germany.
The production capacity of the first stage analgesic project can reach 140
million capsules, 160 million pieces of troche, 100 million pieces of injection,
100 million pieces of oral liquid and 100 million bags of palletized granule.
The supporting facilities, such as the extraction workshop, engine house,
thermal workshop, storehouse, office building, and employee housing, have all
been completed.
The
executive and production facilities of Hebei Aoxing are located at No. 1
Industry District, Xinle City, Hebei Province, China 050700. China
Aoxing maintains its U.S. office at 15 Exchange Place, Suite 500, Jersey City,
NJ 08302.
Item
3.
Legal Proceedings
None.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
PART
II
Item
5.
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
(a)
Market Information
The Company’s common stock is quoted on
the OTC Bulletin Board under the trading symbol “CAXG.” Set
forth below are the high and low bid prices for each quarter in our past two
fiscal years. The reported bid quotations reflect inter-dealer prices
without retail markup, markdown or commissions, and may not necessarily
represent actual transactions.
|
Bid
|
||||||||
|
Quarter
Ending
|
High
|
Low
|
||||||
|
September
30, 2007
|
$ | 2.90 | $ | 2.10 | ||||
|
December
31, 2007
|
$ | 3.55 | $ | 2.00 | ||||
|
March
31, 2008
|
$ | 2.95 | $ | 1.00 | ||||
|
June
30, 2008
|
$ | 2.50 | $ | .60 | ||||
|
September
30, 2008
|
$ | 1.08 | $ | .25 | ||||
|
December
31, 2008
|
$ | 1.30 | $ | .36 | ||||
|
March
31, 2009
|
$ | 1.10 | $ | .55 | ||||
|
June
30, 2009
|
$ | 1.49 | $ | .51 | ||||
25
(b)
Shareholders
Our
shareholders list contains the names of 498 registered stockholders of record of
the Company’s Common Stock as of September 28, 2009.
(c) Dividends
The
Company has never paid or declared any cash dividends on its Common Stock and
does not foresee doing so in the foreseeable future. The Company
intends to retain any future earnings for the operation and expansion of the
business. In addition, the Company’s ability to pay dividends may be
hampered by restrictions on capital outflow imposed by government regulation in
China. Any decision as to future payment of dividends will depend on
the available earnings, the capital requirements of the Company, its general
financial condition and other factors deemed pertinent by the Board of
Directors
(d) Securities Authorized
for Issuance Under Equity Compensation Plans
The
information set forth in the table below regarding equity compensation plans
(which include individual compensation arrangements) was determined as of June
30, 2009.
|
Number
of securities to be issued upon exercise of outstanding options,
warrants and rights
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under
equity compensation plans
|
|
|
Equity
compensation plans approved by security holders
|
0
|
--
|
0
|
|
Equity
compensation plans not approved by security holders
|
0
|
--
|
950,000(1)
|
|
Total
|
0
|
--
|
950,000
|
_________________________
|
|
(1)
|
In
2006 the Board of Directors adopted the 2006 Stock and Stock Option
Plan. The Plan authorizes the Board to issue up to 1,000,000
common shares during the ten year period of the Plan. The
shares may be awarded to employees or directors of China Aoxing
Pharmaceutical Company or its subsidiaries as well as to consultants to
those entities. The shares may be awarded as outright grants or
in the form of options, restricted stock or performance
shares. 950,000 shares remain available for issuance under the
plan.
|
26
(e) Sale
of Unregistered Securities
None.
(f) Repurchase of Equity
Securities
The
Company did not repurchase any of its equity securities that were registered
under Section 12 of the Securities Act during the 4th
quarter of fiscal 2009.
Item
6. Selected
Financial Data
Not
applicable.
Item
7.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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 ( 47 % 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.
27
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 “Operating 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 and continuous collection efforts of accounts
receivable, we increased our bad debt reserve at June 30, 2009. We sell our
products to both distributors and retailers, and the payment terms are ranged
from 30 days to 90 days from invoice date or receipt of goods, whichever is
late.. LRT is our major operating subsidiary and most of our accounts receivable
are from LRT’s accounts. We evaluate collectability of our accounts receivable
periodically and provide bad debt reserve based on their aging and our
collection action taken. The global economic slowdown impacted the payment
pattern of a group of LRT’s accounts, particularly during the first half of
2009. As of June 30, 2009, we performed an aging analysis of each customer,
determined that some of the balances were not collectable, and made additional
and appropriate bad debt provision related to over 100 accounts. The revaluation
led us to record a bad debt expense of $1,461,789 during the 2009 fiscal
year.
As a
result of the expenses discussed above, our loss from operations for the year
ended June 30, 2009 exceeded the operating loss in fiscal year 2008 by
$2,769,519, reaching $6,348,485.
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. The 24% 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.
After
including the net amount of our “Other Income,” 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 $3,281,060 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.
28
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 $16,902,541. This
represented a decline of $3,680,182 from our working capital position at June
30, 2008. The decline was primarily due to our net loss, as well as
the reclassification from long-term to current of the $4.4 million loan we
received from AOB in May 2008. ,
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 and that portion is in default. The maturity date
for the remainder has been extended to December 31, 2009. 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.
29
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
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.
|
|
F-6
to F-21
|
Notes
to Consolidated Financial
Statements.
|
31
REPORT OF INDEPENDENT
REGISTERED ACCOUNTING FIRM
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.
Accompanying
consolidated statement of operation for the year ended June 30, 2009 has been
restated as discussed in note 18.
/s/
Paritz & Company, P.A.
Hackensack,
New Jersey
September 28, 2009 , except for note 18,
which is dated March 2, 2010
F-1
|
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 | ||||
See
Notes to the Financial Statements
F-2
|
CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(LOSS)
|
||||||||
|
Year
ended June 30,
|
||||||||
|
2009
|
2008
|
|||||||
| (Restated) | ||||||||
|
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 | ||||||
| Impairment loss | 2,345,420 | - | ||||||
|
TOTAL
COSTS AND EXPENSES
|
10,154,731 | 6,808,999 | ||||||
|
LOSS
FROM OPERATIONS
|
(6,348,485 | ) | (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 | ||||||
|
Forgiveness
of debt
|
1,461,299 | - | ||||||
|
TOTAL
OTHER INCOME (EXPENSE)
|
(372,376 | ) | 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 | ||||||
See
Notes to the Financial Statements
F-3
|
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 | |||||||||||||||||||||||
See
Notes to the Financial Statements
F-4
|
CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
Year
ended June 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
OPERATING
ACTIVITIES:
|
||||||||
|
Net
income (loss)
|
$ | (2,695,050 | ) | $ | 3,646,859 | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
1,017,559 | 730,570 | ||||||
|
Deferred
tax assets
|
(3,331,045 | ) | - | |||||
|
Impairment
loss on land and builindg
|
2,345,420 | - | ||||||
|
Bad
debt
|
1,461,453 | - | ||||||
|
Forgiveness
of debt
|
(1,460,963 | ) | - | |||||
|
Non-cash
interest expense related to debentures and
warrants
|
215,371 | 1,432,462 | ||||||
|
Stocks
issued for services and interest
|
1,000,506 | 1,695,898 | ||||||
|
Change
in fair value of warrants and derivative liability
|
(627,183 | ) | (8,547,374 | ) | ||||
|
Minority
interest
|
(24,598 | ) | (515,927 | ) | ||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
25,543 | (525,085 | ) | |||||
|
Inventories
|
137,581 | (168,807 | ) | |||||
|
Prepaid
expenses and sundry current assets
|
(272,729 | ) | 85,506 | |||||
|
Accounts
payable
|
(1,240,164 | ) | 1,627,658 | |||||
|
Accrued
expenses, taxes and sundry current liabilities
|
2,805,701 | (442,707 | ) | |||||
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(642,598 | ) | (980,947 | ) | ||||
|
INVESTING
ACTIVITIES:
|
||||||||
|
Acquisition
of property and equipment
|
(2,227,309 | ) | (1,483,489 | ) | ||||
|
Cash
paid for acquisition of subsidiary
|
- | (12,232,123 | ) | |||||
|
Acquisition
of minority interest
|
- | (3,420,000 | ) | |||||
|
NET
CASH USED IN INVESTING ACTIVITIES
|
(2,227,309 | ) | (17,135,612 | ) | ||||
|
FINANCING
ACTIVITIES:
|
||||||||
|
Repayment
of bank borrowings
|
- | (4,895,950 | ) | |||||
|
Other
borrowings
|
123,316 | 2,837,959 | ||||||
|
Loans
from stockholders
|
2,629,655 | 2,953,664 | ||||||
|
Sale
of convertible debentures
|
- | 425,000 | ||||||
|
Sale
of common stock
|
- | 17,100,000 | ||||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
2,752,971 | 18,420,673 | ||||||
|
EFFECT
OF EXCHANGE RATE ON CASH
|
(178,655 | ) | (247,728 | ) | ||||
|
INCREASE
(DECREASE) IN CASH
|
(295,591 | ) | 56,386 | |||||
|
CASH
– BEGINNING OF PERIOD
|
1,567,513 | 1,511,127 | ||||||
|
CASH
– END OF PERIOD
|
$ | 1,271,922 | 1,567,513 | |||||
|
Supplemental
disclosures of cash flow information:
|
||||||||
|
Non-cash
financing activities:
|
||||||||
|
Conversion
of convertible debentures into common stock
|
290,000 | |||||||
F-5
CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2009 AND 2008
1
BUSINESS DESCRIPTION AND ACQUISITION
Business
description
China
Aoxing Pharmaceutical Co., Inc. (“the Company” or ‘China Aoxing”) is a specialty
pharmaceutical company specializing in research, development, manufacturing and
distribution of a variety of narcotics and pain-management products. As of June
30, 2009, 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”). During the year ended June 30, 2009, Hebei integrated into
itself the business operations of Shijazhuang Lerentang Pharmaceutical Company,
Ltd. (“LRT”), which had been an operating subsidiary acquired by Hebei in May
2008.
