Item 1. Business
The Company has one operating subsidiary, Hebei Aoxing Pharmaceutical Co., Inc. (“Hebei Aoxing”), which is organized under the laws of the Peoples Republic of China (“PRC”). Since 2002, Hebei Aoxing has been engaged in developing narcotics and pain management products, building its facilities and obtaining the requisite licenses from the Chinese Government. Hebei Aoxing has completed the integration of Shijiazhuang Lerentang Pharmaceutical Company, Ltd. (“LRT”), a specialty pharmaceutical company focusing on herbal pain related therapeutics, which was acquired by Hebei Aoxing in May 2008. The Company owns 95% of the equity in Hebei Aoxing. The remaining 5% is owned by our Chairman, Zhenjiang Yue, and his family.
History of the Company
The Company was incorporated in the State of Florida on January 23, 1996 under the name “Central American Equities Corp.” Until mid-2006, the Company was engaged in the business of owning and operating hotels and restaurants and real property in Costa Rica. On July 31, 2006, the Company’s hotel assets were sold to the individuals who were the Company’s Board of Directors until April 18, 2006.
On April 18, 2006, Ostar Pharmaceutical, Inc., a Delaware corporation, was merged into a wholly-owned subsidiary of Central American Equities Corp. Ostar Pharmaceutical owned 60% of Hebei Aoxing. As a result of the merger, the former stockholders of Ostar Pharmaceutical became owners of a majority of the voting power of the Company, and the Company became the owner of a 60% interest in Hebei Aoxing. On July 6, 2006, the Company changed its name to “China Aoxing Pharmaceutical Company, Inc.” to better reflect the nature of its business. On May 1, 2008 the Company completed the acquisition of an additional 35% interest in Hebei Aoxing from its Chairman and Chief Executive Officer, Mr. Zhenjiang Yue.
On April 15, 2008 the Company entered into a Joint Strategic Alliance and Securities Purchase Agreement with American Oriental Bioengineering, Inc. (“AOB”). The agreement provides that the Company and AOB will cooperate in the development and marketing of several narcotic drugs. The agreement also provided for the sale to AOB by Aoxing Pharma of 7.5 million shares of its common stock. As of September 15, 2011, AOB owns approximately 34.2% of the common stock of the Company.
On April 16, 2008, Hebei Aoxing completed the acquisition of 100% of the registered capital of LRT. LRT is engaged in the manufacture and distribution of Chinese traditional medicines focusing on pain management related therapeutics within China. In exchange for transfer of ownership of LRT to Hebei Aoxing, the Company paid to the shareholders of LRT 80 million RMB and related expenses (approximately $12.4 million in total) and issued 4 million shares of common stock. As of June 30, 2009, LRT was completed integrated into Hebei Aoxing.
On April 14, 2010, Aoxing Pharma’s common stock began trading on NYSE Amex, a subsidiary of NYSE Euronext, under the ticker symbol "AXN." In anticipation of the listing, on March 29, 2010 the Company changed the name of the corporation to "Aoxing Pharmaceutical Company, Inc.," to better reflect its global brand extension, and effected a one-for-two reverse split of its common stock.
On February 23, 2010, the Company and QRxPharma Limited, a publicly listed pharmaceutical company based in Australia, signed a strategic alliance to collaborate in the development of MoxDuo®IV, an intravenous formulation of QRxPharma's patented morphine and oxycodone Dual-Opioid™ technology for the acute treatment of moderate to severe pain. Under the terms of the agreement, the Company will fund the development of MoxDuo®IV for the China market in exchange for exclusive marketing rights in China. Under similar terms, the Company also licensed the rights to the China market for MoxDuo®IR, an immediate release capsule presently in pivotal Phase 3 studies in the United States under development by QRxPharma Limited.
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. 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 Aoxing, the operating subsidiary of Aoxing Pharma, 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 Company, while Macfarlan Smith (Hong Kong) Ltd (a wholly owned subsidiary of Johnson Matthey Pacific Ltd) holds 49%. Each company has equal representation on a board of directors that will oversee a management team responsible for corporate strategies and operations. The new joint venture will be located on the Hebei Aoxing campus in Xinle City, 200 kilometers southwest of Beijing. The total capital investment is projected to be approximately $15 million during the first five years.
On June 30, 2010, Aoxing Pharma and Phoenix PharmaLabs (“PPL”), Inc entered into a co-development, manufacturing and license agreement related to a novel class of poly-receptor active opioid-like drug candidates targeting pain and substance abuse and addiction treatment. The two companies will continue to co-collaborate with the U.S. National Institute of Drug Abuse ("NIDA") and the Chinese National Institute on Drug Dependence at Beijing University ("NIDD"). Under the terms of the agreement, (1) Aoxing Pharma received an exclusive license to develop a new class of poly-receptor active opioid-like drug candidates being developed by PPL for therapeutic indications in pain management and substance abuse and addiction treatment in the Country of China, Macau and Hong Kong; (2) PPL will receive tiered royalties based on Adjusted Gross Sales (AGS) in the licensed territories, defined and agreed by both companies. Aoxing Pharma receives tiered royalties based on Adjusted Gross Sales (AGS) from the territories held by PPL, defined and agreed by both companies; (3) Aoxing Pharma will execute and fund the development, regulatory applications, manufacturing and marketing of the licensed drug candidates in China, while PPL will fund all development in all other territories.
In April, 2011, Hebei Aoxing received GMP certification from the Chinese State Food and Drug Administration (SFDA) for the pre-treatment, extraction, tincture, and pill workshops, after a site inspection by SFDA. The milestone marks the completion of the Lerentang Pharmaceutical Company's manufacturing facility relocation from Shijiazhuang to Xinle City, Hebei Province.
Pharmaceutical Market in China
According to IMS health, the global pharmaceutical market in 2011 is expected to be about $880 billion and expected to grow 5-7% in 2011 while the Chinese pharmaceutical market is expected to grow 25-27% in 2011 to more than $50, making it the third largest pharmaceutical market behind the United States and Japan. The growth in 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. In January 2009, the Chinese government approved a healthcare reform plan and has budgeted RMB 850 billion, or $124 billion, for a three year program to make medical services and products more affordable and accessible to the whole population
Narcotics and Pain Management
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 this matter through the International drug control conventions. Over 95 per cent of the Member States of the United Nations are now parties to the international drug control conventions, or the “Single Convention on Narcotic Drugs, 1961,” organized by International Narcotics Control Board (“INCB”). The conventions contain the basic legal structure, obligations, tools and guidance that are needed for all States to achieve the main aims of the international drug control system: controlled universal availability of narcotic drugs and psychotropic substances for medical and scientific purposes only; prevention of drug abuse, drug trafficking and other forms of drug-related crime; and the undertaking of effective remedial action when prevention does not fully succeed. As such, the conventions constitute the world’s agreed proportionate response to the global problems of illicit drug abuse and trafficking and the world’s agreed legal framework for international drug control. China entered the “Single Convention on Narcotic Drugs, 1961” in 1985, which resulted in the gradual loosening of government policy toward the control of analgesic supplies.
Global consumption of opioid analgesics for the treatment of moderate to severe pain (expressed in defined daily doses for statistical purposes) increased by more than two and one half times during the past decade. However, the increase in consumption occurred mainly in countries in Europe and North America. In 2006, for example, countries in those two regions together accounted for almost 96 per cent of global consumption of fentanyl, 89 per cent of global consumption of morphine and 97 per cent of global consumption of oxycodone. In 2006, the United States accounted for 99 per cent of global consumption of hydrocodone and 80 per cent of global consumption of oxycodone. In the United States, the consumption of hydrocodone increased by 70 per cent and the consumption of oxycodone by 55 per cent during the past five years. Global consumption of methadone has increased more than three times over the past decade. Methadone is used in several countries for the treatment of pain, but the sharp upward trend in its consumption is mainly attributable to its growing use in maintenance treatment related to opioid dependency. In 2006, the countries using the largest quantities of methadone were (in descending order) the United States, Spain, Germany, the United Kingdom, Italy, Iran and Canada; those countries together accounted for 83 per cent of global consumption.
