10-Q 1 aoxing10q.htm AOXING PHARMACEUTICAL COMPANY, INC. 10Q 2015-12-31

United States
Securities and Exchange Commission
Washington, D. C. 20549

FORM 10‑Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 2015

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____

Commission File No. 1-32674

AOXING PHARMACEUTICAL COMPANY, INC.
 (Exact Name of Registrant as Specified in its Charter)

Florida
65-0636168
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer ID Number)
 

1098 Foster City Blvd., Suite 106-810, Foster City, CA 94404
(Address of Principal Executive Offices)
 
Issuer's Telephone Number: (646) 367-1747

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    X  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   X    No ____

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   X

APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:

As of February 5 2016, the number of shares outstanding of the Registrant's common stock was 76,209,195 with $.001 par value.


AOXING PHARMACEUTICAL COMPANY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2015

TABLE OF CONTENTS
 
   
Page No
Part I
Financial Information
 
     
Item 1.
Financial Statements:
 
     
 
Consolidated Balance Sheet – December 31, 2015 (unaudited) and June 30, 2015
2
     
 
Consolidated Statements of Operations and Other Comprehensive Income (Loss) – for the Three and Six Months Ended December 31, 2015 and 2014 (Unaudited)
3
     
 
Consolidated Statements of Cash Flows – for the Six Months Ended December 31, 2015 and 2014 (Unaudited)
4
     
 
Notes to Consolidated Financial Statements (Unaudited)
5
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
14
     
Item 3
Quantitative and Qualitative Disclosures about Market Risk
18
     
Item 4.
Controls and Procedures
18
     
Part II
Other Information
 
     
Item 1A
Risk Factors
19
     
Item 2
Unregistered Sale of Securities and Use of Proceeds
19
     
Item 3
Defaults Upon Senior Securities
19
     
Item 4
Mine Safety Disclosures
19
     
Item 5
Other Information
19
     
Item 6
Exhibits
19
     
Signatures 
20

1

AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
December 31,
   
June 30,
 
 
 
2015
   
2015
 
  ASSETS
 
(Unaudited)
   
 
CURRENT ASSETS:
 
   
 
Cash and cash equivalents
 
$
6,435,362
   
$
5,371,545
 
Accounts receivable, net
   
6,578,492
     
5,764,738
 
Notes receivable, net
   
23,103
     
89,317
 
Inventories, net
   
3,900,849
     
3,240,026
 
Prepaid expenses and other current assets
   
8,193,479
     
6,630,407
 
TOTAL CURRENT ASSETS
   
25,131,285
     
21,096,033
 
 
               
LONG-TERM ASSETS:
               
Property and equipment, net of accumulated depreciation
   
26,647,887
     
28,651,717
 
Deferred income tax
   
1,319,524
     
2,711,610
 
Other intangible assets, net
   
427,554
     
484,857
 
Investment in joint venture
   
53,210
     
96,475
 
TOTAL LONG-TERM ASSETS
   
28,448,175
     
31,944,659
 
TOTAL ASSETS
 
$
53,579,460
   
$
53,040,692
 
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
               
 
               
CURRENT LIABILITIES:
               
Short-term borrowings
 
$
11,038,551
   
$
12,484,356
 
Accounts payable
   
2,348,225
     
3,625,139
 
Notes payable
   
-
     
1,631,641
 
Loan payable – bank
   
14,939,856
     
16,316,408
 
Current portion of loan payable - related parties
   
13,494
     
5,793
 
Current portion of loan payable – others
   
15,402
     
-
 
Accrued expenses and other current liabilities
   
7,154,105
     
7,176,325
 
TOTAL CURRENT LIABILITIES
   
35,509,633
     
41,239,662
 
 
               
LONG-TERM LIABILITIES:
               
Loan payable - related parties
   
-
     
8,158
 
Loan payable – others
   
-
     
1,361,199
 
Deferred income
   
348,083
     
368,751
 
TOTAL LONG-TERM LIABILITIES
   
348,083
     
1,738,108
 
 
               
Common stock, par value $0.001, 100,000,000 shares authorized, 72,252,200 and 69,839,259 shares issued and outstanding on September 30, 2015 and June 30, 2015
   
74,299
     
69,839
 
Additional paid in capital
   
71,998,484
     
66,457,250
 
Accumulated deficit
   
(55,018,398
)
   
(58,354,968
)
Accumulated other comprehensive income
   
1,713,633
     
3,066,026
 
TOTAL SHAREHOLDERS' EQUITY OF THE COMPANY
   
18,768,018
     
11,238,147
 
 
               
NONCONTROLLING INTEREST IN SUBSIDIARIES
   
(1,046,274
)
   
