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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________

FORM 10-K

Commission File No. 1-32674

(Exact Name of Registrant as Specified in its Charter)

 

(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:

 

Securities Registered Pursuant to Section 12(g) of the Act: None

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  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. [ ]

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 ___        Smaller 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 √ 

The aggregate market value of the Registrant's common stock, $.001 par value, held by non-affiliates as of December 31, 2015, the last business day of the second fiscal quarter, was $30,727,141.

As of September 27, 2016 the number of shares outstanding of the Registrant's common stock was 76,209,195 with $.001 par value.

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

FORWARD-LOOKING STATEMENTS: NO ASSURANCES INTENDED

This Annual Report on Form 10-K (including the section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations) contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, as well as information relating to Aoxing Pharmaceutical Company, Inc. that represents management's assumptions based on the information currently available to management. Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. When used in this document and other documents, releases and reports released by us, the words "anticipate," "believe," "estimate," "expect," "intend," "the facts suggest" and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Many factors could cause actual results to differ materially from our forward looking statements, including those set forth in Item 1A of this report. Other unknown, unidentified or unpredictable factors could materially and adversely impact our future results. We undertake no obligation and do not intend to update, revise or otherwise publicly release any revisions to our forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.

 

We file reports with the Securities and Exchange Commission ("SEC" or "Commission"). You can read and copy any materials we file with the Commission at its Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition, the Commission maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission, including our reports.

 

Our fiscal year ends on June 30, and any references herein to "Fiscal 2016" mean the year ended June 30, 2016, and references to other "Fiscal" years mean the year ending June 30 of the year indicated.

 

Item 1.  Business

Aoxing Pharmaceutical Company, Inc. ("Aoxing Pharma" or "Company") has one operating subsidiary, Hebei Aoxing Pharmaceutical Co., Inc. ("Hebei Aoxing"), which is organized under the laws of the People's Republic of China ("PRC"). Since 2002, Hebei Aoxing has been engaged in developing narcotics and pain management products.  In 2008 Hebei Aoxing supplemented its product lines by acquiring Shijiazhuang Lerentang Pharmaceutical Company, Ltd. ("LRT"), a specialty pharmaceutical company focusing on herbal pain related therapeutics.  The Company owns 95% of the equity in Hebei Aoxing.

The Company was incorporated in the State of Florida on January 23, 1996. In 2006 the Company liquidated its previous business assets and acquired 60% of Hebei Aoxing. On May 1, 2008 the Company completed the acquisition of an additional 35% interest in Hebei Aoxing from Zhenjiang Yue, our Chief Executive Officer.

On April 16, 2008, Hebei Aoxing completed the acquisition of 100% of the registered capital of Shijiazhuang Lerentang Pharmaceutical Company Limited ("LRT"). LRT was 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, the Company paid to the shareholders of LRT 80 million Renminbi and related expenses (approximately $12.4 million in total) and issued 4 million shares of common stock. Subsequently the Company undertook the integration of LRT's business and operations into Hebei Aoxing, which resulted in a requirement that our manufacturing facilities be relicensed by the government.  In April 2011, the combined Hebei Aoxing and LRT manufacturing facility received GMP certification from the Chinese State Food and Drug Administration (CFDA) for its production lines.  The certification marked the completion of the integration of LRT into Hebei Aoxing. LRT's business is currently operated under Hebei Aoxing.

On April 26, 2010, Aoxing Pharma and Johnson Matthey Plc entered into an agreement to establish a joint venture focused on research, development, manufacturing and marketing of active pharmaceutical ingredients ("API') for narcotics and neurological drugs for the China market. Under the terms of the agreement, Macfarlan Smith Ltd, a wholly owned subsidiary of Johnson Matthey Plc, headquartered in the United Kingdom, will contribute technology expertise and capital to the joint venture. Hebei Aoxing will contribute capital, fixed assets and related API manufacturing licenses. The joint venture company is called Hebei Aoxing API Pharmaceutical Company, Ltd. Hebei Aoxing has a 51% stake in the joint venture, while Macfarlan Smith (Hong Kong) Ltd (a wholly owned subsidiary of Johnson Matthey Pacific Ltd) holds 49%. Each joint venturer has equal representation on a board of directors that will oversee a management team responsible for corporate strategies and operations.  The joint venture is located on the Hebei Aoxing campus in Xinle City, 200 kilometers southwest of Beijing. The total capital investment was originally projected to be approximately $15 million during the first five years at the time of establishment. However, due mainly to the delays in securing API manufacturing licenses and reduced focus from both partners, only approximately $1 million of capital resources had been invested in the joint venture . At this point, we do not expect any major investment in API in the near term.

The market for pharmaceutical products in China has been growing dramatically during the past decade. The growth in the Chinese pharmaceutical market is driven by several factors including improving standards of living and an increase in disposable income fueled by the growing economy, the aging population, the increasing participation in the State Basic Medical Insurance System and the increase in government spending on public health care.  Nevertheless, 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 CFDA, there are only 13 pharmaceutical companies designated by the CFDA as narcotic drug producers in China, and we are one of them.

Since its inception in 2002, Hebei Aoxing has been focusing on research, development, manufacturing and distribution of a variety of narcotics and pain management pharmaceutical products in China. A significant portion of 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 - the remainder of the facility is dedicated to the herbal pharmaceutical products acquired from LRT.  Over the years, the company has developed a compelling pipeline in narcotics and pain management drugs, including Naloxone, Tilidine, Oxycodone, and Buprenorphine.

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 (buprenorphine 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 diarrhea (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 with 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.

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 responses to this problem through 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 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. 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 2010, Chinese government had approved the production of 25 varieties of analgesics. In the near future, patients in China will find 30 varieties and over 80 specifications of different types of analgesics. Worldwide, there are about 123 varieties of narcotics and pain medicines.

Each of our pharmaceutical products has certain medicinal functions and has demonstrated safety and efficacy in accordance with the CFDA requirements for the treatment of 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 CFDA 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.

We have more than 100 products under licenses from CFDA. The following is a brief description of the two products that generate most of our revenue during fiscal 2016.

 

Tilidine hydrochloride is an orally-absorbed synthetic narcotic analgesic. It is used in 50mg or 100mg dosage strength for relief of acute, moderate to severe pain, and chronic cancer-related pain. Tilidine hydrochloride tablet is currently selling in European countries, including Germany, Belgium, Ireland, Italy and Switzerland and is not available in China at the moment.

It is estimated that there are at least 50 million operation procedures performed in Chinese hospitals and clinical centers every year, and 50% of these procedures require acute post-operative pain treatment. In addition, there are estimated to be over 2.2 million newly diagnosed cancer patients every year, and 60% of them are unable to receive necessary pain management under the current treatment paradigm. According to the New England Journal of Medicine, cancer has become the No. 1 cause of death, contributing to 20% of adult deaths in China.

Our Phase III clinical study of Tilidine Hydrochloride tablets was a multi-center, randomized, double-blind and active-control study which covered two pivotal trials: (1) a trial of 200 patients with post-operative pain for the indication of acute moderate to severe pain; and (2) a trial of 120 patients with cancer pain for the indication of chronic moderate to severe pain. The study was conducted at 9 metropolitan hospitals in China. The primary endpoints used to evaluate the efficacy were the sum of pain score differences, measured by Pain Intensity Difference (PID).

On June 8, 2015, the China Food and Drug Administration ("CFDA") issued to Aoxing Pharma's subsidiary licenses to produce Tilidine Hydrochloride tablets ("Tilidine HCL"). Registration Certificate 2015S00391 was issued for the 50mg tablet; Registration Certificate 2015S00390 was issued for the 100mg tablet. This approval is the culmination of multiple years of research, development and regulatory activities. Our entry into the market will be a significant break-through in China's fight to treat pain. Tilidine HCL tablets offer a convenient medium for delivery of this drug, which is essential in the fight against pain. Tilidine tablets production started in June, 2016 and we expect the sales to ramp up during fiscal 2017. Tilidine is designated as a Class III New Medicine, which has at least four-year period of exclusively protection from the date when the registration certificate of a new medicine was issued.

We have an in-house state-of-art facility which allows our multi-discipline team to conduct pharmaceutical research and development. Our research and development ("R&D") team consists of chemists, biologists, pharmacologists and other technical experts. The team works on multiple projects, ranging 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. 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.