The low levels of consumption of opioid analgesics for the treatment of pain in many countries, in particular in developing countries, continue to be a matter of serious concern. China entered the “Single Convention on Narcotic Drugs, 1961” in 1985, which resulted in the gradual loosening of government policy toward the control of analgesic supplies. Before 2000, the average consumption of analgesics in China was less than 1% of the consumption in industrialized countries. There were only six varieties of analgesics available in production. By 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.
Based on the report of International Narcotics Control Board in 2009, Global manufacture of oxycodone rose gradually during the 1990s, amounting to 11.5 tons in 1998. Since 1999, the global manufacture of oxycodone has accelerated, reaching a record level of 94.9 tons in 2008. The United States accounted for 68.2 tons, or 72 per cent of the world total. The manufacture of oxycodone grew steadily in the United Kingdom and France, which each contributed 13 per cent (12.3 tons and 12.1 tons) of the world total. Other major manufacturing countries were Slovakia (1.2 tons) and Switzerland (606 kg). China is currently relying on imported oxycodone for the Chinese market.
Global consumption has also risen steadily, reﬂecting the increased use of controlled-release preparations containing oxycodone for the treatment of moderate to severe pain. In 2005 and 2006, global consumption reached a level of 42.6 tons and, in 2008, it further increased, considerably, to 52.5 tons (700 million S-DDD), the highest level ever recorded. That was mainly a result of increased consumption in the United States, which continued to be the principal consumer country of oxycodone, accounting for 40.5 tons, or 77 per cent of the world total. Other major consumer countries in 2008 were Canada (4.5 tons), Germany (2 tons), Australia (1.3 tons) and the United Kingdom (902 kg), together accounting for 17 per cent of global consumption. Consumption of oxycodone has spread to more than 50 other countries, including developing countries. China only consumed 117kg of oxycodone in 2008.
Currently, the pharmaceutical market in China is highly fragmented. We believe there are over 3,000 small enterprises currently engaged in the development, manufacture and sale of pharmaceutical products, and we expect significant consolidation of pharmaceutical business, products and technologies in China in near future. However, based on recent statistics provided by the China SFDA, there are only 13 pharmaceutical companies designated by the China SFDA as narcotic drug producers in China.
Since its inception in 2002, Hebei Aoxing has been focusing on research, development, manufacturing and distribution of a variety of narcotics and pain management pharmaceutical products in China. Its facility is dedicated to conducting the narcotic drug business with GMP manufacturing capability for drugs in tablet, capsule, injectable, oral solution and granulated formulations. Over the years, the company has developed a compelling pipeline in narcotics and pain management drugs, including Naloxone, Oxycodone, Tilidine, Codeine Phosphate, Pholcodine, and Buprenorphine.
Marketed Products
Each of our pharmaceutical products has certain medicinal functions and has demonstrated safety and efficacy in accordance with the China SFDA requirements for the treatment of at least one or more therapeutic indications. Our products are produced in various formulations, such as injection, tablets, capsules, oral solution and powders. Our manufacturing facility in China is GMP certified, fully integrated with manufacturing support systems including quality assurance, quality control and regulatory compliance. We have developed our own independent quality control systems in accordance with SFDA regulations. Our quality assurance team devotes significant attention to quality control for designing, manufacturing and testing our products, and is also responsible for ensuring that we are in compliance with all applicable national and local regulations and standards, as well as our internal policies. Our senior management team is also actively involved in setting quality assurance policies and managing internal and external quality performance. These support systems enable us to maintain high standards of quality for our products and deliver reliable products to our customers on a timely basis.
We have more than 100 products under licensee from Chinese SFDA, but we were not able to sell many of our products during most of our fiscal year 2011, especially those of pill and tincture formulations, due to delay in GMP facility certification from our manufacturing facility relocation. We have been granted GMP certification for those facilities in April 2011 and have gradually resumed production of on some of the products. The following is a brief description of some of our main marketed products.
Zhongtongan: It is a capsule of herbal extraction manufactured under modern GMP standard for the indication of oral and dental pain. It is currently our main product, accounting for more than 80% our total sales in 2011.
Bismuth Potassium Citrate: An oral solution containing bismuth subcitrate potassium, for the treatment of chronic gastritis and stomachache due to excessive stomach acid.
Xiaopiling: A granule formulation of herbal extraction manufactured under modern GMP standard for the treatment of fatigue from lack of rest.
Naloxone Hydrochloride: An IV formulation for the treatment of opioid over dosage.
Currently Hebei Aoxing is authorize by the SFDA to manufacture Naloxone Hydrochloride injectable in four dosage strengths: 0.4mg (1ml), 1mg (1ml), 2mg (2ml) and 4mg (10ml).
Research and Development
We have an in-house state-of-art facility which allows our multi-discipline team to conduct pharmaceutical research and development. Our R&D team consists of chemists, biologists, pharmacologists and other technical experts. It 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. During our fiscal year 2011, we directly invested $929,598 in R&D efforts. Our R&D expenditures during fiscal 2010 and 2009 were $1,540,744 and $722,567, respectively. In addition, we rely on arrangements with universities, our collaborators, contract research organizations and clinical research sites for a significant portion of our product development efforts.
Tilidine Tablets under Clinical Development: Tilidine hydrochloride is an orally-absorbed synthetic narcotic analgesic in 50mg or 100mg dosage strength for relief of acute, moderate to severe pain, and chronic cancer-related pain. It is mainly used in European countries, including Germany, Belgium, Ireland, Italy, Switzerland, and etc. It is not available in China at the moment. Based on the Annual Report of International Narcotics Control Board in 2008, global consumption reached a record level in 2007 and global Tilidine manufacture also reached a peak of 62.2 tons in 2007, twice the level reported in 2002, or at a compound annual growth rate (CAGR) of 15% during the last five year period.
It is estimated that there are at least 50 million operation procedures performed in Chinese hospital 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.
In April 2007, Hebei Aoxing received clearance from the China SFDA for the clinical study of Tilidine Hydrochloride tablets for the treatment of moderate to severe post-operative and cancer pain in adult patients. The Tilidine tablets drug is not currently available in China. To the best of our knowledge, Hebei Aoxing is currently the only authorized domestic manufacturer to develop Tilidine tablets. . In the first half of 2010, Hebei Aoxing completed Phase III registration clinical study for Tilidine tablets, which is designated as a Class III New Medicine with approximately at least three-year market exclusivity protection upon marketing clearance by the China SFDA.
The Phase III clinical study was a multi-center, randomized, double-blind and active-control study which covers 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). The Company plans to submit the New Drug Application (NDA) for the final production clearance to the China SFDA when we gather all the materials required.
Codeine Phosphate Compound Oral Solution under Clinical Development: In June 2007, Hebei Aoxing received formal approval from the SFDA for the clinical study of Codeine Phosphate Compound Medicine for cold and flu treatment. While Codeine Phosphate is widely used and considered effective in cold and flu treatment in Western countries, it just became available in China in 2006. To the best of our knowledge, Hebei Aoxing is one of only two domestic drug makers developing this medicine in China. The China SFDA is currently reviewing the NDA submitted by the Company.