(1,175,225
)
TOTAL EQUITY
   
17,721,744
     
10,062,922
 
 
               
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
53,579,460
   
$
53,040,692
 
 
See accompanying notes to the consolidated financial statements
2

 
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
 
(Unaudited)
 
 
 
 
For the three months ended
   
For the six months ended
 
 
 
December 31,
   
December 31,
 
 
 
2015
   
2014
   
2015
   
2014
   
SALES
 
$
8,195,839
   
$
6,430,701
   
$
16,940,661
   
$
10,955,783
   
COST OF SALES
   
1,726,592
     
1,624,853
     
3,484,671
     
3,012,386
   
GROSS PROFIT
   
6,469,246
     
4,805,849
     
13,455,990
     
7,983,397
   
 
                                 
OPERATING EXPENSES:
                                 
  Research and development expense
   
830,105
     
95,597
     
1,207,411
     
203,147
   
  General and administrative expenses
   
511,127
     
821,008
     
1,455,485
     
1,332,495
   
  Selling expenses
   
1,589,866
     
1,775,924
     
3,984,212
     
2,978,433
   
  Depreciation and amortization
   
128,126
     
140,801
     
259,656
     
280,076
   
      TOTAL OPERATING EXPENSES
   
3,059,224
     
2,833,331
     
6,906,764
     
4,794,151
   
 
                                 
INCOME FROM OPERATIONS
   
3,410,023
     
1,972,518
     
6,549,225
     
3,189,246
   
 
                                 
OTHER INCOME (EXPENSE):
                                 
  Interest expense, net of interest income
   
(979,906
)
   
(1,628,120
)
   
(1,908,936
)
   
(2,821,280
)  
  Gain on foreign currency transactions
   
24,753
     
0
     
83,345
      -    
  Equity in loss of joint venture, net
   
(14,474
)
   
(22,018
)
   
(38,765
)
   
(47,989
)  
  Subsidy income
   
157,266
     
279,573
     
205,027
     
279,573
   
     TOTAL OTHER EXPENSE
   
(812,362
)
   
(1,370,565
)
   
(1,659,329
)
   
(2,589,696
)  
 
                                 
INCOME BEFORE INCOME TAXES
   
2,597,661
     
601,952
     
4,889,897
     
599,550
   
 
                                 
Income tax expense
   
409,393
     
-
     
1,353,196
     
-
   
 
                                 
NET INCOME
   
2,188,268
     
601,952
     
3,536,700
     
599,550
   
 
                                 
Net income attributed to non-controlling interest in subsidiaries
   
119,633
     
34,784
     
200,129
     
40,251
   
INCOME ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY
   
2,068,635
     
567,169
     
3,336,571
     
559,299
   
 
                                 
OTHER COMPREHENSIVE INCOME (LOSS):
                                 
  Foreign currency translation adjustment
   
(753,581
)
   
7,900
     
(1,423,572
)
   
21,708
   
 
                                 
COMPREHENSIVE PROFIT
   
1,315,054
     
575,068
     
1,912,999
     
581,007
   
 
                                 
Other comprehensive income (loss) attributable to non-controlling interest
   
(37,679
)
   
395
     
(71,179
)
   
1,085
   
 
                                 
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY
 
$
1,352,733
   
$
574,673
   
$
1,984,178
   
$
579,922
   
 
                                 
EARNINGS PER SHARE
                                 
Basic
 
$
0.03
   
$
0.01
   
$
0.05
   
$
0.01
   
Diluted
 
$
0.03
   
$
0.01
   
$
0.05
   
$
0.01
   
WEIGHTED AVERAGE SHARES OUTSTANDING
                                 
Basic
   
73,097,698
     
57,614,546
     
71,475,000
     
57,614,546
   
Diluted
   
73,177,698
     
57,674,546
     
71,555,000
     
57,674,546
   
 
See accompanying notes to the consolidated financial statements
3

 
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
   
 
For the Six Months Ended
 
 
December 31,
 
  2015     2014  
OPERATING ACTIVITIES:
       
Net income
 
$
3,336,571
   
$
559,298
 
Adjustments to reconcile net loss to net cash used in operating activities:
   
 
     
 
 
Depreciation and amortization
   
528,874
     
547,550
 
Deferred income tax
   
1,269,851
     
-
 
Inventory markdown
   
-
     
83,528
 
Bad debts written back/(written off)
   
2,074
     
(126,471
)
Common stock issued for services
   
145,600
     
4,800
 
Equity in loss of joint venture, net of tax
   
38,765
     
47,989
 
Net loss attributable to non-controlling interests     200,129       40,251  
Changes in operating assets and liabilities:
               