As of
June 30, 2007 the Company owned 60% of the issued and outstanding common stock
of Hebei. On May 1, 2008 the Company acquired an additional 35% interest for
$3,420,000. In accordance with FASB Statement 141, the Company has
accounted for the additional investment under the purchase method of accounting,
resulting in goodwill of $2,790,236.
Since
2002, Hebei has been engaged in developing narcotics and pain management
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.
Acquisition of LRT
On April
16, 2008, Hebei acquired 100% of the registered capital of LRT for approximately
85 million RMB including related expenses (approximately $12.4 million) and 8
million shares of common stock valued at $10,480,000. The Company
paid the cash portion of the purchase price with funds received from its
simultaneous sale of common stock to American Oriental Bioengineering, Inc.
(“AOB”).
The
following table summarizes unaudited proforma financial information assuming the
LRT acquisition had occurred on July 1, 2007. This unaudited proforma
financial information does not necessarily represent what would have occurred if
the transaction had taken place on the date presented and should not be taken as
representative of the Company’s future consolidated results of operations or
financial position.
F-6
|
Year
ended
|
||||
|
June
30, 2008
|
||||
|
Revenue
|
$ | 17,796,778 | ||
|
Cost
of sales
|
9,294,802 | |||
|
Gross
profit
|
8,501,976 | |||
|
Operating
expenses
|
7,386,974 | |||
|
Other
expenses
|
12,925,859 | |||
|
Net
loss
|
$ | (11,810,857 | ) | |
Purchase
price allocation
In
accordance with the purchase method of accounting as prescribed by SFAS No. 141,
“Business
Combinations”, the Company has initially allocated the consideration to
the net tangible and identifiable intangible assets, based on their estimated
fair values. Goodwill represents the excess of the purchase price
over the fair value of the underlying net tangible and identifiable intangible
assets. The factors that contributed to the recognition of goodwill
included securing buyer-specific synergies that increase revenue and profits and
are not otherwise available to a marketplace participant, and the acquisition of
a talented workforce.
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed on April 15, 2008.
|
Current
assets
|
$ | 2,809,310 | ||
|
Property
and equipment
|
6,399,316 | |||
|
Goodwill
|
16,114,609 | |||
|
Drug
permits
|
1,633,979 | |||
|
Land
use rights
|
2,160,867 | |||
|
Trademark
|
12,984 | |||
|
Total
assets acquired
|
29,131,065 | |||
|
Liabilities
assumed:
|
||||
|
Short-term
bank loan
|
1,867,520 | |||
|
Current
liabilities
|
4,115,708 | |||
|
Total
liabilities assumed
|
5,983,228 | |||
|
Total
purchase price
|
$ | 23,147,837 |
|
2
|
SIGNIFICANT
ACCOUNTING POLICIES
|
|
|
Basis
of presentation
|
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. At June 30, 2009 the Company owned 95% of Hebei. The consolidated
accounts include 100% of the assets and liabilities of Hebei and the ownership
interest of minority investors is not included for the year ended June 30, 2009
since it is negative. All significant inter-company accounts and
transactions have been eliminated. These financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America. The Company’s functional currency is the
Chinese Renminbi (RMB); however, the accompanying consolidated financial
statements have been translated and presented in United States Dollars
(USD).
Certain
amounts included in the 2008 financial statement have been reclassified to
conform to the 2009 financial statement presentation.
F-7
Uses
of estimates in the preparation of financial statements
The
preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and
the reported amounts of net revenue and expenses during each reporting
period. Actual results could differ from those
estimates.
Cash
and cash equivalents
The
Company maintains cash and cash equivalents with financial institutions in the
PRC which are not insured or otherwise protected. Should any of these
institutions holding the Company’s cash become insolvent, or if the Company is
unable to withdraw funds for any reason, the Company could lose the cash on
deposit with that institution.
Cash and
cash equivalents include cash on hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Accounts
Receivable
Accounts
receivables represent customer accounts receivables. The allowance for doubtful
accounts is based on a combination of current sales, historical charge-offs and
specific accounts identified as high risk. Uncollectible accounts receivable are
charged against the allowance for doubtful accounts when all reasonable efforts
to collect the amounts due have been exhausted. Such allowances, if any, would
be recorded in the period the impairment is identified. The Company recorded
$1,461,091and $0 bad debt expense for the year ended June 30, 2009 and 2008,
respectively.
Inventories
Inventories
are stated at the lower of cost, determined using the weighted average cost
method, and net realizable value. Net realizable value is the
estimated selling price, in the ordinary course of business, less estimated
costs to complete and dispose.
Advances to Suppliers
The
Company makes advances to certain vendors for purchase of its material and
equipment. The advances to suppliers are interest free.
Property
and equipment
Property
and equipment are recorded at cost. Depreciation is provided in
amounts sufficient to amortize the cost of the related assets over their useful
lives using the straight line method for financial reporting
purposes.
Hebei
lease a parcel of land on which its offices and production facilities are
situated pursuant to real estate contracts from the local government of the PRC
expiring in 2053.
|
Maintenance,
repairs and minor renewals are charged to expense when
incurred. Replacements and major renewals are
capitalized.
|
F-8
Revenue
Recognition
Revenue
is recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, and no
other significant obligations of the Company exist and collectibility is
reasonably assured. Payments received before all of the relevant
criteria for revenue recognition are satisfied and recorded as advances from
customers.
Impairment
of long lived assets
The
Company accounts for the impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 144.
|
|
“Accounting
for the Impairment or Disposal of Long-Lived
Assets”. Long-lived assets are reviewed for impairment when
circumstances indicate the carrying value 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 group 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. Based on its review as of
June 30, 2009, the Company recorded impairment loss on buildings and
equipment of $2,345,420, see note
5.
|
Deferred
income taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ( " SFAS 109") which
requires that deferred tax assets and liabilities be recognized for future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. In addition, SFAS 109 requires recognition of future tax
benefits, such as carry-forwards, to the extent that realization of such
benefits is more likely than not and that a valuation allowance be provided when
it is more likely than not that some portion of the deferred tax asset will not
be realized.