In June 2009 the Company completed the registration trial with Codeine Phosphate, a compound oral solution for the treatment of acute moderate to severe cough. This registration trial is a randomized, multi-center, double-blind, positive-controlled study designed to evaluate the efficacy and efficacy of compound oral solution of codeine phosphate in 215 patient subjects with acute moderate to severe cough. In early September 2009, the Company submitted its NDA of the product to the China SFDA.
Buprenorphine/Naloxone Entering Clinical Development: In November 2007, the China SFDA granted Hebei Aoxing and its partner, the National Institute of Drug Dependence at Beijing University, an important research and development license of Buprenorphine/Naloxone sublingual combo tablet to treat opioid dependence. This project has been a joint effort of scientists from our Company and Beijing University since April 2005. This new combo therapy is expressly designed to combine the proven effectiveness and tolerability of buprenorphine with a lower potential for misuse, underlining our commitment to this therapy area. There is much peer-reviewed evidence of superior efficacy and safety profile for this therapy.
In August 2010, the China SFDA granted the Company authority to initiate the registration clinical trial of Buprenorphine/Naloxone sublingual tablets for opioid addiction treatment. The approval enables 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 planned to be administered by the National Institute on Drug Dependence of China at Beijing University, the co-development partner of Aoxing Pharma. The patient enrollment will take place in at least three Compulsory Drug Dependence Treatment Centers. The trial is designed to establish the safety and efficacy of the Buprenorphine/Naloxone sublingual tablet therapy among patients who are suffering from opioid dependence. The registration trial is a multi-center, randomized, double-blind and active-control study, which is planned to enroll approximately 280 patients registered at Compulsory Drug Dependence Treatment Centers. Subjects are randomized during a brief induction phase, a multi-week maintenance phase and a detoxification phase.
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 2010 there were 1.17 million registered drug addicts in China. However, the real population of drug addicts is estimated to be about 10 times of the registered number in the country. The Chinese government has taken comprehensive measures to address the problem, including centralized compulsory treatment camp, community clinics, psychological consulting and pharmacological therapies. In 2009 approximately 200,000 individuals received compulsory drug addiction treatment at over 80 centralized treatment centers and other centers managed by the Chinese government. The direct cost of illegal heroin purchase in China was estimated at $4 billion USD, and the overall monetary cost in connection with illegal drug purchase in China was estimated at $63 billion USD in 2010.
Tongjingshule Capsules for Primary Dysmenorrha: In May 2009 the Company acquired all rights to Tong Jin Shu Le (“TJSL”), a novel drug at Phase II development stage to treat primary dysmenorrhea (“”PD”), or menstrual pain, in adult women. TJSL is a capsule form of selected herbal medicines that we have recently completed Phase III clinical development under the protocol approved by the China SFDA.
The Phase II trial provided positive results of safety and efficacy among 240 patients with primary dysmenorrheal during the 12-week, multi-center, randomized, double-blind and placebo-controlled trial.
The current Phase III clinical study is a 12-week, multi-center, randomized, double-blind and active-controlled study to evaluate the safety and efficacy of TJSL Capsules among 440 patients with primary dysmenorrheal. Subjects between 18 and 35 years old are actively being enrolled at six leading university teaching hospitals in metropolitan areas of China. Subjects receive TJSL Capsules or active control, three times a day for ten days, starting one week prior to each menstrual cycle or period. The primary endpoints used to evaluate efficacy is the sum of pain score differences, measured by visual analogue scale (“VAS”), as well as symptom improvement during menstruation over three menstrual cycles. This is a non-inferiority registration trial to the controlled arm, which was pre-approved by the China SFDA. We are in the process of analyzing the Phase III trial data and will submit NDA when all necessary materials are compiled for the filing.
The prevalence rates of PD among women are from 60 to 90 percent. The market size of healthcare product to address menstrual pain is estimated at $3 billion per year in China.
Employees
The Company currently has approximately 400 employees. There are 74 employees in administrative and management, 17 employees in the R&D department, 21 employees in QA/QC, 129 employees in the production, and 142 employees in sales and marketing. Our Company has been expanding our direct sales and marketing force from approximately 30 employees as of April 2010 in order to provide additional direct sales force for new product launch and existing product detailing.
Most of our employees are members of a local worker’s union. We consider our employee relations to be good.
Item 1A
Item 1A Risk Factors
Our business, financial condition, operating results and prospects are subject to the following risks. Additional risks and uncertainties not presently foreseeable to us may also impair our business operations. If any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our common stock could decline, and our stockholders may lose all or part of their investment in the shares of our common stock. You should carefully consider the risks described below before buying our common stock. If any of the risks described below actually occurs, that event could cause the market value of our common stock to decline, and you could lose all or part of your investment.
Our sales revenue remains small and mainly derived from a few products and a disruption in, or a compromise of, our manufacturing or sales operations, or distribution channels related to any of these products could materially and adversely affect our financial condition and results of operations.
We booked our first product revenues in late 2006, and only reached a modest level of sales for the year ended June 30, 2011, mainly derived from a few products approved by the China SFDA. We expect that these products will continue to account for a majority of our sales in the near future. Because of our dependence on a few products, any disruption in, or compromise of, our manufacturing operations, sales operations or distribution channels, relating to any of these products could result in our failure to meet shipping and delivery deadlines or meet quality standards, which in turn could result in the cancellation of purchase orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect on our financial condition and results of operations.
We lack sufficient capital to fully carry out our business plan.
In order to make our operations cost-efficient, it is necessary that we expand our operations. At the present time, however, our capital resources are sparse. We are exploring various alternatives to improve our financial position and secure other sources of financing. Such possibilities include a new credit facility, new equity raise, new arrangements to license intellectual property, the sales of selected property rights.
Intense competition from existing and new companies may adversely affect our revenues and profitability.
We compete with other companies, many of whom are developing, or can be expected to develop, products similar to ours. Some of our competitors are more established than we are, have greater brand recognition of products that compete with ours, have more financial, technical, marketing and other resources than we presently possess and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers or adopt more aggressive pricing policies. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects, are less expensive or have more attractive product characteristics than our current products or products that we may develop in the future. We cannot assure you that we will be able to compete effectively with current or future competitors or that the competitive pressures we face will not harm our business.
Most of our pipeline products contain narcotic ingredients. As a result of reports of misuse or abuse of prescription narcotics, the sale of such drugs may be subject to new regulation, which may prove difficult or expensive to comply with, and we and other pharmaceutical companies may face lawsuits.
Most of our core pipeline products contain narcotic ingredients. Misuse or abuse of such drugs can lead to physical or other harm. For example, in the past two years, reportedly widespread misuse or abuse of OxyContin®, a product of Purdue Pharma L.P., or Purdue, containing the narcotic oxycodone, resulted in the strengthening of warnings on its labeling. In addition, we believe that Purdue, the manufacturer of OxyContin®, faces or did face numerous lawsuits, including class action lawsuits, related to OxyContin® misuse or abuse. We may be subject to litigation similar to the OxyContin® suits related to our generic version of oxycodone or any other narcotic containing product that we market.
The China SFDA and Department of Health may impose new regulations concerning the research and development, manufacture, storage, transportation and sale of prescriptionnarcotics. 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 have greater financial and other resources than we have. Acquisitions of businesses, products, technologies or other material operations may require debt financing or additional equity financing, resulting in leverage or dilution of ownership.