Our R&D team is working on the following products pipeline:

Oxycodone & Acetaminophen Tablets and Capsules (waiting for production licenses). Oxycodone & Acetaminophen Tablets and Capsules are compound tablets and compound capsules consisting of Oxycodone HCL and Acetaminophen which is used to treat acute and chronic pain. Oxycodone and Acetaminophen are categorized as class II psychotropic drugs which are not subject to the rules of the Single Convention on Narcotic Drugs.  Oxycodone & Acetaminophen Tablets and Capsules are currently being imported from Mallinckrodt into China.  Aoxing will be the first Chinese company to produce this generic product.

We obtained clinical trial approval of this product in September 2012. This product only requires trial on bioequivalence and needs 24 cases for each trial; no phase II trial or phase III trial is required. We have completed the clinical trials and the trials results have been submitted to the CFDA. The Company had also submitted the New Drug Application (NDA) for the final production clearance to the CFDA and is currently waiting for final approval.

Buprenorphine/ Naloxone (started submission of the registration data). In November 2007, the CFDA granted Hebei Aoxing and its partner, the National Institute of Drug Dependence at Beijing University, an important research and development license for 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.

In August 2010, the CFDA granted the Company authority to initiate the registration clinical trial of Buprenorphine/Naloxone sublingual tablets for opioid addiction treatment.  The approval enabled Aoxing Pharma to move forward to the final development stage with this therapy, which is novel in China as it is not yet available to patients.  The registration trial is being administered by the National Institute on Drug Dependence of China at Beijing University, the co-development partner of Aoxing Pharma.  The patient enrollment takes place in at least three Compulsory Drug Dependence Treatment Centers.  The clinical trial was conducted by Kunming General Hospital of the Chengdu Military Region as the leader unit with Shanghai Mental Health Center and Guangzhou psychiatric hospital as the member units. The phase I and phase II clinical trial have been completed. (This project doesn't require a phase III clinical trial). 

In July of 2015, we announced positive results of Buprenorphine/Naloxone sublingual tablets as a treatment for opioid dependence.  This was a registration clinical study evaluating the safety and efficacy of the sublingual tablets in order to gain the final production and marketing clearance by the China Food and Drug Administration (CFDA). In this multi-center, placebo-controlled, double-blinded, randomized, and paralleled study, 300 patients with opioid dependence were enrolled in 12-week therapy.  The primary endpoints of this study were to evaluate the safety and effectiveness of the sublingual tablets for the opioid dependence patients, by measuring the rate of outpatient service; the secondary endpoints of the study included the negative rate of urine morphine test, among other issues.

Our Buprenorphine/Naloxone sublingual tablets program could be the first such therapy in the Chinese market in treating opioid dependence patients. The drug demonstrated statistical significance in the measurements designed in the trial. We are working on the final preparation toward the submission of the registration data package, and look forward to the final clearance by the China CFDA.

Based on Chinese government data, drug abuse and addiction has become a serious social problem and the situation has been getting worse over the last two decades. As of December 2014 there were 2.95 million registered drug addicts in China, which is 0.5 million more than in 2013.  We believe the real population of drug addicts is estimated to be about 10 times the registered number in the country. The Chinese government has taken comprehensive measures to address this problem, including centralized compulsory treatment camp, community clinics, psychological consulting and pharmacological therapies. We believe Buprenorphine/Naloxone sublingual tablets will be a major product in Chinese market in treating opioid dependence patients.

Tilidine / Naloxone (under clinical trial). Tilidine / Naloxone Capsules are compound capsules consisting of Tilidine HCL and Naloxone, which is used to treat acute and chronic pain. The mixture of naloxone is claimed to lower the abuse liability of the opioid analgesic. This will be the next generation of our Tilidine product line, and it is currently under Phase 2 clinical trial.

The Company currently has approximately 346 employees. There are 73 employees in administrative and management, 10 employees in R&D, 19 employees in quality assurance and quality control, 177 employees in production, and 67 employees in sales and marketing. 

We consider our employee relations to be good.

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.  

Our independent accountants have included an explanatory paragraph in their audit report raising substantial doubt as to the Company's ability to continue as a going concern, due to the Company's history of losses, negative cash flow from operations, and its working capital deficiency.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company had an accumulated deficit of $56.3 million as of June 30, 2016. At June 30, 2016 we had a $10.9 million working capital deficiency. These matters raise substantial doubt about the Company's ability to continue as a going concern. That doubt is expressed in the audit report of our independent auditor for the year ended June 30, 2016. If our Company is unable to continue as a going concern, investors in the Company will incur a loss.

Our sales revenue remains small and mainly derives from a single product. A disruption in, or a compromise of, our manufacturing or sales operations, or distribution channels related to that product would materially and adversely affect our financial condition and results of operations.

 

Sales for the year ended June 30, 2016 mainly derived from a few products approved by the CFDA.  In particular, over 85% of our revenue came from sales of Zhongtong'an. We expect these products will continue to account for a majority of our sales in the next one or two years until our new products are approved, launched and become accepted by the market. 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 pledged the registered trademarks and renewal certificates relating to our principal product, Zhongtong'an, to secure a loan of $4,185,426 that is due on October 25, 2016. In each of the past three fiscal years, sales of Zhongtong'an represented over 80% of our annual sales revenue. We are planning to raise additional capital or seek external financing to replace this loan. If we are unable to satisfy the secured debt, the creditor, Shijiazhuang Construction Investment Group, will be entitled to foreclose on that collateral. If, in that event, we lose our ability to use those trademarks and certificates in connection with the sale of Zhongtong'an, our sales revenue will be drastically reduced.

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, or the sales of selected property rights. If we are unable to secure the necessary capital, we may be unable to achieve the size of operations necessary for profitable operations. 

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.

 

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, recently, 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, 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 CFDA 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.

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 has 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.

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.

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 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 CFDA, 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.

 

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 CFDA regulate the access to supplies of the chemical compounds in some of our current products and products in development, including oxycodone, codeine, buprenorphine, and Tilidine. Consequently, their manufacture, shipment, storage, sale and use are subject to a high degree of regulation.

 

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 a 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 and 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 CFDA'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 studies, 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 CFDA 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 CFDA or delay in or failure to obtain CFDA 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 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:

 

•

decreased demand for our products;

•

adverse publicity resulting in injury to our reputation;

•

product liability claims and significant litigation costs;

•

substantial monetary awards to or costly settlements with consumers;

•

product recalls;

•

loss of revenues; or

•

the inability to commercialize future products.

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.

 

 

The CFDA, as well as Department of Health, imposes 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 CFDA will grant approval to market the product. Satisfaction of CFDA 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.

 

The current CFDA 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 CFDA 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 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.

 

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.

As our drug products businesses are carried out in the PRC, we are subject to and have to operate within the framework of the PRC legal system. Any changes in the laws or policies of the PRC or the implementation thereof, for example in areas such as foreign exchange controls, tariffs, trade barriers, taxes, export license requirements and environmental protection, may have a material impact on our operations and financial performance.

Our operations are carried out through our subsidiary which is located in the PRC. As such, the laws of the PRC govern our businesses and operations. The PRC legal system is a codified system of written laws, regulations, circulars, administrative directives and internal guidelines. The PRC government is still in the process of developing its legal system to encourage foreign investment and to align itself with global practices and standards. As the PRC economy is undergoing development at a faster rate than the changes to its legal system, some degree of uncertainty exists in connection with whether and how existing laws and regulations apply to certain events and circumstances. Some of the laws and regulations and the interpretation, implementation and enforcement of such laws and regulations are also at an experimental stage and are subject to policy changes. Hence, precedents on the interpretation, implementation and enforcement of certain PRC laws are limited and court decisions in the PRC do not have binding effect on lower courts. Accordingly, the outcome of dispute resolutions and litigation may not be as consistent or predictable as in other more developed jurisdictions and it may be difficult to obtain swift and equitable enforcement of the laws in the PRC, or to obtain enforcement of a judgment by a court or another jurisdiction.

There is no assurance that these PRC authorities will not issue further directives, regulations, clarifications or implementation rules requiring us to obtain further approvals in relation to our public listing in the U.S.

Restrictions under PRC law on our PRC subsidiary's ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to our shareholders, and otherwise fund and conduct our business.