Currency
translation
Since the
Company operates primarily in the PRC, the Company’s functional currency is the
Chinese Yuan (”RMB”). Revenue and expense accounts are translated at
the average rates during the period, and balance sheet items are translated at
year-end rates. Translation adjustments arising from the use of
differing exchange rates from period to period are included as a separate
component of shareholders’ equity. Gains and losses from foreign
currency transactions are recognized in current operations.
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into USD at
the rates used in translation.
F-9
Fair
value of financial instruments
Statement
of Financial Accounting Standards No. 107, “Disclosures about Fair Value of
Financial Instruments”, requires that the Company disclose estimated fair
values of financial instruments.
The
Company’s financial instruments primarily consist of cash and cash equivalents,
accounts receivable, other receivables, advances to suppliers, accounts payable,
accrued expenses and other sundry current liabilities, notes payable and related
party advances and borrowings.
As of the
balance sheet dates, the estimated fair values of financial instruments were not
materially different from their carrying values as presented on the balance
sheet. This is attributed to the short maturities of the instruments
and that interest rates on the borrowings approximate those that would have been
available for loans of similar remaining maturity and risk profile at the
respective balance sheet dates.
Derivative
financial instruments
|
|
The
Company’s derivative financial instruments consist of embedded derivatives
related to the convertible debentures (see Note 11). These embedded
derivatives include conversion options. The Company determined that the
features were embedded derivative instruments pursuant to Statement of
Financial Accounting Standards (“SFAS”) No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as amended, and Emerging
Issues Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s
Own Stock.” The accounting treatment of derivative financial instruments
requires that the Company record the derivatives and related warrants at
their fair values as of the inception date of the debt agreements and at
fair value as of each subsequent balance sheet date. Any change in
fair value was recorded as non-operating, non-cash income or expense at
each balance sheet date. If the fair value of the derivatives was
higher at the subsequent balance sheet date, the Company recorded a
non-operating, non-cash charge. If the fair value of the derivatives
was lower at the subsequent balance sheet date, the Company recorded
non-operating, non-cash income.
|
During
the years ended June 30, 2009 and 2008, the Company recognized other income of
approximately $627,000 and $8,547,000, respectively, relating to recording the
warrant and derivative liabilities at fair value. At June 30, 2009
and 2008 there were approximately $3,368,000 and $4,161,000 of warrant and
derivative liabilities, as the related debt instruments were not
settled.
The
Company’s derivative instruments were valued using the black-scholes option
pricing model, using the following assumptions during the year ended June 30,
2009:
|
Estimated
dividends
|
None
|
|
Expected
volatility
|
166.2%
|
|
Risk-free
interest rate
|
0.56
– 1.11%
|
|
Expected
term (years)
|
.83
– 2.21
|
The
expected volatility was determined based on the historic quoted market price of
the common stock over the last 12 months. Risk free interest rate in
the range of 1.87% to 4.92% was determined based on the quoted US treasury rate
under the same expected term with each corresponding financial
instrument.
F-10
Comprehensive
income
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by shareholders and distributions to shareholders. Among
other disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other financial statements. Comprehensive income includes net income
and the foreign currency translation gain, net of tax.
Statement
of cash flows
In
accordance with Statement of Financial Accounting Standards No. 95, “Statement
of Cash Flows,” cash flows from the Company’s operations are calculated based
upon the local currencies. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheet.
Segment
reporting
Statement
of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure about Segments of an
Enterprise and Related Information” requires use of the “management
approach” model for segment reporting. The management approach model
is based on the way a company’s management organized segments within the company
for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure, or any other manner in which management disaggregates a
company. SFAS 131 has an immaterial effect on the Company’s financial
statements, as the Company consists of one reportable business
segment. All revenue is from customers in the PRC. The
majority of the Company’s assets are located in the PRC.
New
Accounting Pronouncements
In March
2008, the FASB issued SFAS No. 151, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of SFAS No. 133 (“SFAS
161”). This statement requires disclosures of how and why an
entity used derivative instruments, how derivative instruments and related
hedged items are accounted for and how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. SFAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged. The Company will adopt this statement as of February 1,
2009, the beginning of the third quarter of its fiscal year ending July 31,
2009. The Company is currently evaluating the impact this statement
will have on its consolidated financial statements.
In April
2008, the FASB issued FASB Staff Position (“FSP”) No, 142-3, Determination of the Useful life of
Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors
to be considered in developing renewal or extension assumptions used to
determine the useful life of intangible assets under SFAS No. 142, Goodwill and
Other Intangible Assets. Its intent is to improve the consistency
between the useful life of an intangible asset and the period of expected cash
flows used to measure its fair value. This FSP is effective on January 1,
2009. The adoption of SFAS No. 159 is not expected to have a material
impact on the Company’s financial position, results of operations or cash
flows.
F-11
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Non-controlling
Interests in Consolidated Financial Statements. SFAS 141 (R)
requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired. SFAS No. 160 clarifies that a
non-controlling interest in a subsidiary should be reported as equity in the
consolidated financial statements. SFAS No. 141 (R) and SFSS No. 160
are effective for financial statements issued for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. The
Company has not yet determined the effect on its financial statements, if any,
upon adoption of SFAS No. 141 (R) or SFAS No. 160. SFAS 141 (R) will
significantly affect the accounting for future business combinations and the
Company will determine the accounting as new combinations are
determined.
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133. This statement
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash flows.
SFAS No. 161 is effective for fiscal years and interim periods beginning after
November 15, 2008. The Company's adoption of SFAS No. 161 is not expected to
have a material effect on its condensed consolidated financial
statements.
In April
2008, the FASB issued FASB Staff Position SOP 90-7-1, An Amendment of AICPA
Statement of Position 90-7 (“FSP SOP 90-7-1”). FSP SOP 90-7-1 resolves the
conflict between the guidance requiring early adoption of new accounting
standards for entities required to follow fresh-start reporting under American
Institute of Certified Public Accountants Statement of Position 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy Code, and other
authoritative accounting standards that expressly prohibit early adoption.
Specifically, FSP SOP 90-7-1 will require an entity emerging from bankruptcy
that applies fresh-start reporting to follow only the accounting standards in
effect at the date fresh-start reporting is adopted, which include those
standards eligible for early adoption if an election is made to adopt early.
Management has elected to only adopt new accounting standards in effect at the
date fresh-start reporting is adopted and to not early adopt standards eligible
for early adoption.
In May
2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible
Debt Instruments that may be Settled in Cash upon Conversion (Including Partial
Cash Settlement), (the “FSP”). The adoption of this FSP will affect the
accounting for convertible and exchangeable notes and convertible preferred
units. The FSP requires the initial proceeds from the sale of our convertible
and exchangeable senior notes and convertible preferred units to be allocated
between a liability component and an equity component. The resulting discount
will be amortized using the effective interest method over the period the debt
is expected to remain outstanding as additional interest expense. The FSP is
effective for our fiscal year beginning on July 1, 2008 and requires retroactive
application. The Company is currently evaluating the impact that this will have
on the Company’s results of operations or financial condition.
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles". This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Board does not expect that this
Statement will result in a change in current practice. However, transition
provisions have been provided in the unusual circumstance that the application
of the provisions of this Statement results in a change in
practice.
F-12
In June
2008, the FASB issued FSP EITF 03-6-1, which addresses whether instruments
granted in equity-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing basic earnings per unit under the two-class method prescribed by SFAS
128. FSP EITF 03-6-1 is retrospectively effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those years, with early application prohibited. The Company is evaluating
the impact the adoption of FSP EITF 03-6-1 will have on its earnings per share
calculations.
3
GOING
CONCERN
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.
The
Company is exploring various alternatives to improve its financial position and
continue to meet its obligations. Management is focusing on improving its
operations and seeking additional debt and/or equity financing or debt
restructuring. There can be no assurance that any of these efforts will be
fruitful.