Even if we complete one or more strategic transactions, we may be unable to integrate or coordinate successfully the personnel and operations of a business. Integration of acquired business operations could disrupt our business by diverting management away from day-to-day operations. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. We also may not be able to maintain key employees or customers of an acquired business or realize cost efficiencies or synergies or other benefits we anticipated when selecting our acquisition candidates. In addition, we may incur non-recurring severance expenses, restructuring charges and change of control payments and may need to record write-downs from future impairments of intangible assets, which could reduce our future reported earnings. At times, acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition.
In addition to the above, acquisitions in China, including of state owned businesses, will be required to comply with laws of the PRC, to the extent applicable. There can be no assurance that any proposed acquisition will be able to comply with PRC requirements, rules and/or regulations, or that we will successfully obtain governmental approvals to the extent required, which may be necessary to consummate such acquisitions.
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 China SFDA, and government agency requirements. Our business and financial viability are dependent on the regulatory compliance of these third parties, and on the strength, validity and terms of our various contracts with these third party manufacturers, distributors and collaboration partners. Any interruption or failure by these suppliers, distributors and collaboration partners to meet their obligations pursuant to various agreements with us could have a material adverse effect on our business, financial condition and results of operations.
We are dependent upon third parties to provide us with various estimates as a basis for our financial reporting. While we undertake certain procedures to review the reasonability of this information, we cannot obtain absolute assurance over the accounting methods and controls over the information provided to us by third parties. As a result we are at risk of them providing us with erroneous data which could have a material adverse impact on our business.
The government limits the availability of the active ingredients used in many of our current products and products in development and, as a result, our procurement quota may not be sufficient to meet commercial demand or complete clinical trials.
The Chinese government and SFDA regulate the access and supplies of chemical compounds in some of our current products and products in development, including oxycodone, codeine, buprenorphine, Tilidine. Consequently, their manufacture, shipment, storage, sale and use are subject to a high degree of regulation.
Furthermore, the government limits the availability of the active ingredients used in many of our current products and products in development and, as a result, our procurement quota of these active ingredients may not be sufficient to meet commercial demand or complete clinical trials. We must annually apply to the government agencies for procurement quota in order to obtain these substances. Any delay or refusal by the agencies in establishing our procurement quota for controlled substances could delay or stop our clinical trials, product launches or could cause trade inventory disruptions for those products that have already been launched, which could have a material adverse effect on our business, financial position and results of operations.
Timing and results of clinical trials to demonstrate the safety and efficacy of products as well as the SFDA’s approval of products are uncertain.
Before obtaining regulatory approvals for the sale of our products, , we must demonstrate through preclinical studies and clinical trials that the product is safe and effective for each intended use. Preclinical and clinical studies may fail to demonstrate the safety and effectiveness of a product. A failure to demonstrate safety and efficacy would result in our failure to obtain regulatory approvals.
The rate of patient enrollment sometimes delays completion of clinical studies. There is substantial competition to enroll patients in clinical, and such competition has delayed clinical development of our products in the past. Delays in planned patient enrollment can result in increased development costs and delays in regulatory approval. In addition, we rely on collaboration partners that may control or make changes in trial protocol and design enhancements that may also delay clinical trials. We cannot assure you that we will not experience delays or undesired results in these or any other of our clinical trials.
We cannot assure you that the SFDA or other regulatory agencies will approve any products developed by us, on a timely basis, if at all, or, if granted, that such approval will not subject the marketing of our products to certain limits on indicated use. Any limitation on use imposed by the SFDA or delay in or failure to obtain SFDA approvals of products developed by us would adversely affect the marketing of these products and our ability to generate product revenue, as well as adversely affect the price of our common stock.
Before obtaining regulatory approvals for certain generic products, we must conduct limited clinical or other trials to show comparability to the branded products. A failure to obtain satisfactory results in these trials would prevent us from obtaining required regulatory approvals.
We do not have adequate product liability insurance and we could be exposed to substantial liability.
We face an inherent business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in adverse side effects. Adverse side effects, marketing or manufacturing problems pertaining to any of our products could result in:
•
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.
Our international operations require us to comply with a number of U.S. and international regulations.
We need to comply with a number of international regulations in countries outside of the United States. In addition, we must comply with the Foreign Corrupt Practices Act, or FCPA, which prohibits U.S. companies or their agents and employees from providing anything of value to a foreign official for the purposes of influencing any act or decision of these individuals in their official capacity to help obtain or retain business, direct business to any person or corporate entity or obtain any unfair advantage. Any failure by us to adopt appropriate compliance procedures and ensure that our employees and agents comply with the FCPA and applicable laws and regulations in foreign jurisdictions could result in substantial penalties or restrictions on our ability to conduct business in certain foreign jurisdictions. The U.S. Department of the Treasury’s Office of Foreign Asset Control, or OFAC, administers and enforces economic and trade sanctions against targeted foreign countries, entities and individuals based on U.S. foreign policy and national security goals. As a result, we are restricted from entering into transactions with certain targeted foreign countries, entities and individuals except as permitted by OFAC which may reduce our future growth.
We may incur significant costs to ensure compliance with SEC and Stock Exchange corporate governance and accounting requirements.
We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors, on committees of our board of directors or as executive officers.
As a public company, we are required to comply with rules and regulations of the SEC, including expanded disclosure, accelerated reporting requirements and more complex accounting rules. This will continue to require additional cost management resources. We will need to continue to implement additional finance and accounting systems, procedures and controls as we grow to satisfy these reporting requirements. In addition, we may need to hire additional legal and accounting staff with appropriate experience and technical knowledge, and we cannot assure you that if additional staffing is necessary that we will be able to do so in a timely fashion. If we are unable to complete the required annual assessment as to the adequacy of our internal reporting or if our independent registered public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting in the future, we could incur significant costs to become compliant.
We continuously evaluate and monitor developments with respect to Section 404 of Sarbanes-Oxley and other applicable rules, however, we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
In addition, Chinese accounting rules and American rules differ in many material respects. Since Chinese law requires us to use Chinese accounting rules for our operations in China and keep accounts in RMB, there may be discrepancies on the conversion to American standards and dollar.
There could be changes in government regulations in China toward the pharmaceutical industries that may adversely affect our business.
The manufacture and sale of pharmaceutical products in China is heavily regulated by many state, provincial and local authorities. These regulations significantly increase the difficulty and costs involved in obtaining and maintaining regulatory approvals for marketing new and existing products. Our future growth and profitability depend to a large extent on our ability to obtain regulatory approvals. Additionally, the law could change so as to prohibit the use of certain pharmaceuticals. If one of our products becomes prohibited, this change would cease the productivity of that product. The China National Development and Reform Commission, or CNDRC, has recently implemented price adjustments on many marketed pharmaceutical products. We have no control over such governmental policies, which may impact the pricing and profitability of our products.
The State Food and Drug Administration of China requires pharmaceutical manufacturers to obtain Good Manufacturing Practices, or GMP, certifications. We have received our certifications. However, should we fail to receive or maintain the GMP certifications in the future, we would no longer be able to manufacture pharmaceuticals in China, and our businesses would be materially and adversely affected. Moreover, the laws and regulations regarding acquisitions in the pharmaceutical industry in China may change, which could significantly impact our ability to grow through acquisitions.
Certain political and economic considerations relating to China could adversely affect our company.
China is transitioning from a planned economy to a market economy. While the PRC government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the Chinese economy is still operating under five-year plans and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating results may be adversely affected by changes in China’s economic and social conditions as well as by changes in the policies of the PRC government, such as changes in laws and regulations, or the official interpretation thereof, which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of additional restrictions on currency conversion.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
The pharmaceutical industry is heavily regulated, which creates uncertainty about our ability to bring new products to market and imposes substantial compliance costs on our business.