 

All of our sales are earned by our PRC subsidiary. However, PRC regulations restrict the ability of our PRC subsidiary to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiary only out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiary is also required under PRC laws and regulations to allocate at least 10% of its annual after-tax profits determined in accordance with PRC Accounting Standards for Business Enterprises ("ASBEs") to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiary to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

 

Furthermore, our PRC subsidiary, which is foreign investment entity ("FIE"), is subject to the PRC rules and regulations on currency conversion. In the PRC, the State Administration of Foreign Exchange ("SAFE") regulates the conversion of the Renminbi into foreign currencies. Currently, foreign investment enterprises (including wholly foreign-owned enterprises) are required to apply to the SAFE for "Foreign Exchange Registration Certificates for FIEs". With such registration certification (which have to be renewed annually), FIEs are allowed to open foreign currency accounts including the "current account" and "capital account". Currently, transactions within the scope of the "current account" (for example, remittance of foreign currencies for payment of dividends) can be effected without requiring the approval of the SAFE. However, conversion of currency in the "capital account" (for example, for capital items such as direct investments, loans and securities) still requires the approval of the SAFE.

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 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.

 

The Chinese government does not permit our auditor, or any other independent registered public accounting firm operating in China, to be inspected by the Public Company Accounting Oversight Board, so investors will be deprived of the benefits of such inspection.

The independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB. Inspections of other firms that PCAOB has conducted outside of China have, at times, identified deficiencies in those firms' audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control procedures. As a result, investors will be deprived of the benefits of PCAOB inspections.

A material failure of internal control over financial reporting could materially impact the Company's financial results.

In designing and evaluating its internal control over financial reporting, management recognizes that any internal control or procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management believes that the Company's internal control over financial reporting currently provides reasonable assurance of achieving their control objectives. However, no system of internal controls can be designed to provide absolute assurance of effectiveness. See ITEM 9A "Controls and Procedures" later in this Report. A material failure of internal control over financial reporting could materially impact the Company's reported financial results and the market price of its stock could significantly decline. Additionally, adverse publicity related to a material failure of internal control over financial reporting could have a negative effect on the Company's reputation and business.

The value of our securities will be affected by the foreign exchange rate between U.S. dollars and Renminbi.

The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and Renminbi, and between those currencies and other currencies in which our sales may be denominated. For example, to the extent that we need to convert U.S. dollars into Renminbi for our operational needs and should the Renminbi appreciate against the U.S. dollar at that time, our financial position, the business of the company, and the price of our common stock may be harmed. 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 Renminbi, the U.S. dollar equivalent of our earnings from our subsidiary in China would be reduced.

AOB has significant influence over the outcome of matters submitted to shareholders for approval.

Item 1B.  Unresolved Staff Comments

None.

 

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 acres leased by Hebei Aoxing.  The land lease will expire in 2053. On that land, the Company has located a building complex that offers an aggregate of 32,268 m² in floor space (approximately 347,330 square feet).  The complex includes office facilities, research facilities, 13,000 square meters (approximately 139,931 square feet) of factory space, and a five story residential facility for employees.

 

The Company's technology center is the 4,600 square meters (approximately 49,514 square feet) 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 National Institute on Drug Dependence of Beijing University.

 

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 annual production capacity of the first stage analgesic project can reach 140 million capsules, 160 million pieces of troche, 100 million pieces of injectable, 100 million pieces of oral liquid and 100 million bags of palletized granules. 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. Aoxing Pharma relocated its U.S. office during fiscal 2016 to 1098 Foster City Blvd., Suite 106-810, Foster City, CA 94404.

Item 3.  Legal Proceedings

At present, the Company is not engaged in or the subject of any material legal proceedings.
 

Item 4.    Mine Safety Disclosures

Not Applicable.

PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company's common stock is listed for trading on the NYSE MKT under the symbol "AXN". Set forth below are the high and low close prices for each quarter in our past two fiscal years.  

 

 

Holders

Our shareholders list contained the names of 416 registered stockholders of record of the Company's common stock as of September 25, 2016.

 

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 the foreseeable future. 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.

 

Issuer Purchases of Equity Securities

The Company did not make any stock repurchases during the quarter ended June 30, 2016.

 

Recent Sales of Unregistered Securities

On June 23, 2016 the Company issued 150,000 shares of common stock to six employees, including 20,000 shares to our President for Research and Development. The shares were issued as compensation for services, valued at $0.63 per share, the market value on the date of grant. The sales were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, because the shares were offered privately to employees of the Company. The sales were also exempt from registration pursuant to Regulation S, since the purchasers were non-U.S. persons and resale restrictions were imposed

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, 2016.

_________________________

 

Item 6.  Selected Financial Data

Not applicable.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our combined and consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The discussion in this section contains forward-looking statements that involve risks and uncertainties. As a result of various factors, including those set forth under "Risk Factors" and elsewhere in this report, our actual future results may be materially different from what we expect.

Results of Operations-Comparison of the years ended June 30, 2016 and 2015

Revenue

Revenue for the year ended June 30, 2016 was $32,329,525, representing a 26.9% increase from the revenue of $25,481,199 for the year ended June 30, 2015. The increase in revenue was primarily attributable to the increase in the sales of herbal therapeutics products, especially these products other than the Zhongtong'an. The Company has increased its effort to evaluate the strength of its product portfolio and market these products with large growth potentials. Zhongtong'an, which represents ~80% of total revenue, has sales growth of ~7% year over year during the Fiscal 2016, which is below our initial expectation partly due to inventory drawdown in the sales channels. On the local currency comparison, total revenue increased 33% year over year while the revenue from Zhongtong'an increased 12% year-over-year. The difference in the growth rate between local currency and U.S. dollar is the result of currency devaluation of Chinese yuan against U.S. dollar during the periods.

The following table shows the dollar volume of sales of our primary product lines in each of the past two fiscal years:

 

Cost of Goods Sold; Gross Profit

Cost of sales was $7,775,524 for the fiscal year 2016, representing an increase of 36.7% from $5,688,863 for the fiscal year 2015. Gross Margin was 75.9% for the fiscal year 2016 and relatively flat compared to 77.7% for the fiscal 2015. Lower gross margin was mainly the result of product mix shift as we try to increase sales for the products other than Zhongtong'an.

Research & Development Expense

Research and development ("R&D") expenses were $3,143,233 for the year ended on June 30, 2016, representing a significant increase from the $337,067 expended in fiscal 2015. Our R&D expenses may fluctuate significantly from period to period, reflecting the progress and timing of our various drug development projects. The larger expense this year was mainly due to large payments for clinical trials and a large payment for a key raw material used in our R&D program.

   

General and Administrative Expenses

Our general and administrative expenses consist primarily of employee compensation and benefits payable to general management, finance and administrative staff, professional and legal fees, and bad debt expenses. In the year ended June 30, 2016, our general and administrative expenses were $3,066,634, an increase of 11.4% compared to the $2,753,534 incurred during the previous year. The increase in general and administrative expense was mainly due to professional fees as a result of the registered direct offering of securities during September 2015,

Selling Expense

 

Selling expense for the year ended June 30, 2016 was $11,613,220, which was 55.7% higher than the selling expense of $7,457,758 for the year ended June 30, 2015. Sales and marketing efforts to introduce the products other than Zhongtong'an and the new Tilidine tablets are the main reasons for higher selling expenses.

Depreciation and amortization

Depreciation and amortization expense decreased 8.3% from $548,319 in fiscal 2015 to $502,862 in fiscal 2016 in part due to changes in currency exchange as the Chinese government devalue its currency against U.S. dollar from fiscal 2015 to fiscal 2016.

Income from Operations

Income from Operations was $6,228,051 for the year ended June 30, 2016, a decline of 28.4% from $8,695,658 for the fiscal year 2015. The decline was mainly due to higher selling expenses and R&D expenses.

Other Income (Expense)

Other income/ (expense) comprises:

These non-operating expenses were partially offset by the government subsidies that we recorded as non-operating income. During the year ended June 30, 2016, the Company's subsidiary in China, Hebei Aoxing, received local government subsidies totaling $201,912. These government subsidies were given to the Company with no restrictions and are for operating purposes. We recorded the subsidies and grants as other income. For fiscal 2015, the government subsidy income was $279,893.

Income taxes

Income taxes were $642,245 for the fiscal year 2016. This compares to $2,704,369 Income tax benefits the Company recognized during fiscal 2015. The Company's loss carry forwards for the 5 years prior to fiscal 2015 provided a significant amount of the deferred tax assets.