4
INVENTORIES
Inventories
consist of the following:
|
-------------June
30,--------------
|
||||||||
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 503,114 | $ | 498,762 | ||||
|
Finished
goods
|
209,406 | 350,197 | ||||||
| $ | 712,521 | $ | 848,959 | |||||
|
5
|
PROPERTY
AND EQUIPMENT
|
A summary
of property and equipment and the estimated lives used in the computation of
depreciation and amortization is as follows:
|
-------
June 30, ----------
|
|||||||||
|
2009
|
2008
|
LIFE
|
|||||||
|
Right
to use land
|
$ | 10,042,325 | $ | 10,028,831 |
40
years
|
||||
|
Building
and building improvements
|
16,636,643 | 18,144,540 |
39
years
|
||||||
|
Machinery
and equipment
|
3,098,718 | 3,932,563 |
5-8
years
|
||||||
|
Furniture
and office equipment
|
439,891 | 412,333 |
5-8
years
|
||||||
|
Automobiles
|
423,567 | 450,673 |
3-5
years
|
||||||
|
Construction
in progress
|
2,226,735 | - | |||||||
| 32,867,879 | 32,968,940 | ||||||||
|
Accumulated
depreciation and amortization
|
3,543,517 | 2,637,797 | |||||||
| $ | 29,324,362 | $ | 30,331,143 | ||||||
F-13
In July
15, 2009, the Company sold LRT’s facility in connection with the relocation of
LRT’s operation and manufacturing function into Hebei for RMB 33 million
(approximately $4.8 million). During the year ended in June 30, 2009, the
Company recorded impairment loss on buildings and equipment in connection with
above mentioned sale of $2,345,420.
6
SHORT-TERM BORROWINGS
Short-term
borrowing is a non-interest bearing
note payable to a local government, due three months after the Company is listed
on the NASDAQ
7
LOANS PAYABLE – OTHER
Loans
payable – other consists of the following:
|
-------------June
30,--------------
|
||||||||
|
2009
|
2008
|
|||||||
|
Loans
payable bearing interest at 10% per annum and maturing on March
2012
|
$ | 3,491,113 | $ | 3,127,643 | ||||
|
Loans
from unrelated third parties maturing on various dates through June 30,
2010 and bearing interest at an average rate of 10%
|
144,635 | 380,070 | ||||||
|
Less
current portion
|
3,635,748 | 3,507,713 | ||||||
| 144,635 | 380,070 | |||||||
| $ | 3,491,113 | $ | 3,127,643 | |||||
F-14
8
LOAN FROM STOCKHOLDERS
Loan from
stockholders consists of the following:
|
-------------June
30,--------------
|
||||||||
|
2009
|
2008
|
|||||||
|
Short-term
borrowing from AOB bearing interest at 8% per annum and due August 26,
2009. (see note 17)
|
$ | 4,382,418 | $ | 1,750,800 | ||||
|
Loans
maturing on December 31, 2011 bearing interest of 10% per
annum
|
4,104,201 | 4,098,687 | ||||||
|
Loans
maturing on various dates through June 30, 2010, bearing interest at an
average rate of 10%
|
112,211 | 112,068 | ||||||
| 8,598,830 | 5,961,555 | |||||||
|
Less
current portion
|
4,494,629 | 1,862,868 | ||||||
| $ | 4,104,201 | $ | 4,089,687 | |||||
|
9
|
ACCRUED
EXPENSES AND OTHER SUNDRY
LIABILITIES
|
|
|
Accrued
expenses and taxes consist of the
following:
|
|
-------------June
30,--------------
|
||||||||
|
2009
|
2008
|
|||||||
|
Accrued
salaries and benefits
|
$ | 137,786 | $ | 463,798 | ||||
|
Accrued
interest
|
1,944,382 | 2,429,155 | ||||||
|
Accrued
taxes
|
33,319 | 552,967 | ||||||
|
Other
accrued expenses and sundry liabilities
|
265,784 | 527,279 | ||||||
|
Accrued
sales commission
|
21,914 | 878,115 | ||||||
| $ | 2,403,185 | $ | 4,851,314 | |||||
|
10
|
NOTES
PAYABLE – BANK
|
Note
payable – bank bears interest at 5.58% , is due December 31, 2008, is
collateralized by a first security interest in substantially all assets of the
Company and guaranteed by a vendor of the Company.
According
to this agreement, the loan matures as follows:
|
December
31, 2008
|
$ | 2,921,926 | ||
|
June
30, 2009
|
1,460,963 | |||
|
December
31, 2009
|
1,711,539 | |||
| $ | 6,094,428 |
The
Company is in default of these obligations and is continuing a new round of
negotiation with BC on new terms of restructuring and is also actively
negotiating with other potential landers to refinance the BC loan.
F-15
|
11
|
CONVERTIBLE
DEBENTURES
|
On
September 28, 2006, the Company sold 869,500 units of securities for
$1,739,000. Each unit consisted of one share of common stock and four
common stock purchase warrants exercisable at prices ranging from $2.50 to
$5.50. In October 2006, the Company exchanged all of the shares of common stock
purchased in this offering for a 10% convertible debenture in the amount of
the investment, plus the four warrants purchased in the offering. The
debentures are convertible into common stock at a price equal to 75% of the
market price (as defined) of the Company’s common stock. The warrants are
exercisable for five years and may be redeemed by the Company if the market
price of its common stock exceeds 200% of the exercise price of the
warrants.
On
November 30, 2006, the Company sold 188,500 units of securities for
$377,000. Each unit consists of a share of common stock or 10%
convertible debenture and four common stock purchase warrants, exercisable at
prices ranging from $2.50 to $5.50. The warrants are exercisable for
five years and may be redeemed by the Company if the market price of its common
stock exceeds 200% of the exercise price of the warrants. These
convertible debentures may be converted at any time by the holder of the note
and will be automatically converted into the Company’s common stock at September
30, 2008.
All above
mentioned 10% convertible debenture were converted to common stock as of June
30, 2009.
During
the year ended June 30, 2008, the Company sold $1,173,000 of convertible
debentures, which bear interest at 8% per annum, are payable semi-annually and
are due May 1, 2010. Interest will accrue on the principal amount at
8% per annum and will be payable on January 1st and
July 1st each
year. The holder may convert the principal and accrued interest into
the Company’s common stock at a conversion price per share equal to the greater
of (a) $5.00, or (b) 75% of the average of the closing bid prices reported for
the five trading days preceding the date of conversion.
Convertible
debentures outstanding as of June 30, 2009, are as follows:
|
|
|
Convertible
debentures issued
|
3,289,000 | |||
|
Less
amounts converted to common stock
|
(2,116,000 | ) | ||
| 1,173,000 | ||||
|
Less
debt discount
|
(149,267 | ) | ||
|
Balance
– June 30, 2009
|
1,023,733 |
The terms
of the convertible debentures include certain features that are considered
embedded derivative financial instruments, such as a conversion feature which
provides for the conversion of the debentures into shares of the Company’s
common stock at a rate which is variable. Because the debentures are not
conventional convertible debt, the Company is required to record the derivative
financial instruments and the warrants issued in connection with the convertible
debentures at their fair values as of the issuance date of each of the
debentures.
The
initial fair values assigned to the embedded derivatives related to convertible
debentures issued during the year ended June 30, 2009 and 2008 were $58,242 and
$127,432. The Company did not issue any warrants in connection with the
convertible debentures during the year ended June 30, 2008.
F-16
12 WARRANTS
The
following table summarizes the information relating to the warrants issued in
connection with the sale of securities referred to in Note 10
above:
|
Number
Outstanding
|
Weighted
Average
|
||||||||||||
|
Exercise
|
----------June
30,--------------
|
Remaining
Contractual
|
|||||||||||
|
Price
|
2009
|
2008
|
Life
(Years)
|
||||||||||
| $2.50 | 1,058,000 | 1,058,000 | 2.21 | ||||||||||
| 3.50 | 1,058,000 | 1,058,000 | 2.21 | ||||||||||
| 4.50 | 1,058,000 | 1,058,000 | 2.21 | ||||||||||
| 5.50 | 1,058,000 | 1,058,000 | 2.21 | ||||||||||
| 2.00 | 423,200 | 493,733 | 2.21 | ||||||||||
| 4,655,200 | 4,725,733 | ||||||||||||
13
STOCKHOLDERS’ EQUITY
On April
15, 2008, the Company issued 30,000,000 shares of restricted common stock to
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. The cash was used 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.