The China SFDA as well as Department of Health impose substantial requirements on the development, manufacture, labeling, sale, distribution, marketing, advertising, promotion and introduction of therapeutic narcotic pharmaceutical products through lengthy and detailed laboratory and clinical testing and other costly and time-consuming procedures. The submission of a drug application alone does not guarantee that the SFDA will grant approval to market the product. Satisfaction of SFDA requirements typically takes a number of years, varies substantially based upon the type, complexity and novelty of the pharmaceutical product and is subject to uncertainty. The drug approval process varies in time, could take several years from the date of application. The timing for the approval process is difficult to estimate and can vary significantly.
The current SFDA standards of approving pharmaceutical products are more stringent than those that were applied in the past. These standards were not applied to many established products currently on the market, including certain narcotics products. We cannot assure you that the SFDA or other regulatory agencies will approve any products developed by us, on a timely basis, if at all, or, if granted, that approval will not entail limiting the indicated uses for which we may market the product, which could limit the potential market for any of these products.
The recent nature and uncertain application of many PRC laws applicable to us create an uncertain environment for business operations and they could have a negative effect on us.
The PRC legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, the PRC government began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.
Currency conversion and exchange rate volatility could adversely affect our financial condition and the value of our common stock.
The PRC government imposes control over the conversion of Renminbi, or RMB, into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China publishes an exchange rate, which we refer to as the PBOC exchange rate, based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC exchange rate according to market conditions.
Pursuant to the Foreign Exchange Control Regulations of the PRC issued by the State Council which came into effect on April 1, 1996, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which came into effect on July 1, 1996, regarding foreign exchange control, conversion of RMB into foreign exchange by Foreign Investment Enterprises, or FIEs, for use on current account items, including the distribution of dividends and profits to foreign investors, is permissible. FIEs are permitted to convert their after-tax dividends and profits to foreign exchange and remit such foreign exchange to their foreign exchange bank accounts in China. Conversion of RMB into foreign currencies for capital account items, including direct investment, loans, and security investment, is still under certain restrictions. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, which provides that the PRC government shall not impose restrictions on recurring international payments and transfers under current account items.
Enterprises in China, including FIEs, which require foreign exchange for transactions relating to current account items, if within a certain limited amount may, without approval of the State Administration of Foreign Exchange, or SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.
Convertibility of foreign exchange in respect of capital account items, such as direct investment and capital contribution, is still subject to certain restrictions, and prior approval from the SAFE or its relevant branches must be sought.
Between 1994 and 2004, the exchange rate for RMB against the U.S. dollar remained relatively stable, most of the time in the region of approximately RMB8.28 to US$1.00. However, in 2005, the Chinese government announced that it would begin pegging the exchange rate of the RMB against a number of currencies, rather than just the U.S. dollar. As our operations are primarily in China, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, financial condition and the value of our common stock. For example, to the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of this currency against the U.S. dollar could have a material adverse effect on our business, financial condition, results of operations and the value of our common stock. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.
Most of our assets are located in China, any dividends or proceeds from liquidation are subject to the approval of the relevant Chinese government agencies.
Our assets are predominantly located inside China. Under the laws governing FIEs in China, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency’s approval and supervision as well the foreign exchange control. This may generate additional risk for our investors in case of dividend payment or liquidation.
There have been recent incidents in which patients have experienced severe adverse reactions following the use of pharmaceutical products manufactured in China.
There have been recent incidents reported in the Chinese media of a significant number of patients experiencing severe adverse health consequences following their use of pharmaceutical products manufactured by certain pharmaceutical companies in China. A number of patients have become ill and a number of fatalities have been reported. For example, several deaths were caused by drugs sold by the Second Pharmaceutical Factory of Qiqihaer, a Chinese drug manufacturer, in May 2006. Concerns over the safety of pharmaceutical products manufactured in China could have an adverse effect on the sale of such products, including products manufactured by us. If in the future we become involved in incidents of the type described above, such problems could severely and adversely impact our product sales and reputation.
Anti-corruption measures taken by the government to correct corruptive practices in the pharmaceutical industry could adversely affect our sales and reputation.
The government has recently taken anti-corruption measures to correct corrupt practices. In the pharmaceutical industry, such practices include, among others, acceptance of kickbacks, bribery or other illegal gains or benefits by the hospitals and medical practitioners from pharmaceutical distributors in connection with the prescription of a certain drug. Substantially all of our sales to our ultimate customers are conducted through third-party distributors. We have no control over our third-party distributors, who may engage in corrupt practices to promote our products. While we maintain strict anti-corruption policies applicable to our internal sales force and third-party distributors, these policies may not be effective. If any of our third-party distributors engage in such practices and the government takes enforcement action, our products may be seized and our own practices, and involvement in the distributors’ practices may be investigated. If this occurs, our sales and reputation may be materially and adversely affected.
We may never pay any dividends to our stockholders.
We have not paid any cash dividends on shares of our common stock. We currently intend to retain all available funds and future earnings, if any, to support our operations and finance the growth and development of our business. Our board of directors does not intend to distribute dividends in the foreseeable future. The declaration, payment and amount of any future dividends, if any, will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors the board of directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Capital outflow policies in China may hamper our ability to pay dividends to shareholders in the United States.
The People’s Republic of China has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals for our operations, and Chinese regulatory authorities may impose greater restrictions on the convertibility of the RMB in the future. Because most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to fund our business activities outside China or to pay dividends to our shareholders.
Our business development would be hindered if we lost the services of our Chairman.
Zhenjiang Yue is the Chief Executive Officer of Aoxing Pharma and of its operating subsidiary, Hebei Aoxing Pharmaceutical Group. Mr. Yue is responsible for strategizing not only our business plan but also the means of financing it. If Mr. Yue were to leave Hebei Aoxing or become unable to fulfill his responsibilities, our business would be imperiled. At the very least, there would be a delay in the development of Hebei Aoxing until a suitable replacement for Mr. Yue could be retained.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
The Company’s facilities are located in Xinle City, Shijiazhuang, Hebei province, about 143 miles from Beijing. We have land use rights that are granted and allocated to us by the People’s Republic of China (“PRC”) government to the land on which our manufacturing facilities are located. According to Chinese law, the government owns all the land in China and companies or individuals are authorized to use the land only through land use rights granted or allocated by, or leased from, the PRC government.
The headquarters of Hebei Aoxing currently cover 29.6 acres of the 49.4 leased by Hebei Aoxing. The land lease expires in 2053. On that land, the Company has located a building complex that offers an aggregate of 32,268 m2 in floor space (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 4600 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 production capacity of the first stage analgesic project can reach 140 million capsules, 160 million pieces of troche, 100 million pieces of injection, 100 million pieces of oral liquid and 100 million bags of palletized granule. The supporting facilities, such as the extraction workshop, engine house, thermal workshop, storehouse, office building, and employee housing, have all been completed.
The executive and production facilities of Hebei Aoxing are located at No. 1 Industry District, Xinle City, Hebei Province, China 050700. Aoxing Pharma maintains its U.S. office at 15 Exchange Place, Suite 500, Jersey City, NJ 08302.
Item 3.
Item 3. Legal Proceedings
At present, the Company is not engaged in or the subject of any material legal proceedings.
Item 4.
Item 4. [Removed and Reserved]
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company’s common stock has been listed for trading on the NYSE Amex under the symbol “AXN” since April 14, 2010. Prior to that date, the common stock was quoted on the OTC Bulletin Board under the trading symbol “CAXG.” Set forth below are the high and low close prices for each quarter in our past two fiscal years. For the periods when the stock was listed on the OTC Bulletin Board, the reported bid quotations reflect inter-dealer prices without retail markup, markdown or commissions, and may not necessarily represent actual transactions.