Accounts receivable
   
(1,103,518
)
   
(507,188
)
Inventories
   
(862,624
)
   
230,587
 
Prepaid expenses and other current assets
   
(1,981,785
)
   
(1,157,381
)
Accounts payable
   
(2,676,621
)
   
(796,885
)
Accrued expenses and other current liabilities
   
387,829
     
4,441,384
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
   
(714,855
)
   
3,367,461
 
               
INVESTING ACTIVITIES:
               
Acquisition of property and equipment
   
(90,507
)
   
(2,937,622
)
NET CASH USED IN INVESTING ACTIVITIES
   
(90,507
)
   
(2,937,622
)
               
FINANCING ACTIVITIES:
               
Proceeds from/(Repayment of) bank loan
   
(473,140
)
   
6,501,697
 
Repayment of short-term borrowings
   
(763,982
)
   
(2,060,095
)
Repayment of other borrowings
    -      
(10,175,156
)
Proceeds from/(Repayment of) loans from related party
   
1,362,643
     
(1,534,190
)
Sale of common stock
   
2,739,000
     
5,816,451
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
2,864,521
     
(1,451,294
)
               
EFFECT OF EXCHANGE RATE ON CASH
   
(995,342
)
   
31,263
 
               
INCREASE (DECREASE) IN CASH
   
1,063,817
     
(990,192
)
CASH – BEGINNING OF PERIOD
   
5,371,545
     
2,329,660
 
CASH – END OF PERIOD
 
$
6,435,362
   
$
1,339,469
 
               
               
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
2,113,180
   
$
2,167,325
 
Cash paid for income taxes
 
$
-
   
$
-
 
Debt extinguishment using stock
 
$
2,662,597
   
$
-
 
 
See accompanying notes to the consolidated financial statements
4

AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Unaudited)
 
 
 1             BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The consolidated balance sheet as of June 30, 2015 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year 2015. These interim financial statements should be read in conjunction with that report.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015 filed on October 13, 2015.

2                    BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
  
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 December 31, 2015, the Company had one operating subsidiary: Hebei Aoxing Pharmaceutical Co., Inc. ("Hebei" or "Hebei Aoxin"), which is organized under the laws of the People's Republic of China ("PRC").  The Company owns 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 SFDA 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 80% 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.  The Company accounts for its investment in the Joint Venture under the equity method of accounting.
 
5

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, fair value of purchase option derivative liability and warranty liability, valuation allowance of deferred tax assets, purchase price allocation of its acquisitions 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.

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 company 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.
 
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 and classified within Level 1 of the fair value hierarchy.

As of December 31, 2015, 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 are considered Level 2 financial instruments measured at fair value on a non-recurring basis as of December 31, 2015.

The carrying amount of the common stock warrants is recorded at fair value and is determined using the Black-Scholes option pricing model based on the Company's stock price at the measurement date, exercise price of the warrant, risk-free rate and historical volatility, and is classified as a Level 3 of the fair value hierarchy.
6

Recent accounting pronouncements
 
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 July 2015, the FASB issued ASU No. 2015-11, "Inventory: Simplifying the Measurement of Inventory", that requires inventory not measured using either the last in, first out (LIFO) or the retail inventory method to be measured 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 cost of completion, disposal and transportation. The new standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and will be applied prospectively. Early adoption is permitted. The Company is evaluating the impact that this standard will have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, "Interest -Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of being presented as an asset. ASU 2015-03 is effective for the Company on January 1, 2016. Once adopted, entities are required to apply the new guidance retrospectively to all prior periods presented. The retrospective application represents a change in accounting principle. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating the effect that ASU 2015-03 will have on its consolidated financial statements and related disclosures.
 
3                 GOING CONCERN

We have incurred operating losses in the past and had an accumulated deficit of $55.1 million as of December 31, 2015. In addition, we had negative working capital of $10.4 million as of December 31, 2015, which 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 product in the near term and the sales from several new products in future years will produce substantial positive cash flow. If the Company's short-term cash flows decrease significantly and the Company is unable to pay its short-term liabilities, the Company's business, financial condition and results of operations could be materially affected. 

Management of the Company believes that the Company's large negative working capital will improve gradually during fiscal year 2016. 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. Currently, there are no firm commitments for debt or equity financing.

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.
7

 4                  INVENTORIES, NET
Inventories consist of the following:
 
December 31,
 
June 30,
 
 
2015
 
2015
 
 
 
 
Work in process
 
$
1,415,794
   
$
383,950
 
Raw materials
   
634,050
     
676,590
 
Finished goods
   
1,851,005
     
2,179,486
 
 
 
$
3,900,849
   
$
3,240,026
 
  
The allowance for obsolete inventory as of December 31, 2015 and June 30, 2015 was $598,416 and $465,828, respectively.
 