On April
16, 2008, the Company issued 8,000,000 shares of restricted common stock to a
group of shareholders of LRT. The shares issued were valued at $10,480,000, as
part of the total consideration for the acquisition of LRT, See Note
1.
In July
2007, the Company issued 120,000 shares of restricted common stock, valued at
$332,400, to four of the Company’s directors for the services rendered by them
from April 1, 2007 to March 31, 2008. All the related stock
compensation expense was fully accrued at the end of March 31,
2008.
In
September 2007, the Company issued 25,000 shares of restricted common stock to a
consulting firm as part of consulting fee for corporate strategic planning
services. The total value in the amount of $52,750 was amortized
through December 31, 2007.
In March
2008, the Company issued 690,000 shares of restricted common stock to the
Company’s employees, including senior management, as part of stock award
compensation, valued at $869,400 and recorded as an expense in same
period.
In
September 2008, the Company issued 930,000 shares of restricted common stock to
stock to the Company’s employees, including senior management, as part of stock
award compensation, valued at $892,800 and will be amortized through October 31,
2009.
F-17
In
October 2008, the Company issued 205,000 shares of restricted common stock,
valued at $196,800, to three of the Company’s directors for the services
rendered by them from July 1, 2008 to October 31, 2008.
In
November 2008, the Company issued 120,000 shares of restricted common stock to
three of the Company’s independent directors for the services rendered by them
through October 31, 2009. All the related stock compensation expense,
valued at $116,400, was amortized over service period.
In connection with equity financing completed in May 2008,
management believed that the Company might be required to compensate several
parties that assisted in bringing the transaction about. Management
made its best estimate of the potential liability and recorded an accrued
financing cost of $900,000, which was charged to additional paid in capital and
credited to accrued financing costs. After negotiations with the parties, the
Company determined that it would not be required to pay additional compensation
as of June 30, 2009 in connection with the financing. Therefore, the
$900,000 accrued financing cost was reversed.
14
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
generally subject to tax at a statutory rate of 25% on income reported in the
statutory financial statements after appropriate tax adjustments.
A
reconciliation of tax at United States federal statutory rate to provision for
income tax recorded in the financial statements is as follows:
|
Computed
expected tax credit
|
$ | (2,031,867 | ) | |
|
Tax
rate differential from China
|
340,757 | |||
|
Valuation
allowance applied to United States
|
||||
|
net
operating loss carryforward
|
927,633 | |||
|
Change
in valuation allowance
|
(2,517,582 | ) | ||
|
Actual
consolidated income tax
|
$ | (3,281,059 | ) |
During
the year ended June 30, 2009, the Company reassed a valuation allowance which
has been applied to net operating losses in China as the operation in China are
now profitable and management projects utilization of the
carryforward.
The
deferred tax asset consists of the following:
|
Net
operating loss carryforward - China
|
$ | 2,291,867 | ||
|
Net
operating loss carryforward - United States
|
927,633 | |||
|
Allowance
for doubtful accounts
|
452,822 | |||
|
Impairment
loss
|
586,355 | |||
| 4,258,677 | ||||
|
Less
valuation allowance
|
(927,633 | ) | ||
|
Deferred
tax assets
|
$ | 3,331,044 |
F-18
The
credit for income taxes consist of:
|
Deferred
- United States
|
$ | 927,633 | ||
|
Deferred
- China
|
3,331,044 | |||
|
Currently
payable - China
|
(49,985 | ) | ||
| 4,208,692 | ||||
|
Less
valuation allowance - United States
|
(927,633 | ) | ||
|
Deferred
tax assets
|
$ | 3,281,059 |
15 CONCENTRATIONS
Sales to
major customers were for 19% and 13% of sales for the year ended June 30, 2009
and 24%, 21%, 21% and 16% for year ended June 30, 2008.
Sales of
major products represented approximately 40%, 13% and 12% of total sales for the
year ended June 30, 2009 and 27% and 16% of sales for year ended Jun 30,
2008.
16 VULNERABILITY
DUE TO OPERATIONS IN PRC
The
Company’s operations may be adversely affected by significant political,
economic and social uncertainties in the PRC. Although the PRC
government has been pursuing economic reform policies for more than twenty
years, no assurance can be given that the PRC government will continue to pursue
such policies or that such policies may not be significantly altered, especially
in the event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRCs political, economic and social
conditions. There is also no guarantee that the PRC government’s
pursuit of economic reforms will be consistent or effective.
Substantially
all of the Company’s businesses are transacted in RMB, which is not freely
convertible. The Peoples Bank of China or other banks are authorized
to buy and sell foreign currencies at the exchange rates quoted by the Peoples
Bank of China. Approval of foreign currency payments by the Peoples
Bank of China or other institutions requires submitting a payment application
form together with suppliers’ invoices, shipping documents and signed
contracts.
Since the
Company has its primary operations in the PRC, the majority of its revenues will
be settled in RMB, not U.S. Dollars. Due to certain restrictions on currency
exchanges that exist in the PRC, the Company’s ability to use revenue generated
in RMB to pay any dividend payments to its shareholders outside of China may be
limited.
The
Company’s business depends on maintaining licenses of its current products from
the China State Food and Drug Administration. Obtaining licenses for
additional products can be expensive and is usually time
consuming. Failure to obtain the necessary licenses when needed can
cause the Company’s business plan to be delayed. If the delays
prevent the Company from generating positive cash flow or introducing a
significant number of products, there will be a material adverse effect on the
Company.
In
September 2006, PRC changed the laws regarding transfer of equity in PRC
companies in exchange for equity in non-PRC companies. Approvals and
registrations for such transfers are required and penalties may be imposed if
the requirements are not met.
F-19
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentration of
credit risk are primarily cash and cash equivalents.
Other
Risks
The core
business of the Company is the manufacture and sale of narcotic drugs, which is
highly regulated by the PRC government. The Company depends on
obtaining licenses of its products from the China State Food and Drug
Administration (SFDA). Obtaining these licenses can be expensive and
is usually time consuming. Failure to obtain the necessary licenses
when needed can cause the Company’s business plan to be delayed. If
the delays prevent the Company from generating positive cash flow or introducing
a significant number of products, there will be a material adverse effect on the
Company.
17 SUBSEQUENT
EVENTS
Sales
of property
In July
15, 2009, the Company sold LRT’s facility in connection with the relocation of
LRT’s operation and manufacturing function into Hebei for RMB 33 million
(approximately $4.8 million). During the year ended in June 30, 2009, the
Company recorded impairment loss in connection with above mentioned sale of
$2,345,420.
Private
placement
On August
6, 2009, the Company 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.
Loan
conversion
On August
15, 2008, the Company issued to American Oriental Bioengineering Inc. (“AOB”) a
convertible term note dated May 26, 2008 in the principal amount of 30 million
RMB (approximately $4.4 million U.S. dollars) bearing interest at 8% per annum.
The maturity date of the Note is May 26, 2009 which was extended to August 26,
2009. The Company has the option to make payments due in cash or in common
stock.
On August
27, 2009, the Company exercised its option to pay the AOB note and accrued
interest in the total amount of 33 million RMB, or $4,830,847, in the form of
3,578,405 shares of common stock at a price of $1.35 per share. As of
September 28, 2009, AOB owns 33,578,405 shares, or
37% of the Company’s common stock.
Change
of warrant exercise price
Effective
on August 27, 2009, the exercise price of the Series A, B, C and D Warrants was
reduced, and accordingly, the number of shares that a warrant-holder may
purchase was increased based on the terms of the contracts. These warrants were
issued in September 2006, are exercisable for five years and may be redeemed by
the Company if the market price of its common stock exceeds 200% of the exercise
price of the warrants.