On March 29, 2010 we implemented a 1-for-2 reverse split of our outstanding common stock. All references to share prices, numbers of outstanding shares, and any per share calculations in this Report have been adjusted to reflect the 1-for-2 reverse split.
Holders
Our shareholders list contains the names of 453 registered stockholders of record of the Company’s common stock as of September 15, 2011.
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 last quarter of 2011.
Recent Sales of Unregistered Securities
On June 26, 2011, Aoxing Pharmaceutical Company, Inc. (the “Company”) entered into a Debt Conversion Agreement (the “Agreement”) with certain holders of its promissory notes (the “Notes”) (collectively, the “Holders”), in which the Holders, including Mr. Zhenjiang Yue, Chairman of the Board and Chief Executive Officer of the Company, agreed to convert the aggregate outstanding principal and accrued and unpaid interest they hold under the Notes, totaling approximately USD$6.57 million, into shares of common stock of the Company at the conversion price of $2.70 per share. On June 24, 2011, the closing price for the Company’s securities as reported on the NYSE Amex was $1.40 per share. As a result of this conversion, the Holders will receive a total of 2,432,296 shares of common stock of the Company. The terms of this conversion transaction were reviewed and approved unanimously by our Board of Directors.
Upon consummation of the debt conversion and the issuance of certificates representing the shares of common stock issuable to the Holders by reason of the debt conversion, the Company’s obligations under the Notes will be satisfied in full. The Company agreed to include the shares of common stock issued to the Holders under the debt conversion, if and to the extent such shares of common stock are not eligible for resale under SEC Rule 144, in the Company’s future registration statement relating to an offering for its own account or the account of others. Each party to the debt conversion agreement made representations and warranties to the other customary in documents of this nature.
The shares of common stock of the Company issuable upon debt conversion were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act and Rule 506 promulgated thereunder. The agreement executed in connection with the debt conversion contain representations to support, among other things, the Company’s reasonable belief that the Holders had access to information concerning the Company’s operations and financial condition, the Holders acquired the securities for their own account and not with a view to the distribution thereof in the absence of an effective registration statement or an applicable exemption from registration, and that the Holders are sophisticated within the meaning of Section 4(2) of the Securities Act and are “accredited investors” (as defined by Rule 501 under the Securities Act). At the time of their issuance, the securities will be deemed to be restricted securities for purposes of the Securities Act, and the certificates representing the securities shall bear legends to that effect. The securities may not be resold or offered in the United States without registration or an exemption from registration.
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, 2011.
_________________________
(1)
In 2006 the Board of Directors adopted the 2006 Stock and Stock Option Plan. The Plan authorizes the Board to issue up to 1,000,000 common shares (500,000 shares after the 2-for-1 reverse split in March 2010). The shares may be awarded to employees or directors of Aoxing Pharmaceutical Company or its subsidiaries as well as to consultants to those entities. The shares may be awarded as outright grants or in the form of options, restricted stock or performance shares. On June 28, 2011, shareholders voted to increase the number of shares issuable to 2, 000,000 shares.
Item 6.
Item 6. Selected Financial Data
Not applicable.
Item 7.
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.
We are a specialized pharmaceutical company focusing on research, development, manufacturing and marketing of a broad range of narcotics, pain management, and addiction treatment pharmaceutical products. Our broad product line is comprised of prescription and over-the-counter pharmaceutical products. Our pharmaceutical products have been approved by the Chinese State Food and Drug Administration, or SFDA, based on demonstrated safety and efficacy. We sell our products primarily to hospitals, clinics, pharmacies and retail in most of the provinces of China, including rural areas and major cities. More importantly, we are dedicated to bringing the new generation of narcotics and pain medicines into the Chinese market and we have invested significantly in developing our core pipeline products and advancing them into clinical stages.
Results of Operations-Comparison of the year ended June 30, 2011 and 2010
Factors Influencing Pharmaceutical Market in China in 2011
Since the beginning of 2011, the bidding system of the market reform of pharmaceutical products in China has an adverse impact on the general pricing of those drugs that won the bidding to be included on the Essential Drug List. At similar time, raw materials, including those that were used to make certain products, especially the herbal medicines, have experienced inflation. In some instances, the inflation is very significant. In the most severe cases, the combined effect of pricing pressure and rising cost of raw materials made it non-profitable for certain products.
Revenue
Revenues for the year ended June 30, 2011 were $6,651,048, representing an 8.8% increase from the revenues of $6,115,774 that we realized during the fiscal year ended June 30, 2010. The increase in revenue is due to increased product sales of 5.8% and foreign currency translation changes contributed 2.8% to sales growth. We increased our selling efforts from July 2010 and adjusted our marketing strategy, which had a positive effect on our sales. However, there had been a very significant increase in the price of raw materials such that some of our products that have won the bidding to be included in the government’s Essential Drug List had become non-profitable. We therefore stopped promotional efforts on these product lines with unattractive gross margin, which had an adverse impact on our total sales. During 2011, these products accounted for only 6.8% of our total sales.
Cost of Goods Sold
Cost of goods sold was $3,327,723 for the year ended June 30, 2011, which was 42% higher than the $2,341,195 in costs incurred during the year ended June 30, 2010. The gross margin ratio was decreased from 61.7% to 50%. Rising cost of raw materials mentioned above is the primary reason for the decrease in gross margin. Increased cost of labor also had a negative impact on gross margin.
Gross Profit
Gross profit was $3,323,325 for the year ended June 30, 2011, 12% lower than the gross profit of $3,774,579 from previous year, reflecting the combined effects of higher sales and lower gross margin ratio.
Research & Development Expenses
Research and development expenses were $929,598 for the year ended on June 30, 2011, representing a 40% decline from $1,540,744 that incurred from previous year. Our R&D expenses could fluctuate significantly from period to period, reflecting the progress and timing of our various drug development projects.
General and Administrative Expenses
Our General and administrative expenses consist primarily of employee compensation and benefits payable to your general management, finance and administrative staff, professional and legal fees, and bad debt expenses. In the year ended June 30, 2011, our general and administrative expenses were $4,787,346, 982,374 or 25.8% higher than $3,804,972 incurred from previous year. Among the significant contributors to the increase in general and administrative expense were the following:
·
In fiscal year 2011 we incurred cash compensation expenses of $902,425 in our subsidiary in China, which is 74.8% higher than $516,258 incurred in fiscal year 2010. There was significant wage inflation across the country during 2011. A strong RMB also contributed to the increase, by 2.8%. The Company increased wages for many employees accordingly, in order for us to attract and retain talented employees.
·
Bad debt expenses. We perform accounts receivable aging analysis of each customer periodically. As a result of our periodic review and continuous efforts to collect our accounts receivable, we had charges of bad debt expense of $917,958 and $216,440 for the year ended June 30, 2011 and 2010, respectively. We sell our products to both distributors and retailers, and the payment terms range from 30 days to 90 days from invoice date or receipt of goods, whichever is late. We evaluate collectability of our accounts receivable periodically and provide a bad debt reserve based on their aging and the results of our collection action.
Selling Expense
Selling expenses in the amount of $1,603,114 were 17% higher than $1,367,997 spent on selling during the previous fiscal year. The increase was mainly due to expansion of our sales and marketing personnel, which contributed positively to our selling expenses, while decreasing promotion on certain products with unattractive gross margin has the opposite effect.
Depreciation and amortization expense decreased 7.8% from $645,004 in fiscal year 2010 to $594,720 in fiscal 2011. The main reason for the decrease is that we sold the remaining fixed assets after Lerentang relocation during the fiscal year 2010. There was no depreciation expense associated with those assets in 2011.