Net income

The Company realized net income of $2,243,580 for the fiscal year ended June 30, 2016.  However, because the Company owns only 95% of Hebei Aoxing, 5% of that company's net income was attributed to the non-controlling interest.  Therefore the net income for the fiscal year attributable to the shareholders of Aoxing Pharmaceutical was $2,061,224. In comparison, during the fiscal year ended June 30, 2015, the Company's net income was $5,818,473 and, after deducting loss attributable to the 5% minority interest in Hebei Aoxing, net loss attributable to shareholders of Aoxing Pharmaceutical was $5,494,713.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis.

 Our cash balance as of June 30, 2016 was $6,912,100, compared to $5,371,545 as of June 30, 2015. Cash used in Operations during the year ended June 30, 2016 was $534,989, while the net cash provided by operations of $3,025,739 for the year ended June 30, 2015. Cash flow from operation was negatively impacted by higher accounts receivables, which was mainly due to the development of new customers and government's procurement policy changes in the pharmaceutical industry. We expect this trend to reverse during fiscal 2017 and believe the cash flow from operation should be positively impacted by the reverse trend in account receivables.

Our investing activities in fiscal 2016 consisted of $117,862 in cash used to purchase additional property and equipment. This compares to $2,705,298 in cash for investing activities in fiscal 2015. Higher investment in fiscal 2015 was mainly for purchasing additional property and equipment relating to the Tilidine project

Our financing activities provided $2,946,484 in cash during the year ended June 30, 2016, which included $2,739,000 cash from sale of common stock.

We have incurred operating losses in the past and had an accumulated deficit of $56.3 million as of June 30, 2016. However, we have reported positive operating results for both fiscal years 2015 and 2016. The income that we incurred during fiscal 2016, coupled with the issuance of common stock in satisfaction of debt, caused our working capital deficit to improve significantly during fiscal 2016. Our working capital deficit on June 30, 2016 was $10,948,767, which was 46.0% lower than the working capital deficit of $20,143,629 on June 30, 2015. The primary reason for our working capital deficit was the fact that there are $25.5 million in short-term debt owed to banks, related and unrelated parties. In accordance with banking customs in China, our bank loans have, throughout our history, been written on a short-term basis. Our business has survived through the years because our banks have proven willing to renew or replace our short-term debt, and we expect that practice to continue.

Our debt service obligations on June 30, 2016 were as following:

 

Total				Less than 1 Year				1-2 Years				2-3 Years				3-4 Years				4-5 Years				After 5 Years
$	14,372,630			$	14,372,630				-				-				-				-				-
	13,317				13,317				-				-				-				-				-
	11,070,966				11,070,966				-				-				-				-				-
	15,048				15,048				-				-				-				-				-
$	25,471,961			$	25,471,961			$	-				-				-				-				-

 

 

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 2016, there were three estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results. These estimates were:

 

We made no material changes to our critical accounting policies in connection with the preparation of financial statements for fiscal 2016.

 

Impact of Accounting Pronouncements

New accounting rules and disclosure requirements can significantly impact the comparability of our financial statements.  There are no recent accounting pronouncements that have had a material effect on our financial statements.  Please refer to Note 2 of our consolidated financial statements included in Item 8 of this Form 10-K.

 

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.

Item 8. Financial Statements and Supplementary Data

Index to the Consolidated Financial Statements

 

Board of Directors

Aoxing Pharmaceutical Co., Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Aoxing Pharmaceutical Co., Inc. and Subsidiaries as of June 30, 2016 and 2015 and the related consolidated statements of operations and comprehensive loss, shareholders' 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 consolidated financial statements based on our audits.

We conducted our audit in accordance with the 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aoxing Pharmaceutical Co., Inc. and Subsidiaries at June 30, 2016 and 2015, 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 of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company accumulated a large deficit and a working capital deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

/s/ BDO China Shu Lun Pan Certified Public Accountants LLP

Shanghai, People's Republic of China

October 5, 2016

 

AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		June 30,				June 30,
		2016				2015
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	6,912,100			$	5,371,545
Accounts receivable, net of allowance for doubtful accounts of $1,940,354 and $1,364,330, respectively			11,200,418				5,854,055
Inventories, net			2,841,690				3,240,026
Prepaid expenses and other current assets			5,912,555				6,630,407
TOTAL CURRENT ASSETS			26,866,763				21,096,033
LONG-TERM ASSETS:
Property and equipment, net of accumulated depreciation			25,603,734				28,651,717
Deferred income tax			1,878,595				2,711,610
Other intangible assets, net			1,878,299				484,857
Investment in joint venture			4,200				96,475
TOTAL LONG-TERM ASSETS			29,364,828				31,944,659
TOTAL ASSETS		$	56,231,591			$	53,040,692
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings		$	11,070,966			$	12,484,356
Accounts payable			2,709,819				3,625,139
Notes payable			-				1,631,641
Loan payable – bank			14,372,630				16,316,408
Current portion of loan payable - related parties			13,317				5,793
Current portion of loan payable - others			15,048				-
Accrued expenses and other current liabilities			9,633,750				7,176,325
TOTAL CURRENT LIABILITIES			37,815,530				41,239,662
LONG-TERM LIABILITIES:
Loan payable - related parties			-				8,158
- others			-				1,361,199
Deferred income			340,089				368,751
TOTAL LONG-TERM LIABILITIES			340,089				1,738,108
Common stock, par value $0.001, 100,000,000 shares authorized, 76,209,195and 69,839,259 shares issued and outstanding on June 30, 2016 and June 30, 2015, respectively			76,209				69,839
Additional paid in capital			73,629,751				66,457,250
Accumulated deficit			(56,293,745	)			(58,354,968	)
Accumulated other comprehensive income			1,723,740				3,066,026
TOTAL SHAREHOLDERS' EQUITY OF THE COMPANY			19,135,955				11,238,147
NON-CONTROLLING INTEREST IN SUBSIDIARIES			(1,059,983	)			(1,175,225	)
TOTAL EQUITY			18,075,972				10,062,922
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	56,231,591			$	53,040,692

 

 See accompanying notes to the consolidated financial statements

 

 

 See accompanying notes to the consolidated financial statements

AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

See accompanying notes to the consolidated financial statements

1                BUSINESS DESCRIPTION

  

Aoxing Pharmaceutical Co., Inc. ("the Company" or "Aoxing Pharma") is a specialty pharmaceutical company specializing in research, development, manufacturing and distribution of a variety of narcotic, pain-management, and addiction treatment pharmaceutical products.

As of June 30, 2016, 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").  As of June 30, 2016, the Company owned 95% of the issued and outstanding common stock of Hebei.

Since 2002, Hebei has been engaged in developing narcotic, pain management, and addiction treatment pharmaceutical 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 CFDA to assure the strictly regulated availability to medical professionals throughout China of its narcotic drugs and pain medicines.

In April, 2008, Hebei completed the acquisition of 100% of the registered capital of Lerentang ("LRT").  LRT was engaged in the manufacture and distribution of Chinese traditional medicines focusing on pain management related therapeutics within China.  By 2011 the manufacturing operations of LRT had been completely integrated into Hebei.  Currently over 90% of the Company's revenues derive from one herbal extraction, obtained from the acquisition of LRT, which is used to alleviate oral/dental and bone pain. 

Investment in Joint Venture ("JV")

On April 26, 2010, Aoxing Pharma and Johnson Matthey Plc ('JM") entered into an agreement to establish a joint venture focused on research, development, manufacturing and marketing of active pharmaceutical ingredients for narcotics and neurological drugs for the China market. The joint venture represents a significant new opportunity for both companies to expand their business in the rapidly growing pharmaceutical market in China. Under the terms of the agreement, Macfarlan Smith Ltd, a wholly owned subsidiary of Johnson Matthey Plc, headquartered in the United Kingdom, will contribute technology expertise and capital to the joint venture. Hebei will contribute capital, fixed assets and related active pharmaceutical ingredients manufacturing licenses. The joint venture company is called Hebei Aoxing API Pharmaceutical Company, Ltd. ("API"). Hebei Aoxing has a 51% stake in API, while Macfarlan Smith (Hong Kong) Ltd (a wholly owned subsidiary of JM) holds 49%. Each company has equal representation on the board of directors that will oversee a management team responsible for corporate strategies and operations. The new joint venture is located on the Hebei campus in Xinle City, 200 kilometers southwest of Beijing. On March 10, 2010, the joint venture obtained a business license from the City Industry & Commercial Administrative Bureau. The Company accounts for its investment in the Joint Venture under the equity method of accounting.

     

2                SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated. These consolidated 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).