A change
to the exercise prices of our outstanding warrants will change the fair value of
the embedded financial derivatives related to the warrants. The change in the
fair value of warrant and derivative liabilities will be charged to the income
statement. When the modified exercise price of warrants became
effective in August 2009, based on the terms of the warrants, the reduced
exercise price along with increased number of shares of warrants led to an
increase in the fair value of warrant and derivative
liabilities. That increase will be charged to our income
statement. As of September 30, 2009, the fair value of
warrant-related liabilities increased by $2,717,398 due to the reduced exercise
price along with higher number of shares of warrants issuable on
exercise. This amount will be recorded as an other expense in the
statement of operations
The
following table summarizes the change of exercise prices in connection with the
warrants referred in Note 12:
F-20
|
Original
Exercise
Price
|
Revised
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Series
A
|
$2.50
|
$1.5721
|
2.21
|
|
Series
B
|
3.50
|
2.0202
|
2.21
|
|
Series
C
|
4.50
|
2.4683
|
2.21
|
|
Series
D
|
5.50
|
2.9164
|
2.21
|
18 RESTATEMENT
OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In late
January 2010, the Company determined that it should reclassify the impairment
loss recognized in the year ended June 30, 2009 from Other Expense to Operating
Expense during the same reporting period and should be restated in the
consolidated financial statements of fiscal year 2009.
|
|
Statement
of Operations
|
|||||||||||
|
Previously
|
||||||||||||
|
As
of June 30, 2009
|
Reported
|
Adjustments
|
As
Restated
|
|||||||||
|
Impairment
Loss included in costs and expenses from operation
|
$ | - | $ | (2,345,420 | ) | $ | (2,345,420 | ) | ||||
|
Total
Costs and Expenses from Operation
|
$ | (7,809,311 | ) | $ | (2,345,420 | ) | $ | (10,154,731 | ) | |||
|
Loss
from Operation
|
$ | (4,003,065 | ) | $ | (2,345,420 | ) | $ | (6,348,485 | ) | |||
|
Impairment
Loss included in other income (Expense)
|
$ | (2,345,420 | ) | $ | 2,345,420 | $ | - | |||||
|
Total
Other Income (Expense)
|
$ | (1,973,044 | ) | $ | 2,345,420 | $ | 372,376 | |||||
F-21
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
Not
Applicable
Item
9A(T). Controls and Procedures
(a) Evaluation of Disclosure Controls
and Procedures. Zhenjiang Yue, our Chief Executive
Officer, and Hongyue Hao, our Chief Financial Officer, carried out an
evaluation of the effectiveness of China Aoxing’s disclosure controls and
procedures as of June 30, 2009. Pursuant to Rule 13a-15(e)
promulgated by the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, “disclosure controls and procedures” means controls and
other procedures that are designed to insure that information required to be
disclosed by China Aoxing in the reports that it files with the Securities and
Exchange Commission is recorded, processed, summarized and reported within the
time limits specified in the Commission’s rules. “Disclosure controls
and procedures” include, without limitation, controls and procedures designed to
insure that information China Aoxing is required to disclose in the reports it
files with the Commission is accumulated and communicated to our Chief Executive
Officer and Chief Financial Officer as appropriate to allow timely decisions
regarding required disclosure. Based on their evaluation, Mr. Yue and
Ms. Hao concluded that China Aoxing’s system of disclosure controls and
procedures was effective as of June 30, 2009 for the purposes described in this
paragraph.
(b) Changes in Internal
Controls. There was no change in internal controls over
financial reporting (as defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act or 1934) identified in connection with the evaluation
described in the preceding paragraph that occurred during the Company’s fourth
fiscal quarter that has materially affected or is reasonably likely to
materially affect the Company’s internal control over financial
reporting.
|
(c)
|
Management’s
Report on Internal Control over Financial
Reporting.
|
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934. We have assessed the effectiveness
of those internal controls as of June 30, 2009, using the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control –
Integrated Framework as a basis for our assessment.
Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate. All internal
control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
A
material weakness in internal controls is a deficiency in internal control, or
combination of control deficiencies, that adversely affects the Company’s
ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with accounting principles generally accepted in the
United States of America such that there is more than a remote likelihood that a
material misstatement of the Company’s annual or interim financial statements
that is more than inconsequential will not be prevented or detected. In the
course of making our assessment of the effectiveness of internal controls over
financial reporting, we identified one material weaknesses in our internal
control over financial reporting. This material weakness consisted
of:
53
a. Lack of expertise in U.S accounting
principles among the personnel in our Chinese
headquarters. Our books are maintained and our financial
statements are prepared by the personnel employed at our executive offices in
Hebei Province in the People’s Republic of China. Few of our
employees have experience or familiarity with U.S accounting
principles. The lack of personnel in our Hebei office who are trained
in U.S. accounting principles is a weakness because it could lead to improper
classification of items and other failures to make the entries and adjustments
necessary to comply with U.S. GAAP.
Management
is currently reviewing its staffing and their training in order to remedy the
weaknesses identified in this assessment. Because of the above
condition, management’s assessment is that the Company’s internal controls over
financial reporting were not effective as of June 30, 2009.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.
Item
9B. Other Information
None.
PART
III
|
Item
10.
|
Directors,
Executive Officers, and Corporate
Governance.
|
The following individuals are the
members of China Aoxing’s Board of Directors and/or its executive
officers.
|
Name
|
Age
|
Position
|
||
|
Zhenjiang
Yue
|
49
|
Director,
Chief Executive Officer,
|
||
|
Min
Jun
|
49
|
Director
|
||
|
John
O’Shea
|
52
|
Director
|
||
|
Howard
Sterling
|
68
|
Director
|
||
|
Guozhu
Xu
|
62
|
Director
|
||
|
Hao
Hongyue
|
38
|
Acting
Chief Financial Officer
|
54
Zhenjiang Yue. In
2000, after securing the approval of the Hebei Provincial Government, Mr. Yue
established the Hebei Aoxing Group. Since 2000, Mr. Yue has been
employed as the President and General Manager of Hebei Aoxing Pharmaceutical Co.
Ltd. Prior to organizing Hebei Aoxing, Mr. Yue was engaged in senior
management of a number of private enterprises, including a carpet factory, a
precast metal factory, the Hebei Brewery Plant, and China Aoxing Food &
Brewery Co. Ltd. As a result of his entrepreneurial activities, Mr. Yue
was named “Leader in the Science & Technology Development Project of the
Communist Youth League” and “Youth Entrepreneur of Hebei
Province.” Mr. Yue has also served as the Vice President of the
Pharmaceutical Association of Shijiazhuang City, the Vice President of the
Non-Governmental Entrepreneur Association of Hebei Province.
Jun Min was one of the
founders of American Oriental Bioengineering Company (NYSE: AOB), which is the
largest shareholder of the Registrant. Mr. Min has served as Vice
President and a member of Board of Directors of AOB since 2002. Mr. Min
has over 20 years of experience in operations management, and has an extensive
knowledge of the consumer and pharmaceutical products industries in China.
Specifically, from 1993 to 2002 Mr. Min was employed in the management of
Harbin Three-Happiness Bioengineering, Co. Ltd. Previously, from 1987 to
1992, Mr. Min worked as Senior Executive Officer of the Price Checking
Bureau of Heilongjiang Province. Mr. Min earned a Bachelor’s Degree
with a concentration in business management from the Harbin Broadcast &
Television University in 1986, and an Executive MBA Degree from Preston
University in 2005. Mr. Min is 49 years old.
John O'Shea is Executive Vice
President and Head of the Westminster Securities Division at Hudson Securities,
Inc. He joined Hudson in 2009 to head the Westminster
Securities division. As the former Chairman and CEO of NYSE member firm
Westminster Securities Corporation, Mr. O’Shea was responsible for establishing
that firm’s global presence. Throughout his 22 year tenure at Westminster, Mr.
O’Shea was an active underwriter, market maker, and investor in public and
private debt and equity offerings. Mr. O'Shea has delivered speeches on a
variety of topics including the benefits of investing in small cap and emerging
growth companies in the US and abroad, the impact of changing regulations on
such companies, reverse mergers, and PIPES. Mr. O’Shea’s most notable speaking
engagements include testifying before the Securities and Exchange Commission
(SEC) and the United States Congress regarding the impact of Sarbanes-Oxley
regulation on US companies and speaking at the Great Hall of the People in China
regarding coal technology. Prior to joining Westminster, Mr. O’Shea was
Syndicate Manager at Yamner & Co., an American Stock Exchange Member Firm.