5            EQUITY-METHOD INVESTMENT IN JOINT VENTURE

The Company account for its investment in API (see Note 2), under the equity method of accounting.

Summarized financial information for our investment in API assuming a 100% ownership interest is as follows:
 
 
For Six Months
 
For the Year
 
  
Ended
 
Ended
 
 
December 31,
 2015
 
June 30,
2015
 
 Current assets
 
$
9,682
   
$
11,767
 
 Noncurrent assets
  692,822
 
 758,649
 
 Current liabilities
 
$
654,020
   
$
640,416
 
 Noncurrent liabilities
  -
 
 -
 
 Equity
 
$
48,484
   
$
130,000
 
Revenue
    -      
-
 
General and administrative expenses
 
$
76,011
   
$
183,044
 
Net loss
 
$
(76,011
)  
$
(183,044
)

8

6                ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and taxes consist of the following:
 
 
 
December 31,
   
June 30,
 
 
 
2015
   
2015
 
Accrued salaries and benefits
 
$
847,950
   
$
1,616,963
 
Accrued interest
   
1,461,201
     
2,073,073
 
Accrued taxes
   
2,018,912
     
1,281,704
 
Deposit payable
   
619,794
     
572,105
 
Due to employee
   
44,334
     
46,967
 
Advance from customers
   
481,384
     
291,005
 
Other accounts payable
   
395,491
     
241,512
 
Other accrued expenses and current liabilities
   
1,285,039
     
1,052,996
 
 
 
$
7,154,105
   
$
7,176,325
 

7                SHORT-TERM BORROWING

Short-term borrowing consists of the following:
 
     December 31      June 30,  
 
 
2015
   
2015
 
Shijiazhuang Finance Bureau (a)
 
$
77,010
   
$
81,582
 
Shijiazhuang Construction Investment Group Co., Ltd (b)
   
4,928,612
     
5,058,086
 
Mr. Li Hui (c)
   
-
     
2,304
 
Hebei Henghui Investment Management Co., Ltd (d)
   
2,182,451
     
3,263,282
 
TianJin Heng Xing Mirco Finance Bureau (e)
   
3,850,478
     
4,079,102
 
Total
 
$
11,038,551
   
$
12,484,356
 

(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%. $1,848,230 was due on October 25, 2015 and was extended to April 24, 2016. $3,080,382 was due on July 12, 2015 and was extended to October 25, 2015 and then further extended to April 26, 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 will be due on April 16, 2016.

(e) A short term loan from TianJin Heng Xing Mirco Finance Bureau. The note bears an annual interest rate of 20.04%, and is payable on March 17, 2016.

9

 8             LOAN PAYABLE - BANK

Loan payable – bank consist of the following loans collateralized by assets of the company:
 
 
 
December 31,
   
June 30,
 
 
 
2015
   
2015
 
Bank Note in the amount of 30 million RMB with Shijiazhuang Huirong Rural Cooperative Bank bearing an annual interest rate of 10% made on September 23, 2014. The note matured on November 22, 2014 and was extended to March 16, 2016
 
$
4,620,574
   
$
4,894,922
 
Bank Note in the amount of 27 million RMB with Postal Savings Bank bearing an annual interest rate of 7.8%, made on July 22, 2014 for one year maturing on July 21, 2015 and was extended to December 21, 2016.
   
4,158,516
     
4,894,922
 
Bank Note in the amount of 20 million RMB with China Merchant Bank bearing an annual floating rate of 7.0%, initially made on December 27, 2013, renewed on January 13, 2015 for one year maturing on January 12, 2016.
   
3,080,383
     
3,263,282
 
Bank Note in the amount of 20 million RMB with China Everbright Bank bearing 7.84% interest per annum made on January 16, 2015 for one year maturing on January 15, 2016 and was extended to January 15, 2017.
   
3,080,313
     
3,263,282
 
 
 
$
14,939,856
   
$
16,316,408
 

We are in negotiations with China Merchant Bank regarding renewal of the loan that matured on January 12, 2016. To date, the bank has not declared a default on the loan.
 