As a result of these expenses and reduction of gross profit, our loss from operations increased 28% from $3,584,138 incurred in fiscal year 2010 to $4,591,453 in fiscal 2011. The significant increase in the loss was primarily due to lower gross profit, higher general and administrative expenses, and higher selling expenses. Less spending on R&D had a positive impact on loss.
Interest expense was $1,744,735 for fiscal year 2011, 28% lower than the interest expense of $2,427,675 incurred in fiscal 2010. The reduction of interest expense was primarily due to repayment and conversion of a convertible debenture in May 2010.
The volatility in the market price of our common stock has a significant impact on the fair valuation of our outstanding warrant liabilities. During the fiscal year ended June 30, 2011, this value decreased by $1,912,373, primarily due to a decline in the market price of our common stock. The decrease was recorded as other income for the year. In the previous fiscal year ended on June 30, 2010, decline in the market price of our common stock led to a decline of $1,455,368 in the fair value of outstanding warrants and other derivative liabilities, with a corresponding other income in that amount.
Taxes and Effect of Expiration of Net Operating Loss Carrryforward
The Company’s Chinese subsidiaries are governed by income tax laws of the PRC concerning private-run enterprises, which are generally subject to taxes at a statutory rate of 25% on income reported in the statutory financial statements prepared in accordance with PRC GAAP after appropriate tax adjustments. Operating loss can be carryforwarded for five years in China and twenty years in the U.S.
During the year ended June 30, 2011, the Company concluded that it was more likely than not that approximately $7 million operating loss carryforward in China would not be realized, due to the expiration of net operating loss. The write-off of the operating loss carryforward resulted in a non-cash tax expenses that contributed to tax expenses of $779,286 for the year ended June 30, 2011, compared to a tax benefit of $63,058 for the year ended June 30, 2010. (Please see note 13 for more details.)
The Company realized a net loss of $5,203,101 for the fiscal year ended June 30, 2011. However, because the Company owns only 95% of Hebei Aoxing, 5% of that company’s income was attributed to the minority interest. Therefore the net loss for the fiscal year attributable to the shareholders of Aoxing Pharmaceutical was $4,926,772. In comparison, during the fiscal year ended June 30, 2010, there was a forgiveness of $3,648,616 debt by Bank of China that we recorded as other income, which helped reduce the net loss to $844,771. After deducting income (loss) attributable to the 5% minority interest in Hebei Aoxing, net loss attributable to shareholders of Aoxing Pharmaceutical was $832,159.
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.
During fiscal year 2011, the changes in Company’s liquidity and capital resources are mixed. On the negative side, cash and cash equivalent position has decreased by $1,214,966. On the positive side, a debt-to-equity conversion at the end of the fiscal year helped reducing the company’s total debt service obligation by $2,766,511.
Our cash balance on June 30, 2011 was $2,770,744, compared to $3,985,710 on June 30, 2010. The decrease reflected the combined effects of cash use in operating activities ($2,673,141), capital expenditure ($1,373,156), net borrowing, and repayment of loans to unrelated parties.
Working capital deficit on June 30, 2011 was $7,257,567, which is $2,622,080 more than the working capital deficit of $4,635,487 on June 30, 2010. Decrease in current assets, mostly due to a lower cash position, contributed $1,541,911 to the increase in the deficit. Increase in current liabilities contributed $1,080,169 to the deficit. Two main contributors to the increase in current liabilities are higher accrued expenses and other current liabilities ($622,881) and higher bank loan balance ($430,644) entirely due to foreign currency translation of the same amount of loan in RMB, which appreciated about 5.3% from June 30, 2010 to June 30, 2011.
Long term debt has declined by $3,023,013 from $8,551,061 on June 30, 2010 to $5,528,048 on June 30, 2011, primarily due to the debt to equity conversion. On June 26, 2011, the Company reached an agreement with six debt holders, including our Chairman and CEO, Mr. Zhenjiang Yue, to convert certain outstanding debts and accrued interest totaling $6,567,200 into shares of the Company’s common stock at $2.70 per share.
Our total debt service obligation, listed below, was $14,298, 074 on June 30, 2011, $2,766,511 less than the $17,064,585 debt service obligation on June 30, 2010. The decrease in total debts is significantly greater than the decrease either in current assets ($1,541,911) or in cash level (1,214,966).
Our operations during the year ended June 30, 2011 used $2,673,141 in cash, compared to $3,978,718 cash consumed during the year ended June 30, 2010. This change primarily reflected less use of cash for research and development, a more favorable change in inventory levels in comparison to the year ended June 30, 2010.
Our ongoing expansion of operations led us to improve our manufacturing facility by acquiring new machinery and equipment for $1,373,156 during the year ended June 30, 2011. In the previous year, capital expenditure was $1,996,018. Our capital expenditure will fluctuate significantly from one year to another, depending on the need and timing of manufacturing facility expansion or improvements.
As a result of the several debt refinancing and the debt-to-equity conversion mentioned above during fiscal 2011, our debt service obligations on June 30, 2011 were:
On June 30, 2011, we had cash of $2.77 million in our bank accounts. In April 2011, we obtained GMP certification for tincture and pill formulation facilities and have resumed production for some products that we were not able to manufacture before. For our next fiscal year, we anticipate our cash flow from operations to improve, due to more products available for sale. Presently, the Company does not anticipate large capital expenditure projects in the next 12 months. As a result, the Company will be able to operate at much lower cash burn rates, if needed, without major impact on its operations. The Company does anticipate that its current cash position will be insufficient to support the Company's operations at current capacity for the next 12 month period and, therefore, will need to seek additional financing of its operations. The Company may also want to seek financing to fund expansion of our operations, extend our reach to broader markets, or to acquire additional entities. We may rely on bank borrowing as well as capital raises. We are actively exploring various proposals and alternatives in order to secure sources of financing and improve our financial position. We may raise such additional capital through the issuance of our equity securities, which may result in significant dilution to our current investors. Other options considered include issuance of convertible debt, a new bridge loan, and arrangement to out-license intellectual property. We are also exploring potential strategic partnerships, which could provide a capital infusion to the Company.
Application of Critical Accounting Policies
In preparing our financial statements we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for fiscal year 2011 and 2010, there were two estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results. These were:
·
the determination, described in Note 2 to our Consolidated Financial Statements, to record an allowance for doubtful accounts in the amount of $543,697 and $2,575,177 for the year ended June 30, 2011 and 2010, respectively. The determination was based on our review of the credit history of the relevant customers and the results of our collection efforts.
·
The calculation, described in Notes 2 and 11 to the Financial Statements, of the implicit value of our outstanding warrants and derivative liabilities. The determination was based on comparison with market-valued derivative instruments.
We made no material changes to our critical accounting policies in connection with the preparation of financial statements for fiscal year 2011.
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.
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.
Item 8. Financial Statements and Supplementary Data
Index to the Consolidated Financial Statements
Page
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
Board of Directors
Aoxing Pharmaceutical Co., Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Aoxing Pharmaceutical Co., Inc. and subsidiaries as of June 30, 2011 and 2010 and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
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 as of June 30, 2011 and 2010, 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.
/s/ Paritz & Company, P.A.
Hackensack, New Jersey
September 27, 2011
See notes to financial statements
See notes to financial statements
See notes to financial statements
See notes to financial statements
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
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 narcotics and pain-management products. In March 2010, the Company changed to its current name from “China Aoxing Pharmaceutical Co., Inc.”
As of June 30, 2011, 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, 2011, the Company owned 95% of the issued and outstanding common stock of Hebei.