Mr. O’Shea is a member of the American Council on Renewable Energy and a
non-executive director for three companies in the energy industry: BlueRock
Energy Holdings Inc., AllGreen Energy Pte. Limited, and DayLight
Technology.
Howard David Sterling is
Managing Director of Hudson Securities, Inc. From 2006 until April 2008,
Mr. Sterling was employed as Managing Director of National Securities
Corporation, specializing in the healthcare industry. From 2005 to 2006
Mr. Sterling was employed in a similar position by Carter Securities. From
2003 until 2005 Mr. Sterling was employed as Managing Director of the Laurus
Funds, where he arranged in excess of $50 million in financings for emerging
growth companies. From 1995 to 2003 Mr. Sterling was associated with Sands
Brothers/ Laidlaw, where he served as head of investment banking and COO of the
$175 million Sands Brothers Venture Capital Fund. From 1991 to 1994, Mr.
Sterling was associated with Oscar Gruss & Son in Israel, where he focused
on Israeli technology and biotechnology IPOs as well as the firm’s venture
capital fund. Mr. Sterling was the founder and senior partner of Rifkind
& Sterling, a Beverly Hills legal firm specializing in securities law,
primarily representing technology and biotechnology companies. He received a
B.S. from Columbia University in Economics with honors in 1962 and an LLB, magna
cum laude, from Harvard Law School in 1965. Mr. Sterling is 67 years
old.
55
Dr. Guozhu Xu has, since 1990,
been employed as Director of the China National Drug Dependence Institute at
Beijing University, with responsibility for clinical management. Until
recently, Dr. Xu served as a Committee Member of the Center for Drug Evaluation
at the China State Food and Drug Administration (“SFDA”). In that role, Dr
Xu was the primary investigator for over seventy clinical programs in pain
management, representing over 80% of new pain management drugs approved by the
SFDA. Dr. Xu is an associate director of China Drug Abuse
Prevention magazine and has published over 100 articles regarding drug
research and development. Dr Xu received his medical degree from Beijing
Medical University in 1970. Dr. Xu is 62 years old.
Hongyue Hao was appointed to
the office of Chief Financial Officer in November 2008. Ms. Hao has
been employed since 2000 by the Hebei Aoxing Pharmaceutical Group Company, which
is the operating subsidiary of China Aoxing Pharmaceutical
Company. Ms. Hao was initially employed as Controller, and was
appointed Vice President - Finance in 2007. Prior to joining
Hebei Aoxing, Ms. Hao was employed for four years as Financial Manager of the
China Aoxing Food and Brewery Company, and for three years as an accountant with
the Hebei Brewery Company. In 2007 Ms. Hao earned a Bachelor’s Degree
with a concentration in accounting at the China Science and Technology Training
Institute. Ms. Hao is the niece of the spouse of Juan Yue Han, our
Chairman.
Nominating,
Compensation and Audit Committees
The Board of Directors has appointed
the following committees:
Audit
Committee
Howard David Sterling (Chairman)
Jun Min
Guozhu Xu
Compensation
Committee and Stock Plan Committee
John O'Shea (Chairman)
Jun Min
Guozhu Xu
Nominating
Committee
Jun Min (Chairman)
John O'Shea
Howard David Sterling
Corporate Governance
Committee
Jun Min (Chairman)
John O'Shea
Howard David Sterling
56
The Board of Directors has appointed
an audit committee, which consists of Mr. Howard Sterling as the Chairman and
Jun Min and Guozhu Xu as committee members. Mr. Sterling is qualified
to serve as an “audit committee financial expert,” as defined in the
Regulations of the Securities and Exchange Commission, by reason of his
experience in public accounting and as a principal financial
officer. Mr. Sterling is an “independent” director, as defined in the
listing standards of NASDAQ.
Stock
Plan Committee
The Board
of Directors also set up a Stock Plan Committee, which shall function as the
Disinterested Committee, as defined in Article III of the 2006 Stock and Stock
Option Plan and with the powers set forth in the said Plan, and which shall
report to the Board at each meeting of the Board. The Committee
consists of Mr. John O’Shea as the Chairman and Jun Min and Guozhu Xu as
committee members.
Shareholder
Communications
The Board of Directors will not adopt
a procedure for shareholders to send communications to the Board of Directors
until it has reviewed the merits of several alternative procedures.
Code
of Ethics
Hebei Aoxing has adopted a Code of
Ethics that applies to its executive officers. A copy of the Code of
Ethics was filed as exhibit 14 to the Current Report on Form 8-K filed on April
24, 2006.
Section
16(a) Beneficial Ownership Reporting Compliance
None of
the officers, directors or beneficial owners of more than 10% of the Company’s
common stock failed to file on a timely basis the reports required by Section
16(a) of the Exchange Act during the year ended June 30, 2009, except that each
of Messrs. O’Shea, Sterling, Min, and Xu failed to file a Form 3 when
due.
Item
11. Executive Compensation
This
table itemizes the compensation paid to Zhenjiang Yue by China Aoxing
Pharmaceutical Company, Inc. and/or Hebei Aoxing Pharmaceutical Co., Ltd. for
services as its Chief Executive Officer during the past three years and to
Hongyue Hao for services as Chief Financial Officer and senior manager for the
fiscal year ended in June 30, 2009.
57
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)(1)
|
Other
Compensation
($)
|
Total
($)
|
||||||||||||
|
Zhenjiang
Yue
|
2009
|
50,000 |
--
|
64,000 | -- | 114,000 | |||||||||||
|
2008
|
50,000 | -- | -- | -- | -- | ||||||||||||
|
2007
|
40,000 | -- | -- | -- | -- | ||||||||||||
|
Hongyue
Hao
|
2009
|
29,325 | -- | 64,000 | -- | 93,325 | |||||||||||
|
(1)
|
The
Company issued 100,000 shares of restricted common stock to Mr. Yue and to
Ms Hao for services during the period from July 01, 2008 through
December 31, 2009.
|
Equity
Grants
The
following tables set forth certain information regarding the stock options
acquired by the Company’s Chief Executive Officers during the year ended June
30, 2008 and those options held by him on June 30, 2009.
Option Grants in the Last
Fiscal Year
|
Number
of
securities
underlying
option
|
Percent
of
total
options
granted
to
employees
in
fiscal
|
Exercise
Price
|
Expiration
|
Potential
realizable
value
at assumed
annual
rates of
appreciation
for
option term
|
||
|
granted
|
year
|
($/share)
|
Date
|
5%
|
10%
|
|
|
Zhenjiang
Yue
|
--
|
--
|
--
|
--
|
--
|
--
|
The
following tables set forth certain information regarding the stock grants
received by the executive officers named in the table above during the year
ended June 30, 2009 and held by them unvested at June 30, 2009.
Unvested Stock Awards in the
Last Fiscal Year
|
Number
of
Shares
That
Have
Not
Vested
|
Market
Value
of
Shares That
Have
Not
Vested
|
|
|
Zhenjiang
Yue
|
100,000
|
$110,000 |
|
Jun
Min
|
-- | -- |
|
John
O’Shea
|
40,000
|
$ 44,000 |
|
Howard
Sterling
|
40,000
|
$ 44,000 |
|
Guozhu
Xu
|
40,000
|
$ 44,000 |
|
Hongyue
Hao
|
100,000
|
$110,000 |
58
Remuneration of Directors
The
following table sets forth all compensation paid or to be paid by the Company,
as well as certain other compensation paid or accrued, for each of the directors
for the fiscal year ended June 30, 2009.
|
Fees Earned or
Paid in Cash
($)
|
Stock Awards
($)
|
All
Other
Compensation
($)
|
Total
($)
|
||||||||||||
|
Zhenjiang
Yue
|
|
||||||||||||||
|
Jun
Min
|
|
||||||||||||||
|
John
O’Shea
|
48,000 | 25,867 | (1 | ) |
|
73,867 | |||||||||
|
Howard
Sterling
|
48,000 | 25,867 | (1 | ) |
|
73867 | |||||||||
|
Guozhu
Xu
|
7,014 | 25,867 | (1 | ) |
|
32,881 | |||||||||
| (1) |
The
Company issued 40,000 shares of restricted common stock to Messrs. O’Shea,
Sterling and Xu each for services during the period from October 01, 2008
through December 31, 2009
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of the date of this report by the
following:
|
|
·
|
each
shareholder known by us to own beneficially more than 5% of our common
stock on a fully-diluted basis;
|
|
|
·
|
Zhenjiang
Yue, our Chief Executive Officer
|
|
|
·
|
each
of our directors; and
|
|
|
·
|
all
directors and executive officers as a
group.
|
There are
91,669,562 shares of our common stock outstanding on the date of this
report. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below have sole voting power and investment
power with respect to their shares, subject to community property
laws where applicable. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange
Commission.