9               LOAN PAYABLE – RELATED PARTIES

Loan payable – related parties consists of loans from shareholders, officers, and other related parties, bearing interest at an average rate of 10.0% per annum as of December 31, 2015 and June 30, 2015. Loans will mature as follows:

   
December 31,
   
June 30,
 
   
2015
   
2015
 
Within one year
 
$
13,494
   
$
5,793
 
1 – 2 years
   
-
     
8,158
 
2 – 3 years
   
-
     
-
 
Total
   
13,494
     
13,951
 
Less current portion
   
(13,494
)
   
(5,793
)
   
$
-
   
$
8,158
 

10

10            LOAN PAYABLE – OTHER

Loan payable – other consist of loans from unrelated third-parties, bearing interest at an average rate of 10% per annum as of December 31, 2015 and June 30, 2015. Loans will mature as following:

   
December 31,
   
June 30,
 
   
2015
   
2015
 
Within one year
 
$
15,402
   
$
-
 
1 – 2 years
   
-
     
1,361,199
 
2 – 3 years
   
-
     
-
 
3 – 4 years
   
-
     
-
 
Total
   
15,402
     
1,361,199
 
Less current portion
   
(15,402
)
   
-
 
   
$
-
   
$
1,361,199
 

On November 4, 2015, the Company reached agreement with the creditors to convert the debt into shares of common stock. The conversion was completed on November 23, 2015, which caused the balances of other loan payable declined significantly thereafter.
 
11             ISSUANCE OF COMMON STOCK AND WARRANTS

During the period ended September 30, 2014, the Company issued 11,862,278 shares of common stock in satisfaction of $4.6 million in debt at $0.39 per share. Paid in capital was increased by $4,614,426 as a result of the exchange.
 
On November 5, 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.
 
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 completed a registered direct public offering of 2,352,941 shares of common stock and 1,764,706 common stock purchases warrants (the "public warrants" pursuant to a securities purchase agreement dated as of September 24, 2015. The purchaser was an institutional investor. Each public warrant will permit the holder to purchase one share of common stock from the Company for a price of $1.74 per share. The public 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 warrants, 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 public warrants. 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 public warrants.
11


11             ISSUANCE OF COMMON STOCK AND WARRANTS (continued)

The fair value of the warrants issued was estimated by using the Black-Scholes-Merton Option Pricing Model with the following assumptions:
 
 
 
For the
 six months ended December 31,
2015
   
Investor
Stock price
   
0.67
 
Exercise price
   
1.74
 
Expected life in years
   
4.7
 
Annualized Volatility
    116.72 %
Annual Rate of Quarterly Dividends
    1.65  
Discount Rate - Bond Equivalent Yield
    1.37  

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 period ended September 30, 2015 was $1.24 per share. No warrants were exercised, cancelled or expired during the period ended December 31, 2015.

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.

12            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:
 
 
 
For the six months
ended December 31,
 
 
 
2015
   
2014
 
Tax at U.S. Statutory rate
 
$
1,711,464
   
$
209,842
 
Tax rate difference between China and U.S.
   
(1,509,717
)
   
(2,949,659
)
Change in Valuation Allowance
   
(248,584
)
   
2,739,853
 
Net operating loss expired
    -       -  
Stock and option compensation
   
46,838
      -  
Effective tax rate
 
$
-
   
$
-
 

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

 
 
For the six months
 ended December 31,
 
 
 
2015
   
2014
 
Current
 
$
-
   
$
209,842
 
Deferred - U.S.
    -      
(38,113
)
Deferred - China
   
1,601,781
     
(2,911,582
)
Valuation allowance - U.S.
    -      
38,113
 
Valuation allowance - China.
   
(248,584
)
   
2,701,740
 
Total
 
$
1,353,197
   
$
-
 
 
12

12          TAXES    (continued)

The tax effects of temporary differences that give rise to the Company's net deferred tax asset as of December 31, 2015 and June 30, 2015 are as follows: 
 
 
 
December 31,
2015
   
June 30,
2015
 
Net operating loss carryforward - China
 
$
561,834
   
$
1,342,696
 
Net operating loss carryforward - US
   
1,889,794
     
1,935,121
 
Allowance for doubtful accounts
   
488,157
     
823,190
 
Others
   
282,545
     
808,334
 
     
3,222,330
     
4,909,341
 
Less: valuation allowance- U.S.
   
(1,889,794
)
   
(1,935,121
)
Valuation allowance- China.
   
(13,012
)
   
(262,610
)
Deferred tax assets
 
$
1,319,524
   
$
2,711,610
 
 
13               CONCENTRATIONS
 
Sales to two major customers accounted for 8% and 7% of total sales for the three months ended December 31, 2015. Sales to two major customers accounted for 8% and 7% of total sales for the three months ended December 31, 2014. As of December 31, 2015, two major customers accounted for 7% and 6% of Company's accounts receivable balance. As of December 31, 2014, two major customers accounted for 8% and 6% of Company's accounts receivable balance.