Use of estimates in the preparation of financial statements

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America 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 consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates reflected in the consolidated financial statements include, but are not limited to, the recoverability of the carrying amount and estimated useful lives of long-lived assets, allowance for accounts receivable, realizable values for inventories, valuation allowance of deferred tax assets, impairment assessment of goodwill, and share-based compensation expenses. Management makes these estimates using the best information available at the time the estimates are made. However, actual results when ultimately realized could differ significantly 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 balances of allowance for doubtful accounts are $1,940,354 and $1,364,330 at June 30, 2016 and 2015 respectively. The Company recorded bad debt expense of $576,024 for the year ended June 30, 2016 and bad debt written back of $204,597 for the year ended June 30, 2015, respectively.

Inventories, net

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. The Company wrote-off $118,846 of obsolete inventory during the year ended June 30, 2016. The Company charged $108,601 against the allowance for obsolete inventory during the year ended June 30, 2015. For the years ended June 30, 2016 and 2015, the Company's allowance for obsolete inventory is $584,674 and $633,948, respectively.

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.

Construction in progress is stated at cost, which includes the cost of construction, acquisition of plant and equipment and other direct costs attributable to the construction. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction.

All land in the PRC is owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time. Thus, all of the Company's land purchases in the PRC are considered to be leasehold land and are stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreements on a straight-line basis, which is 50 years and they will expire in 2053.

Maintenance, repairs and minor renewals are charged to expense when incurred. Replacements and major renewals are capitalized.

Estimated useful lives are as follows:

 

Intangible assets

Definite lived intangible assets include drug permits recorded at cost less accumulated amortization and any recognized impairment loss. The drug permits were acquired in 2008 when the Company purchased LRT and are amortized over their estimated useful life of 15 years on a straight-line basis. In addition, the Company acquired the intellectual properties relating to Lorcaserin Hydrochloride, Caffeine tablets and Caffeine buccal tablets, and Buprenorphine/naloxone through issuance of the Company's common stock. An intangible asset that is subject to amortization shall be reviewed for impairment in accordance with the Impairment or Disposal of Long-Lived Assets ASC 360-10. In accordance with Accounting Standards Codification ("ASC") Topic 360-10-5, "Impairment or Disposal of Long-Lived Assets", the Company performs an intangible asset impairment test for its definite-lived intangibles whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  The intangible assets balance as of June 30, 2016 and June 30, 2015 were $1,878,299 and $484,857 respectively.

Revenue Recognition

In accordance with the ASC Topic 605, "Revenue Recognition", the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers. The agreements with customers do not contain any rights of return other than for goods that fail to meet the specifications provided by the customer or other quality problems. The Company has not experienced any significant returns from customers and accordingly, in management's opinion, no reserve for returns is provided.

The Company derives revenues from the sale of pharmaceutical products. The Company recognizes its revenues net of value-added taxes ("VAT"). The Company is subject to VAT which is levied on the majority of the products at the rate 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

 

The Company recognizes revenue from the sale of products upon customers' receipt of the shipment at the customers' facility or upon when the transfer of title and risk of loss has transferred to the customer. The Company has distributor arrangements with certain parties for sale of its pharmaceutical products. The distributor agreements do not provide chargeback, price protection, or stock rotation rights.

Research and Development

Research and development is charged to expense as incurred.

Share-Based Compensation

Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period.  The Company's policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.

Impairment of long lived assets

In accordance with the provisions of ASC Topic 360-10-5, "Impairment or Disposal of Long-Lived Assets," all long-lived assets such as property, plant and equipment, land use rights and intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount 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.

 

Income taxes

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, "Income Taxes." Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity's financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.

 

ASC Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.

Non-controlling interest

Non-controlling interests in our subsidiaries are recorded in accordance with the provisions of ASC Topic 810, "Consolidation", and are reported as a component of our equity, separate from the parent's equity. Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the non-controlling interests are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, If any, will be reported at fair value with any gain or loss recognized in earnings.

Under ASC 810-10-45-21, losses attributable to the parent and the non-controlling interest in a subsidiary may exceed their interests in the subsidiary's equity. The excess, and any further losses attributable to the parent and the non-controlling interest, shall be attributed to those interests. That is, the non-controlling interest shall continue to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance

Currency translation

Since the Company operates primarily in the PRC, the Company's functional currency is the Chinese Yuan ("RMB") while the reporting currency is the United States Dollars ("USD"). 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.

Fair value of financial instruments

The Company has adopted ASC Topic 820, "Fair Value Measurement and Disclosure", which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.

The carrying amount of cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short term nature of these items.

 

As of June 30, 2016, the Company does not have any assets or liabilities that are measured on a recurring basis at fair value. The Company's short-term borrowings, loans payable, related party notes payable and unrelated party notes payable that are considered Level 2 financial instruments measured at fair value on a non-recurring basis as of June 30, 2016. 

 

As of June 30, 2016, the Company does not have any level 3 financial instruments. The Company uses the discounted cash flow approach when determining fair values of its non-recurring fair value measurements when required. We determine the fair value of our goodwill for purposes of comparing to the carrying value on at least an annual basis. Our goodwill would be adjusted to fair value if it is deemed to be impaired. Certain unobservable units for these assets are offered quotes, lack of marketability, long-term revenue growth rates and discounts rates. For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a significantly lower or higher fair value measurement. In general, a change in the long-term growth rate of our Hebei Aoxing business unit could negatively affect the fair value of our goodwill.

 

Comprehensive income

ASC Topic 220, "Comprehensive Income", establishes standards for reporting and display of comprehensive income or loss, its components and accumulated balances. Comprehensive income or loss as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income or loss, as presented in the accompanying statement of changes in shareholders' equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit

Earnings per share

Basic earnings per common share are computed on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed on the basis of the weighted average number of common shares and dilutive securities (such as warrants and convertible preferred stock) outstanding. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.

 

Statement of cash flows

In accordance with the provisions of Accounting Standards Codification on "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

ASC Topic 280, "Segment Reporting" establishes standards for reporting information about operating segments on a basis consistent with the Company's internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. For the year ended June 30, 2016, ASC 280 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.

Recent accounting pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" ("ASU 2015-14") in August 2015. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.  Further to ASU 2014-09 and ASU 2015-14, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" ("ASU 2016-08") in March 2016, ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" ("ASU 2016-10") in April 2016, and ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" ("ASU 2016-12"), respectively.  The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers.  ASU 2016-10 clarifies guideline related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard.  The updates in ASU 2016-10 include targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders.  It seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis.  ASU 2016-12 addresses narrow-scope improvements to the guidance on collectibility, non-cash consideration, and completed contracts at transition.  Additionally, the amendments in this ASU provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.  The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 are the same as ASU 2014-09.  We are currently in the process of evaluating the impact of the adoption of ASU 2014-09, ASU 2016-08, ASU 2016-10 and ASU 2016-12 on our financial statements.

In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" ("ASU 2015-11"). The amendments in this update require an entity to measure inventory within the scope of ASU 2015-11 (the amendments in ASU 2015-11 do not apply to inventory that is measured using last-in, first-out or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out or average cost) at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is uncharged for inventory measured using last-in, first-out or the retail inventory method. The amendments in ASU 2015-11 more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards ("IFRS"). ASU 2015-11 is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in ASU 2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We do not expect the adoption of ASU No. 2015-11 to have a material impact on our financial statements.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Currently, the Company is evaluating the impact of our pending adoption of ASU 2014-09 and ASU 2015-14 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard in year 2018.

In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17").  Topic 740, Income Taxes, requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position.  Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting.  Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference.  To simplify the presentation of deferred income taxes, the amendments in ASU 2015-17 require that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position.  For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  We do not expect the adoption of ASU 2015-17 to have a material impact on our financial statements.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01").  The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee).  The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.  In addition the amendments in this update eliminate the requirement for to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public entities.  For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is not permitted.  We do not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02").  The amendments in this update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases.  Topic 842 specifies the accounting for leases.  The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease.  The main difference between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases under Topic 840.  Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP.  The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities.  Early application of the amendments in ASU 2016-02 is permitted.  We are currently in the process of evaluating the impact of the adoption of ASU 2016-02 on our financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, requiring the recognition of the income tax effects of stock awards in the income statement when the awards are settled and allowing the Company to repurchase more of an employee's shares than allowed under current guidance, without triggering liability accounting. This ASU also addresses simplifications related to statement of cash flows classification and accounting for forfeitures. This ASU is effective for the Company beginning in the first quarter of 2017 and allows for early adoption. The Company is currently evaluating the impact this ASU will have on its Consolidated Financial Statements.