In
computing the number of shares beneficially owned by a person and the percent
ownership of that person, we include shares of common stock subject to options
or warrants held by that person that are currently exercisable or will become
exercisable within 60 days. We do not, however, include these “issuable” shares
in the outstanding shares when we compute the percent ownership of any other
person.
59
|
Name of
Beneficial
Owner
|
Amount
and Nature of
Beneficial
Ownership(1)
|
Percentage of
Class
|
|
Zhenjiang
Yue
|
8,000,000(2)
|
8.7%
|
|
Jun
Min
|
0
|
0.0%
|
|
John
O’Shea
|
529,563
|
0.6%
|
|
Howard
Sterling
|
40,000
|
0.0%
|
|
Guozhu
Xu
|
40,000
|
0.0%
|
|
Hongyue
Hao
|
600,000
|
0.6%
|
|
All
directors and officers as a group (6 persons)
|
9,209,563
|
10.0%
|
|
American
Oriental Bioengineering, Inc.
15
Exchange Place
Suite
500
Jersey
City, NJ 08302
|
34,830,847
|
38.0%
|
__________________________________
|
(1)
|
Unless
otherwise indicated, all shares are held of record as of September 28,
2009.
|
|
(2)
|
Includes
3,000,000 shares owned of record by Mr. Yue’s spouse, Cuiying
Hao.
|
Item
13. Certain Relationships and Related Transactions, and Director
Independence
Certain Relationships and Related
Transactions
None.
Director Independence
The following members of our Board of
Directors are independent, as “independent” is defined in the rules of the
NASDAQ Stock Market: John O’Shea, Howard Sterling, Guozhu
Xu.
Item
14. Principal Accountant Fees and Services
Audit Fees
Paritz & Company, P.A. (“Paritz”)
billed $64,500 in connection with the audit of China Aoxing’s financial
statements for the year ended June 30, 2009. Also included are
services performed in connection with reviews of the financial statements of
China Aoxing and its subsidiaries for the interim quarters of fiscal 2009 as
well as those services normally provided by the accountant in connection with
the Company’s statutory and regulatory filings for fiscal year
2009.
Paritz billed $45,500 in connection
with the audit of the financial statements of China Aoxing for the
year ended June 30, 2009.
Audit-Related Fees
Paritz billed China Aoxing $0 for any
Audit-Related fees in fiscal 2009 and in fiscal 2008.
60
Tax Fees
Paritz billed $0 to China Aoxing in
fiscal 2009 and in fiscal 2008 for professional services rendered for tax
compliance, tax advice and tax planning.
All Other Fees
Paritz billed China Aoxing $0 for other
services in fiscal 2009 and fiscal
2008.
It is the policy of the Company
that all services other than audit, review or attest services must be
pre-approved by the Board of Directors. All of the services described
above were approved by the Board of Directors.
Item
15. Exhibit List and Financial Statement Schedules
( a) Financial Statements
Report of
Independent Registered Accounting Firm
Balance
Sheets – June 30, 2009 and 2008
Consolidated
Statements of Operations – Years Ended June 30, 2009 and
2008
Consolidated
Statement of Changes in Stockholders’ Equity - Years Ended June 30, 2009 and
2008
Consolidated
Statements of Cash Flows - Years ended June 30, 2009 and
2008
Notes to
Consolidated Financial Statements
(b)
Exhibit List
|
3-a
|
Certificate
of Incorporation, as amended to date – filed as an exhibit to the
Company’s Annual Report on Form 10-KSB for the year ended June 30, 2006
and incorporated herein by
reference.
|
|
3-b
|
By-laws
- filed as an exhibit to the Company's Registration Statement on Form
10-SB (File No.: 000-24185) filed on May 4, 1998, and incorporated herein
by reference.
|
|
4-a
|
Form
of Series A Common Stock Purchase Warrant issued as of September 28, 2006
– filed as an exhibit to the Company’s Annual Report on Form 10-KSB for
the year ended June 30, 2006 and incorporated herein by
reference.
|
61
|
4-b
|
Form
of Series B Common Stock Purchase Warrant issued as of September 28, 2006
– filed as an exhibit to the Company’s Annual Report on Form 10-KSB for
the year ended June 30, 2006 and incorporated herein by
reference.
|
|
4-c
|
Form
of Series C Common Stock Purchase Warrant issued as of September 28, 2006
– filed as an exhibit to the Company’s Annual Report on Form 10-KSB for
the year ended June 30, 2006 and incorporated herein by
reference.
|
|
4-d
|
Form
of Series D Common Stock Purchase Warrant issued as of September 28, 2006
– filed as an exhibit to the Company’s Annual Report on Form 10-KSB for
the year ended June 30, 2006 and incorporated herein by
reference.
|
|
10-a
|
Midterm
RMB Loan Contract Number 10, Year 2003 with Bank of China. – filed as an
exhibit to the Current Report on Form 8-K filed on April 24, 2006 and
incorporated herein by reference.
|
|
10-b
|
Midterm
RMB Loan Contract Number 11, Year 2003 with Bank of China – filed as an
exhibit to the Current Report on Form 8-K filed on April 24, 2006 and
incorporated herein by reference.
|
|
10-c
|
Joint
Strategic Alliance and Securities Purchase Agreement dated April 15, 2008
between China Aoxing Pharmaceutical Company, Inc. and American Oriental
Bioengineering, Inc. - filed as an exhibit to the Company’s
Current Report on Form 8-K dated April 15, 2008 and filed on
April 21, 2008.
|
|
|
|
10-d
|
Amended
Junior Subordinated Promissory Note dated May 1, 2008 and amended on
August 12, 2008, issued to Zhenjiang Yue. – filed as an exhibit
to the Company’s Current Report on Form 8-K dated August 12,
2008 and filed on August 20, 2008.
|
|
10-e
|
Convertible
Term Note dated May 26, 2008, issued to American Oriental Bioengineering
Inc. - filed as an exhibit to the Company’s Current Report on
Form 8-K dated August 15, 2008 and filed on August 20,
2008.
|
|
14
|
Hebei
Aoxing Pharmaceutical Group Co., Ltd. Code of Conduct Policy – filed as an
exhibit to the Current Report on Form 8-K filed on April 24, 2006 and
incorporated herein by reference.
|
|
21
|
Subsidiaries
– Ostar Pharmaceutical
|
|
|
Hebei
Aoxing Pharmaceutical Group Co.,
Ltd.
|
|
31.1
|
Rule
13a-14(a) Certification – Zhenjiang
Yue
|
|
31.2
|
Rule
13a-14(a) Certification – Hongyue
Hao
|
|
32
|
Rule
13a-14(b) Certification
|
62
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
China
Aoxing Pharmaceutical Company, Inc.
|
|
|
By:
/s/ Zhenjiang
Yue
|
|
|
Zhenjiang
Yue, Chief Executive Officer
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this Report has been signed below on October 13, 2009 by the following
persons on behalf of the Registrant and in the capacities
indicated.
/s/ Zhenjiang
Yue
Zhenjiang
Yue, Director,
Chief
Executive Officer,
/s/ Hongyue
Hao
Acting
Chief Financial Officer,
/s/ John
O’Shea
John
O’Shea, Director
/s/ Howard David
Sterling
Howard
David Sterling, Director
/s/ Jun
Min
Jun Min,
Director
/s/ Guozhu
Xu
Guozhu
Xu, Director
63