Sales of two major products represented approximately 82% and 12% of total sales for the three months ended December 31, 2015. Sales of two major products represented approximately 96% and 1% of total sales for the three months ended December 31, 2014. 
 
14             SUBSEQUENT EVENTS

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 relation to the formulation of Lorcaserin Hydrochloride, (b) issued 500,000 shares of common stock and paid $77,000 to acquire certain technology relating to the formulation of caffeine tablets, and (c) issued 500,000 shares of common stock and paid $77,000 to acquire certain technology relating to the formulation of Buprenorphine/Naloxone.

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 will not vest until they have been approved by the shareholders of the Company.

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.

In accordance with ASC 855, "Subsequent Events", the Company has evaluated subsequent events that have occurred through the date of issuance of these financial statements and has determined that, except for the matters described above, there was no material event that occurred after the date of the balance sheets included in this report.

13

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q (including the section regarding Management's Discussion and Analysis) contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, as well as information relating to Aoxing Pharmaceutical Company, Inc. that is based on management's exercise of business judgment and assumptions made by and information currently available to management. When used in this document and other documents, releases and reports released by us, the words "anticipate," "believe," "estimate," "expect," "intend," "the facts suggest" and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. You should read the following discussion and analysis in conjunction with our unaudited financial statements contained in this report, as well as the audited financial statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Risk Factors" contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015. We undertake no obligation and do not intend to update, revise or otherwise publicly release any revisions to our forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of any unanticipated events.
Outline of Our Business

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. Currently, the Company owns 95% of Hebei Aoxing.

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 projected to be approximately $15 million during the first five years at the time of establishment. Approximately $1 million of capital resources had been invested in the joint venture as of December 31, 2015.The slower than planned investment has been mainly resulted from the delays in securing API manufacturing licenses and the Company's focus on its core business.

14


Pharmaceutical Market in China

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 China SFDA, there are only 13 pharmaceutical companies designated by the China SFDA as narcotic drug producers in China, and we are one of them.

Narcotics and Pain Management

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 Oxycodone, Tilidine/Naloxone and Buprenorphine. In June 2015, the Company received licenses to produce Tilidine Hydrochloride tablets ("Tilidine HCL")

Narcotics, also known as opioids, are chemical substances that have a morphine-like action in the body.  They are prescribed when other pain medications and therapies fail to work. Opioids are used mostly for their analgesic properties to treat severe pain (fentanyl, hydromorphone, methadone, morphine and pethidine), moderate to severe pain (buprenorphine18 and oxycodone) and mild to moderate pain (codeine, dihydrocodeine and dextropropoxyphene), as well as to induce or supplement anaesthesia (fentanyl and fentanyl analogues such as alfentanil and remifentanil). They are also used as cough suppressants (codeine, dihydrocodeine and, to a lesser extent, pholcodine and ethylmorphine), to treat gastrointestinal disorders, mainly diarrhoea (codeine and diphenoxylate), and in the treatment of addiction to opioids (buprenorphine and methadone). Certain analgesic opioids, such as hydrocodone or oxycodone, are compounded in mixtures with non-opiate drugs to provide analgesic action (analgesic-antipyretic preparations).  These drugs are often used in combination with other medications such as antidepressants, anticonvulsants, and non-narcotic pain relievers.  Opioids are the strongest pain medicines available and may become addictive if used on a long-term basis.

Scientific research suggests that opioids relieve pain in two ways. First, they attach to opioid receptors, which are specific proteins on the surface of cells in the brain, spinal cord and gastrointestinal tract. These drugs interfere 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 world's agreed legal framework for international drug control.  

China entered the "Single Convention on Narcotic Drugs, 1961" in 1985, which resulted in the gradual loosening of government policy toward the control of analgesic supplies.  Before 2000, the per capita 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 have available 30 varieties and over 80 specifications of different types of analgesics.  Worldwide, there are about 123 varieties of narcotics and pain medicines.
15

Results of Operations
Revenue for the three months ended December 31, 2015 was $8,195,839, representing a 27% increase over the revenue of $6,430,701 realized during the three months ended December 31, 2014. Revenue for the six months ended December 31, 2015 was $16,940,661, representing a 54% increase over the revenue of $10,955,783 realized during the six months ended December 31, 2014. The increase in revenue was primarily attributable to the increase in number of customers and changes in our marketing program. During 2014, the Company adjusted its sales team and sales strategies, and business has been expanding rapidly. The Company's previous sales process began with the sales manager who shipped the product to a third-party sales agent. The sales agent then sold the product to the customer. With the current sales process, the Company has gradually terminated the sales agent contracts and now sells the product directly to customers. The sales price to direct customers is higher than the price to sales agencies, which has led to an increase in the average price of our products. The Company also increased its sales channel to hospitals, pharmacies, government health insurance plan and the rural cooperative medical service.