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13").  Financial Instruments—Credit Losses (Topic 326) amends guideline on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities.  For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses.  The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected.  For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down.  ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income.  The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.  The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  We are currently evaluating the impact of the adoption of ASU 2016-13 on our financial statements.

These ASUs are effective for the Company beginning in the first quarter of 2018, allow for early adoption in the first quarter of 2017 and may be applied using either a full retrospective approach or a modified retrospective approach. The Company is currently evaluating the method of adoption and the impact these ASUs will have on its Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Gross versus Net), clarifying the principal versus agent guidance in the new revenue recognition standard, by revising the indicators to focus on evidence that the company is a principal.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, reducing the complexity when applying the guidance for identifying performance obligations and clarifying how to determine whether revenue related to a performance obligation for an intellectual property license is recognized over time or at a point in time.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, clarifying certain core recognition principles including collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition.

3                 GOING CONCERN

We have incurred operating losses in the past and had an accumulated deficit of $56.3 million as of June 30, 2016. In addition, we had negative working capital of $10.9 million as of June 30, 2016, although this is a significant improvement from the negative working capital of $20.1 million as of June 30, 2015. Currently and historically, the Company has managed to operate the business with negative net working capital. The Company's negative working capital is primarily due to our accumulated deficit, which we funded by short-term bank loans.

The Company is able to operate with negative net working capital because of loans from banks and related parties. The Company believes future positive operating cash flows, continued support from related parties, and the ability to continue to roll over short-term debt, taken together, provide adequate resources to fund ongoing operations in the foreseeable future. The Company may also seek equity financing to replace both short-term and long-term debts. The Company believes that the increased market demand for its main products in the near term and the sales from several new products in future years will produce substantial positive cash flow.

Management of the Company believes that the Company's large negative working capital will continue to improve during fiscal year 2017. Management expects the improvement to come from improved operating results, by extending short term into longer term loans, and by selling equity and converting debt to equity. Management anticipates that these improvements will enable the Company to reduce current high interest expenses and fund on-going operations.  The management of the Company has taken a number of actions and will continue to address this situation in order to restore the Company to a sound financial position going forward. In September 2015, the Company sold 2,352,941 shares of common stock and 1,764,706 common stock purchase warrants to an institutional investor and also issued warrants to purchase 141,176 shares of common stock to the placement agent and its affiliates. The company received a net proceed of $2,739,000. Each warrant will permit the holder to purchase one share of common stock from the Company at $1.74 per share. The Company will receive a total of $3,316,234.68 if the warrants are exercised. In November 2015, the Company converted $2.66 million high interest bearing debt into 2,046,995 shares of common stock.

4                 INVENTORIES, NET

Inventories consist of the following:

 

The allowance for obsolete inventory as of June 30, 2016 and 2015 was $584,674 and $465,828, respectively.

5                PROPERTY AND EQUIPMENT, NET

Property, plant and equipment, net, consisted of the following:

 

Depreciation expense for the years ended June 30, 2016 and 2015 were $508,775 and $634,344, respectively.

 

6                 EQUITY-METHOD INVESTMENT IN JOINT VENTURE

The Company accounts for its investment in API (see Note 1) under the equity method of accounting.

Summarized unaudited financial information for our investment in API, assuming a 100% ownership interest, is as follows:

 

The Company recorded a loss on investment of $87,500 and $93,352 for the years ended June 30, 2016 and 2015 respectively for its 51% (50% control right) share of API.

7                SHORT-TERM BORROWING

Short-term borrowing consists of the following:

 

(a) A non-interest bearing note payable to Shijiazhuang Finance Bureau, an agency of a local government, due on demand.

(b) A one-year loan from Shijiazhuang Construction Investment Group, disbursed through China Construction Bank. The notes bear an annual interest rate of 12%. $1,860,234 was due on October 25, 2015 and was extended to October 23, 2016. $3,100,391 was due on July 12, 2015 and was extended to October 25, 2015 and then further extended to October 25, 2016. The notes were secured by certain registered trademarks and renewal certificates relating to Aoxing's Zhongtong'an capsule.

(c) The balance of $2,304 as at June 30, 2015 represents unpaid portion of interest which was already repaid in fiscal 2016.

(d) A six-month term loan from Hebei Henghui Investment Management Co., Ltd. The note bears an annual interest rate of 10% and has been extended to October 20, 2016.

(e) A short term loan from TianJin Heng Xing Mirco Finance Bureau. The note bears an annual interest rate of 20.04%, and was extended to November 18, 2016.

(f) A short term loan from Xinle State-Owned Assets Supervision and Administration Commission. This loan bears an annual interest rate of 9.6%. The term was from January 25, 2016 to June 25, 2016 and was extended to March 31, 2017.

 

8                 LOAN PAYABLE – BANK

Loan payable – bank consist of the following loans collateralized by assets of the company:

 

 

9                 LOAN PAYABLE – OTHER

Loan payable – other consist of loans from unrelated third-parties, bearing interest at an average rate of 10.0% per annum as of June 30, 2016 and June 30, 2015.  

10               LOAN PAYABLE – RELATED PARTIES

Loan payable – related parties bears interest at an average rate of 10.0% per annum as of June 30, 2016 and June 30, 2015.

11               NOTES PAYABLE

 

The balance of deferred income is the result of government grants received for the improvement of the production line of the Zhongtong'an product. As the project was, this government grants were transferred from construction in progress (CIP) to building and building improvements.  The government grants, which is recorded as deferred income, are recognized as subsidy income on a systematic basis (straight-line method) over the useful life of the fixed asset, which is 35 years in this case.

13              ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and taxes consist of the following:

14              STOCK OPTIONS

On January 1, 2015, the Company issued a total of 300,000 common stock purchase options to management. This stock compensation grant was valued at $74,691 and the Company recorded $22,822 stock option compensation expense for the year ended June 30, 2015.

The unrecognized compensation expense for the Company as of June 30, 2015 and 2016 were $51,869 and $18,673 respectively.

The Company calculated the estimated fair value of the options of the grant date using the Black-Scholes Option Pricing Model with the following assumptions:

The model requires the input of subjective assumptions including the expected stock price volatility and the expected dividend yield. The Company uses historical experience of employee turnover and future expectation to estimate forfeiture rate. For expected volatilities, the Company has made reference to historical volatilities of the Company's stock. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury Bills yield in effect at the time of grant.

On January 5, 2016, the Board of Directors granted options for a total of 590,000 shares of common stock to 25 employees of the Company. The options are exercisable at a price of $.64 per share, which was the closing price for the common stock on January 4, 2016. Each option has a term of five years. The options vested on June 23, 2016 when they were approved by the shareholders of the Company. The Company calculated the estimated fair value of the options of the grant date using the Black-Scholes Option Pricing Model with the following assumptions:

A summary of option activity as of June 30, 2016 and 2015, and changes during the years then ended is as followings:

 

15               ISSUANCE OF COMMON STOCK

 

On September 5, 2014, the Company issued 11,862,278 shares of common stock in satisfaction of $4.6 million in debt. The shares were valued at $0.39 per share, which exceeded the six month average share price as well as the market price at time of issuance. Paid in capital was increased by $4,614,426 as a result of the exchange.

 

On December 23, 2014 the Company sold to 22 of its employees a total of 4,527,832 shares of common stock for a total of $1,177,236 or $0.26 per share, which exceeded the market price on October 4, 2014, when the contract of sale was made.

 

On February 3, 2015, the Company issued 300,000 shares of common stock to management at $0.33 per share. The shares are equally vested on January 1, 2016, January 1, 2017 and January 1, 2018. The Company recorded $30,250 stock compensation expense for the year ended June 30, 2015 and the unrecognized compensation expense was $68,750.

 

On February 3, 2015, the Company issued 40,000 shares of common stock to independent directors at $0.39 per shares for services rendered by them.

 

 

 

 

On February 3, 2015, the Company issued 1,704,915 shares of its common stock to six investors, each of whom is either an employee or a consultant to the Company. The average purchase price for the shares was $0.32 per share.

 

On March 12, 2015, the Company issued 480,000 shares of its common stock to a creditor at $0.5 per share to offset a loan payable.

 

On April 8 2015, the company sold 508,000 shares of common stock to officers and employees of the Company at a price of $1.36 per share, which exceeded the market price at time of issuance

 

On April 8 2015, the Company also issued 521,412 shares of common stock at a price of $1.36 per share to a creditor in satisfaction of $709,120 debt.

 

On September 10, 2015, the Company issued 60,000 shares of common stock to independent directors at $2.01 per share for services rendered by them.

 

On September 30, 2015 the Company issued 2,352,941 shares of common stock and 1,764,706 common stock purchases warrants pursuant to a securities purchase agreement dated as of September 24, 2015. The purchaser was an institutional investor. Each warrant will permit the holder to purchase one share of common stock from the Company for a price of $1.74 per share. The warrants will be exercisable from March 31, 2016 until March 31, 2021. Cashless exercise of the warrants is permitted only if there is no effective registration statement permitting resale of the common shares underlying the warrants.

 

The proceeds from the offerings were $2,739,000, net of issuance costs of $261,000 paid to the placement agent. The warrants were classified as equity at the date of issuance. They contained no provision that would require liability classification, and can be exercised on a cashless basis. Accordingly, they were classified as equity at the date of issuance. The proceeds were allocated between common stock and warrant, based on relative fair value. The issuance cost was recorded as a reduction of additional paid in capital.

 

In connection with the aforesaid sale, the Company issued to the placement agent and its affiliates warrants to purchase 141,176 shares of common stock. The warrants issued to the placement agent and its affiliates are substantially identical to the warrants sold to the institutional investor.

The fair value of these warrants, which amounted to $175,150, was classified as equity at the date of issuance and recorded as an offset to the proceeds from the issuance of the shares and warrants.

 

The fair value of the warrants issued was estimated by using the Black-Scholes-Merton Option Pricing Model with the following assumptions:

 

		For the year ended  June 30, 2016
		Investor
Stock price			0.64
Exercise price			1.74
Expected life in years			4.2
Annualized Volatility			140.71	%
Annual Rate of Quarterly Dividends			1.65
Discount Rate - Bond Equivalent Yield			1.01

 

 

 

 

 

 

The Company applied its best judgment to estimate key assumptions in determining the fair value of the warrants on the date of issuance. The Company used historical data to estimate stock volatilities. The risk-free rates are consistent with the terms of the warrants and are based on the United States Treasury yield curve in effect at the time of issuance.

 

The weighted average fair value of warrants granted for the year ended June 30, 2016 was $0.49 per share. No warrants were exercised, cancelled or expired during the period ended June 30, 2016.

 

On November 4, 2015, the Company reached agreement with three of its creditors to convert $2.66 million high interest bearing debt into 2,046,995 shares of common stock. The shares were valued at $1.30 per share and will be restricted under Rule 144.

 

On January 5, 2016 the Board of Directors approved three technology acquisition agreements made by the Company during December 2015. Pursuant to the agreements, the Company (a) issued 800,000 shares of common stock and paid $123,000 to acquire technology relating to the formulation of Lorcaserin Hydrochloride for $0.66 per each stock, (b) issued 500,000 shares of common stock and paid $77,000 to acquire certain technology relating to the formulation of caffeine tablets for $0.66 per each stock, and (c) issued 500,000 shares of common stock and paid $77,000 to acquire certain technology relating to the formulation of Buprenorphine/ Naloxone for $0.71 per each stock. The share price was determined by the Company's stock price at the issuance date.

 

On January 5, 2016 the Board of Directors approved two consulting agreements pursuant to which a total of 110,000 shares of common stock were issued in exchange for media and investor relations consulting services for $0.66 per each stock based on the Company's stock price at the issuance date.

 

16              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.

The reconciliation of income tax at the U.S. statutory rate to the Company's effective tax rate is as follows:

 

 

The provisions of income taxes (credit) are summarized as follows:

The tax effects of temporary differences that give rise to the Company's net deferred tax asset as of June 30, 2016 and 2014 are as follows:

The Company's net operating loss was as follows

As of June 30, 2015, the Company has recognized deferred tax assets of $1,878,595. The Company's loss carry forwards for the past 5 years produced a significant amount of the deferred tax assets and the realization of tax loss carry forwards are deemed to be probable. Therefore, the Company determined it was appropriate under US GAAP to recognize the deferred tax assets during the Fiscal 2016.

For the year ended June 30, 2016 and 2015, the Company did not have any interest and penalties associated with tax positions. As of June 30, 2016 and 2015, the Company did not have any significant unrecognized uncertain tax positions.

17              CONCENTRATIONS

 

Sales to two major customers were 13% and 5% of total sales for the year ended June 30, 2016.  Sales to two major customers were 7% and 5% of total sales for the year ended June 30, 2015.

 

Sales of one major product represented approximately 85% and 95% of total sales for the years ended June 30, 2016 and 2015, respectively.

Two major customers accounted for 8% and 7% of outstanding accounts receivable as of June 30, 2016. Two major customers accounted for 4% and 0.1% of outstanding accounts receivable as of June 30, 2015. 

 18             SUBSEQUENT EVENTS

In accordance with ASC 855 "Subsequent Events", which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, we have evaluated all events or transactions that occurred after June 30, 2016 up through the date we issued the consolidated financial statements and has determined that there was no other material event that occurred after the date of the balance sheets included in this report.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable

 

Item 9A.  Controls and Procedures

We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to provide reasonable assurance that information required by Aoxing Pharma 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 Aoxing Pharma is required to disclose in the reports it files with the Commission is accumulated and communicated to our Certifying Officers as appropriate to allow timely decisions regarding required disclosure.

The Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this annual report (the "Evaluation Date"). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective.

Changes in Internal Controls.

There have been no changes in our internal control over financial reporting during the fiscal 2016 that have materially affected, or are reasonably likely to materially affect, our 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, 2016, using the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") Internal Control –Integrated Framework (1992) as a basis for our assessment.

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 did not identify material weakness in our internal control over financial reporting.   Accordingly, management's assessment is that the Company's internal controls over financial reporting were effective as of June 30, 2016.

Because we are a smaller reporting company, this Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  

Item 9B.   Other Information

None.

 

PART III

The following individuals are the members of Aoxing Pharma's Board of Directors and/or its executive officers.

 

Board of Directors
 

Our Board oversees our business affairs and monitors the performance of our management. Each director and executive officer holds office until his successor is duly elected and qualified, he resigns or he is removed in the manner provided by our Bylaws. All officers are appointed and serve at the discretion of the Board. All of our officers devote their full-time attention to our business.

Biographical Information of Directors and Executive Officers 

 

Biographical information with respect to the Company's current executive officers and directors is provided below.

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 (all in the PRC). Mr. Yue's day to day leadership, as chief executive officer of the Company, provides him with intimate knowledge of our operations.

Jun Min was one of the founders of American Oriental Bioengineering Company, which is the largest shareholder of Aoxing Pharma. 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. Mr. Min earned a Bachelor's Degree with a concentration in Business Management from the Harbin Broadcast & Television University in 1986, and an Executive Master's in Business Administration degree from Preston University in 2005. Mr. Min brings his extensive experience in operations management in China to the Board and the Company.

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 ("CFDA"). 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 CFDA. 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 brings his technical, industry and operational expertise to the Board.

Yang Li, Mr. Yang Li is a member of the institute of chartered accountants of Canada and a member of the institute of chartered accountants of Ireland. She previously worked for PricewaterhouseCoopers LLP, one of the big four accounting firm. She leaded audit team to provide audit services for many U.S. and Canadian public company. After her return to China, she has assisted a well-known company successfully listed in the U.S. stock exchange market. She also led a team that provided audit and tax services to many state-owned enterprises. Ms. Yang received her master's degree in accounting from University College Dublin of the National University of Ireland.   Ms. Li brings to the Board a thorough understanding of U.S. accounting principles and practices, and the knowledge of business gained from her experience as an auditor.

 

Yuelin Zhang brings to the board more than 30 years of experience in the pharmaceuticals industry in China. Mr. Zhang has been the general manager for Shijiazhuang Xinantai Pharmaceutical Logistics Limited since 2012. From 2007 to 2012 Mr. Zhang was employed as deputy general manager by Hebei Fuge Pharmaceutical Limited. Prior to joining Hebei Fuge Pharmaceutical Limited, Mr. Zhang had been general manager for Shijiazhuang Yuanzheng Keyun Limited and, before that, Wuji Huamao Pharmaceutical Limited.