Cost of sales was $1,726,592 and $3,484,671 for the three and six months ended December 31, 2015, which was 6% and 16% higher, respectively, than the costs incurred during the three and six months ended December 31, 2014. The Company's increase in sales improved our production efficiency, which led to a decrease in average production cost per unit. As a result, gross margin was 79% during the three and six months ended December 31, 2015 compared to 75% and 73% in the comparable periods of last year. The increase in gross margin, combined with increased revenue, led to gross profits of $6,469,246 and $13,455,990 during the three and six months ended December 31, 2015, 35% and 69% higher than the same periods a year earlier.

Operating expenses increased by 8% from the second quarter of fiscal 2015 to the second quarter of fiscal 2016 and by 44% from the first half of fiscal 2015 to the first half of fiscal 2016, due primarily to large increased in research and development expenses. The categories of operating expenses were:

·
Research and development expenses increased several fold in both the quarter and the first six months of the current year. R&D expenses often fluctuate significantly from one period to another, reflecting the progress and timing of our various development projects. The increase in the current year was mainly due to a large payment for a key raw material used in our R&D program.
   
·
General and administrative expenses were $511,127 in the three months ended December 31, 2015, 38% lower than $821,008 in the three months ended December 31, 2014.  As a result, general and administrative expenses increased by only 9% from the first half of fiscal 2015 to the first half of fiscal 2016, despite an increase in professional fees as a result of the registered direct offering of securities during September 2015, an increase in remuneration for newly hired executives, and directors' fees. The decrease in the recent quarter occurred because the Company incurred substantial fees to renew debts during the second quarter of fiscal 2015.
   
·
Selling expenses in the amount of $1,589,866 incurred during the three months ended December 31, 2015 were 10% lower than $1,775,924 spent on selling during the three months ended December 31, 2014. Selling expenses of $3,984,212 incurred during the six months ended December 31, 2015 were 34% higher than in the first half of fiscal 2015, reflecting the 55% period-to-period increase in revenue
   
·
Depreciation and amortization expense fell by 9% from $140,801 to $128,126 and by 7% from $280,076 to $259,656 in the three and six months ended December 31, 2015. The reduction occurred primarily because some of the equipment we are using has become fully depreciated.

16

We recorded income from operations of $3,410,023 and $6,549,225 for the three and six months ended December 31, 2015, representing increases of 73% and 105% as compared to the same periods last year. Income from operations increased due to the increase in revenue and gross profit.

Net interest expense was $979,906 and $1,908,936 for the three and six months ended December 31, 2015, a decrease of 40% and 32% from net interest expense for the three and six months ended December 31, 2014.  The decrease in interest expense was mainly due to a reduction in loans from related parties.

Equity in loss of joint venture was $14,474 and $38,765 for the three months and six months ended December 31, 2015, a decrease of 34% from a loss of $22,018 recorded during the three months ended December 31, 2014, a decrease of 19% from a loss of $47,989 recorded during the six months ended December 31, 2014 The loss was attributable to our share of the joint venture with Johnson Mathey Plc, which has no operations yet.

The Company realized a net profit of $2,188,268 and $3,536,700 for the three and six months ended December 31, 2015. Because the Company owns 95% of Hebei Aoxing, 5% of Hebei Aoxing's income was attributed to the non-controlling interest. Therefore the net income attributable to the shareholders of Aoxing Pharmaceutical for the three months ended December 31, 2015 was $2,068,635 ($0.03 per share), up 265% compared to the three months ended December 31, 2014, and net income attributable to the shareholders of Aoxing Pharmaceutical for the six months ended December 31, 2015 was $3,336,571 ($0.05 per share), up 497% compared to the six months ended December 31, 2014.

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 December 31, 2015 was $6,435,362 compared to $5,371,545 as of June 30, 2015. The cash balance increased mainly due to the net cash provided by financing activities as a result of the public sale of equity in September 2015.

Operations during the six month period ended December 31, 2015 used $714,855 in cash, as compared to $3,367,461 cash generated during the six month period ended December 31, 2014. The increase in use of cash during the period ended December 31, 2015 is mainly attributable to the increases in our raw materials inventory and prepaid expenses during the current year, as well as our reduction of out accounts payable by over $2.6 million.