 

Dr. Zheng James Chen joined Aoxing Pharma in 2016. From 2012 to 2016 Dr. Chen was employed as the CFO of Origin Agritech Limited (NASDAQ: SEED), an agricultural biotechnology company headquartered in Beijing. From 2008 to 2012 Dr. Chen was employed as an investment manager by Abu Dhabi Investment Authority. From 2003 to 2008 Dr. Chen worked as an equity research analyst with three investment banking firms: Fulcrum Group Partners, Morgan Joseph and BB&T Capital Markets. Dr. Chen is currently a Director and the Chairman of the Audit Committee of the Board of Directors of China Finance Online (NASDAQ: JRJC), and the Chairman of the Board of Supervisors of Linjiang Chemicals, which is listed on the New Third Board in China. Dr. Chen received his Ph.D. Degree in Chemical Engineering from the University of Connecticut in 1996 and his M.B.A degree from New York University in 2004.

 

Guoan Zhang has been the Company's Senior Vice President of Finance since June 2010. Mr. Zhang also served as the Company's Acting Chief Financial Officer from July 2012 to December 2014. Prior to the appointment of Mr. Zhang as the Company's Senior Vice President of Finance, Mr. Zhang was the Senior Director of Financial Operation of the Company between January 2009 and February 2010. Mr. Zhang was Vice General Manager of Finance of LRT between 2007 and 2008. Mr. Zhang graduated from Heilongjiang School of Business and he is a Certified Public Accountant in China.

 

Guirong Zhou was appointed President of Research and Development in July 2012. Prior to that, she was deputy director in our R&D department. Ms. Zhou joined the company in 2011 from Shijiazhuang Pharmaceutical Company, where she worked there since 1985 and  held various senior positions especially in R&D   Ms. Zhou has been involved in the registration of many new drug certificates and product licenses, including tablet, injection, transfusion, soft capsule, drop pills, lyophilized powder, quick release preparation and control release preparation. Among all the achievements, Ms. Zhou was the project leader in bringing Pentoxifylline Sustained Release Tablets and Acemetacine capsule to market and they are leading products in China. Ms. Zhou is an academic advisor in pharmaceutical engineering at Tianjin University and Hebei University of Science and Technology.

There are no material legal proceedings to which any director, executive officer or affiliate of the Company, any owner of record or beneficial owner of more than five percent of any class of voting securities of the Company, or any associate of any such director, executive officer, affiliate or security holder is a party adverse to the Company or has a material interest adverse to the Company. There are no family relationships between any of the Company's executive officers or directors and there are no arrangements or understandings between a director and any other person pursuant to which such person was elected as director.

 

No director or officer of the Company has, during the last 10 years, been subject to or involved in any legal proceedings described under Item 401(f) of Regulation S-K, been convicted of any criminal proceeding (excluding traffic violations or similar misdemeanors), or been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, United States federal or state securities laws or finding any violations with respect to such laws.

There were no material changes to the procedures by which shareholders may recommend nominees to the Board since the Company's last disclosure of such policies.

Board Committees

Our Board has three committees: Audit Committee, Compensation Committee, and the Nominating and Governance Committee.  The membership and responsibilities of these current committees are summarized below.

Below are the current committee memberships and other information about the Board committees. The membership of each of the standing committees of the Board is comprised solely of independent directors, as described below.

 

Audit Committee
 

Yang Li currently serves as Chairman of the Audit Committee. The Board has determined that Yang Li is an audit committee financial expert as defined by Item 407(d)(5) of Regulation S-K under the Securities Act and is "independent" as defined under applicable rules and regulations. Guozhu Xu and Yuelin Zhang are the other members of the Audit Committee. The Board has determined that each of the members of the Audit Committee satisfies the independence requirements of the NYSE MKT.

The purposes of the Audit Committee are to assist the Board in its general oversight of Aoxing's financial reporting, internal controls and audit functions.  As described in the Audit Committee Charter, the Audit Committee's primary responsibilities are to oversee on behalf of the Board:

 

 

 

 

Compensation Committee
 

Guozhu Xu serves as Chairman of the Compensation Committee. Yang Li and Yuelin Zhang are the other members of this Committee. The Board has determined that each of the members of the Compensation Committee satisfies the independence requirements of the NYSE MKT. The purpose of the Compensation Committee is to assist the Board in determining the compensation of the Chief Executive Officer and make recommendations to the Board with respect to the compensation of the Chief Financial Officer, other executive officers of the Company and the independent directors.  In furtherance of this purpose, the Compensation Committee has the following authority and responsibilities: 

 

The CEO of the Company may not be present during voting or deliberations of the Compensation Committee with respect to his compensation. Moreover, the Compensation Committee has the authority to delegate any of its responsibilities to subcommittees as it may deem appropriate in its sole discretion.  The Compensation Committee also annually reviews its own performance. The Committee may retain and receive advice, in its sole discretion, from compensation consultants. The Compensation Committee does not currently employ compensation consultants in determining or recommending the amount or form of executive and director compensation. None of the members of our Compensation Committee is one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board or Compensation Committee.

Nominating and Corporate Governance Committee

 

Guozhu Xu serves as Chairman of the Nominating and Corporate Governance Committee.  Yang Li and Yuelin Zhang are the other members of this Committee. The Nominating and Corporate Governance Committee has the following responsibilities as set forth in its charter:

 

 

 

 

Code of Ethics

The Company has adopted a Code of Ethics that applies to its executive officers and directors.  A copy of the Code of Ethics was filed as Exhibit 14 to the Current Report on Form 8-K filed on November 30, 2009.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our officers, directors and persons who own more than 10% of a registered class of our equity securities within the specified time periods to file certain reports of ownership and changes in ownership with the SEC.

Based solely upon a review the Forms 3 and Forms 4 furnished to the Company pursuant to Rule 16a-3 under the Exchange Act during the Company's most recent fiscal year, it is the Company's understanding that all such required filings have been made on a timely basis, except that Zhenjiang Yue was late in filing one Form 4.

 

The following table sets forth all compensation earned by Zhenjiang Yue for services as Chief Executive Officer during the years ended June 30, 2016, 2015 and 2014 and by Zheng James Chen for services as Chief Financial Officer during the year ended June 30, 2016. There were no other executive officers whose total salary and bonus for the fiscal year ended June 30, 2016 exceeded $100,000.

 

Summary Compensation Table

 

Employment Contracts, Termination of Employment and Change-in-Control Arrangements
 

The Company has employment agreements with the following named executive officer. The following is a description of those agreements.
 

Executive Employment Agreement dated as of January 13, 2010 with Zhenjiang Yue.  This agreement provides that Mr. Yue will serve as the Company's Chief Executive Officer.  The Company agreed to pay Mr. Yue an annual salary of 1 million Chinese Yuan (approximately US$158,000).  The Company may also pay him a cash bonus, within the discretion of the Board.  In addition, subject to the approval of the Board, Mr. Yue is eligible to receive equity based award in the form of restricted common stock, stock option or other securities by the Company from time to time.  The term of the agreement ended on January 13, 2014, but it renewed for consecutive one year terms unless affirmatively terminated by either party.  The Company can terminate the agreement at any time without cause, but will be liable for six months' severance pay.   The agreement contains a covenant of non-competition by Mr. Yue for one year after termination, unless he is terminated without cause or he terminates for good reason.

Executive Employment Agreement dated as of January 28, 2016 with James Chen.  This agreement provides that Dr. Chen will serve as the Company's Chief Financial Officer.  The Company agreed to pay Dr. Chen an annual salary of US$330,000.  Dr. Chen is entitled to choose to receive common stock in lieu of salary for one or more periods of one, three or six months, with the shares valued at market price at the beginning of each such period The Company also grant Dr. Chen 300,000 stock options at exercise price of $0.71 vesting over 3 years.  The term of the agreement ends on January 28, 2019. The Company can terminate the agreement at any time without cause, but will be liable for two months' severance pay.   The agreement contains a covenant of non-competition by Dr, Chen during the employment period.

Equity Grants in Fiscal 2016

The following tables set forth certain information regarding the stock options and restricted shares acquired by the Company's Executive Officer and Financial Officer during the year ended June 30, 2016 and those options held by them on June 30, 2016.

Option Grants in the Last Fiscal Year

 

Restricted shares Grants in the Last Fiscal Year

 

 Compensation of Directors

The members of the Board receive remuneration in cash and/or restricted shares of the common stock for the period of their duties as shown below:

 

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, 2016. The Board members have the option of receiving fees earned in cash or restricted stock.