Our investing activities during the period ended December 31, 2015 used $90,507 cash to purchase additional property and equipment, modest in comparison to the $2,937,622 expended on equipment in the first half of fiscal 2015

Our cash provided by financing activities was $2,864,521 during the six month period ended December 31, 2015 as compared to $1,451,294 cash used during the same period last year. During the six month period ended December 31, 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 net proceeds of approximately $2.7 million. The Company also obtained $1.4 million loans from related parties. During the same period, the Company repaid bank loans and short-term borrowings of approximately $1.1 million. The use of cash in financing activities for the same period of last year occurred because we used cash provided by operations to reduce our debt load.

Our working capital deficit on December 31, 2015 was $10,378,348, which was a significant decrease from the working capital deficit of $20,143,628 on June 30, 2015. The improvement in working capital deficit occurred primarily because we used cash flow from operations to reduce short-term loans, converted $2.66 million in short-term loans into equity, and obtained $2.66 million from a public offering of our equity.
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As a result of several debts refinancing and debt-to-equity conversion over the first six-month period in fiscal 2016, our debt service obligations on December 31, 2015 were as following:
 
Contractual Obligations
 
Total
   
Less than
1 Year
 
1-2 Years
 
2-3 Years
   
3-4 Years
   
4-5 Years
   
After 5
Years
 
Short-term Borrowing
 
$
11,038,551
   
$
11,038,551
   -  
 
-
     
-
     
-
     
-
 
Banks
   
14,939,856
     
14,939,856
   -    
-
     
-
     
-
     
-
 
Affiliates
   
13,494
     
13,494
   -  
 
-
     
-
     
-
     
-
 
Others
   
15,402
     
15,402
   -    
-
     
-
     
-
      -  
     TOTAL
 
$
26,007,303
   
$
26,007,303
   -  
 
-
     
-
     
-
     
-
 
    
 We had an accumulated deficit of $55.0 million as of December 31, 2015. In addition, we had negative working capital of $10.4 million as of December 31, 2015, although that is a significant improvement from the negative working capital of $20.1 million as of June 30, 2015. Despite the large accumulated deficit, we have generated net profit and operating cash flow over the last six months.  Our management anticipates that we will generate sufficient cash flows to fund our operations for the next twelve months by increasing revenues of our core product sales and continued support from our lenders. We will continue our efforts to control operating costs and preserve cash, such as suspending non-essential research and development projects. Additionally, management does not expect any large capital expenditure projects in the next 12 months.

We have taken a number of actions and will continue to address our liquidity situation in order to restore the Company to a sound financial position going forward. In September 2015, we sold 2,352,941 shares of common stock and 1,764,706 common stock purchase warrants to an institutional investor. The company received net proceeds of $2.7 million. 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 conversion was completed on November 23, 2015. We may also take additional loans from related parties, if necessary. We are actively exploring various proposals and alternatives in order to secure sources of financing and improve our financial position.

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 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure 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 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 Control over Financial Reporting.

There was no change in internal controls over financial reporting during our most recently completed fiscal quarter that has materially affected or is reasonably likely to materially affect Aoxing Pharmaceutical's internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1A. Risk Factors.

There have been no material changes from the risk factors included in the Annual Report on Form 10-K for the year ended June 30, 2015.

Item 2. Unregistered Sale of Securities and Use of Proceeds

(a) Unregistered sales of equity securities

On November 4, 2015 the Company reached agreement with the holders of $2,661,093 in short-term debt issued by the Company to exchange that debt for 2,046,995 shares of the Company's common stock. 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 creditors 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

(c) Purchases of equity securities

The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the second quarter of fiscal year 2016.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item5. Other Information

None

Item 6. Exhibits

31.1
Certification of Chief Executive Officer pursuant to Section 302 of the SOX of 2002.
   
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the SOX of 2002.
   
32.1
Certificate of Chief Executive Officer pursuant to 18 U.S.C.ss.1350.
   
32.2
Certificate of Chief Financial Officer pursuant to 18 U.S.C.ss.1350.
   
101 INS
XBRL Instance Document*
   
101 SCH
XBRL Schema Document*
   
101 CAL
XBRL Calculation Linkbase Document*
   
101 DEF
XBRL Definition Linkbase Document*
   
101 LAB
XBRL Labels Linkbase Document*
   
101 PRE
XBRL Presentation Linkbase Document*

*            The XBRL related information in Exhibit 101 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

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SIGNATURES

Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the undersigned thereunto duly authorized.

  AOXING PHARMACEUTICAL COMPANY, INC.
     
Date: February 8, 2016
 
By: /s/ Zhenjiang Yue
    Zhenjiang Yue, Chief Executive Officer
    (Principal Executive Officer)
     
Date: February 8, 2016
 
By: /s/ Zheng James Chen
    Zheng James Chen, Chief Financial Officer
    (Principal Accounting and Financial Officer)

 
 
 
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