Since 2002, Hebei has been engaged in developing narcotics and pain management products, building its facilities and obtaining the requisite licenses from the Chinese Government. Headquartered in Shijiazhuang City, the pharmaceutical capital of China, outside of Beijing, during the year ended June 30, 2009, Hebei integrated into itself the business operations of Shijazhuang Lerentang Pharmaceutical Company, Ltd. (“LRT”), which had been an operating subsidiary acquired by Hebei in May 2008.
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 has a 51% stake in the Company, 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 will be located on the Hebei campus in Xinle City, 200 kilometers southwest of Beijing. The total capital investment is projected to be approximately $15 million during the first five years, which will be shared between the equity shareholders of the joint venture. On December 10, 2010, the joint venture obtained business license from the City Industry & Commercial Administrative Bureau.
On April 19, 2011, in connection with establishment of the joint venture, Hebei contributed a parcel of land in the area of 14,766 square meters located at its Hebei campus to the JV. The land use rights’ book value is approximately $616,368 (RMB 3,984,203) with accumulated amortization of $65,112 (RMB 420,884). The land’s appraisal value is $520,830 (RMB 3,366,648) at the contribution. On June 10, 2011, Hebei Aoxing again contributed machinery and equipment with net book value of approximately $9,282 (RMB 60,000) to the JV. The appraisal value is $9,078 (RMB 58,680).
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 financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company’s functional currency is the Chinese Renminbi (RMB); however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (USD).
Certain amounts included in the 2010 financial statement have been reclassified to conform to the 2011 financial statement presentation.
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, 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 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 $543,697 and $2,575,177 at June 30, 2011 and 2010 respectively. The Company recorded bad debt expense of $917,959 and $216,879 for the years ended June 30, 2011 and 2010, respectively.
Inventories
Inventories are stated at the lower of cost, determined using the weighted average cost method, and net realizable value. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. The Company recorded $53,987 and $177,987 inventory markdown allowance for the year ended June 30, 2011 and 2010, respectively.
Advances to Suppliers
The Company makes advances to certain vendors for purchase of its material and equipment. The advances to suppliers are interest free.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight line method for financial reporting purposes.
Hebei Aoxing leases a parcel of land on which its offices and production facilities are situated pursuant to real estate contracts from the local government of the PRC expiring in 2053.
Maintenance, repairs and minor renewals are charged to expense when incurred. Replacements and major renewals are capitalized.
Other Intangible Assets
Other intangibles including product rights, which are recorded at fair value and assigned an estimated useful life, are amortized primarily on a straight-line basis over their estimated useful lives ranging from 10 to 15 years. When events or circumstances warrant a review, the Company will assess recoverability from future operations of acquired intangibles using pretax undiscounted cash flows derived from the lowest appropriate asset groupings. Impairments are recognized in operating results to the extent that carrying value of the intangible asset exceeds its fair value,
Goodwill
Goodwill represents the excess of the consideration transferred over the fair value of net assets of business acquired. Goodwill is not being amortized, but is evaluated for impairment on at least an annual basis.
Revenue Recognition
Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, and no other significant obligations of the Company exist and 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.
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
Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.
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.
Currency translation
Since the Company operates primarily in the PRC, the Company’s functional currency is the Chinese Yuan (”RMB”). Revenue and expense accounts are translated at the average rates during the period, and balance sheet items are translated at year-end rates. Translation adjustments arising from the use of differing exchange rates from period to period are included as a separate component of shareholders’ equity. Gains and losses from foreign currency transactions are recognized in current operations.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
Fair value of financial instruments
The Company adopted the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The Company’s financial instruments primarily consist of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities, notes payables and related party advances and borrowings.
As of the balance sheet dates, the estimated fair values of financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at the respective balance sheet dates.
Derivative financial instruments
The Company’s derivative financial instruments consist of embedded derivatives related to the convertible debentures and warrants (see Note 10). The accounting treatment of derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of the inception date of the debt agreements and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense at each balance sheet date. If the fair value of the derivatives was higher at the subsequent balance sheet date, the Company recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company recorded non-operating, non-cash income.
During the years ended June 30, 2011 and 2010, the Company recognized other income of $1,912,373 and $1,455,368, respectively, relating to recording the warrant and derivative liabilities at fair value. At June 30, 2011 and 2010 there were $1,161 and $1,913,534 of warrant and derivative liabilities.
The Company’s derivative instruments were valued using the black-scholes option pricing model, using the following assumptions during the year ended June 30, 2011:
The expected volatility was determined based on the historic quoted market price of the common stock over the last 6 months. Risk free interest rate was determined based on the quoted US treasury rate under the same expected term with each corresponding financial instrument.
Comprehensive income
Comprehensive income is defined to include all changes in equity except those resulting from investments by shareholders and distributions to shareholders. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation gain, net of tax.
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
“Disclosure about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organized segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The related ASC provision has an immaterial effect on the Company’s financial statements, as the Company consists of one reportable business segment. All revenue is from customers in the PRC. The majority of the Company’s assets are located in the PRC.
New Accounting Pronouncements
In April 2010, the FASB issued ASU No. 2010-13, Compensation - Stock Compensation: Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, with early adoption permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
3 INVENTORIES
Inventories consist of the following:
4 PROPERTY AND EQUIPMENT
A summary of property and equipment and the estimated lives used in the computation of depreciation and amortization is as follows:
5 EQUITY-METHOD INVESTMENT IN JOINT VENTURE
The Company account for its investment in API (see Note 1), under the equity method of accounting.
Summarized financial information for our investment in API assuming a 100% ownership interest is as follows:
Since the joint venture was formed in April 2011, there have been no activities other than the initial contribution of assets through June 30, 2011
6 SHORT-TERM BORROWING
Short-term borrowing is a non-interest bearing unsecured note payable to a local government, due on demand.
7 LOAN PAYABLE - BANK
Loan payable - bank consist of the following loans collateralized by assets of the company:
Bank Loan Restructuring
In October 2009, the Company reached a restructuring agreement with Eastern Asset Management Company “(“EAMC”), a nationwide investment company based in China, which acquired the ownership of the Company’s bank loan from Bank of China. Prior to the restructuring, the outstanding balance of the debt was $7,911,560 (or 54,092,916 RMB), including $6,101,203 (or 41,715,142 RMB) of principal and $1,748,724 (or 11,961,278 RMB) of accrued interest. Under the restructuring agreement, the Company received forgiveness from EAMC in the amount of $3,648,616 (or 24,892,316 RMB), including $1,830,361 (or 12,514,542 RMB) of principal and $1,748,724 (or 12,377,774 RMB) of accrued interest. The total outstanding balance of the debt was reduced to $4,270,842 (approximately 29,200,600 RMB) as of October 1, 2009. The Company completely retired this debt on October 1, 2009 with the proceeds of a RMB 32,000,000 bridge loan, most of which had been paid off as of June 30, 2011.
8 LOAN PAYABLE - OTHER
Loan payable - other consist of loans from unrelated third-parties, bearing interest at an average rate of 17.9% per annum. Loans will mature as following:
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 15.13% per annum. Loans will mature as follows:
10 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and taxes consist of the following:
11 STOCK OPTION
During the year ended June 30, 2010, the Company issued a total of 300,000 options to an employee.
During the year ended June 30, 2011, the Company issued a total of 220,000 options to management and employees.
The Company uses the Black-Scholes option pricing model to calculate the fair value of stock options. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award.
The key assumptions for the Black-Scholes valuation method include the expected life of the option, stock price volatility, a risk-free interest rate, and dividend yield. Many of these assumptions are judgmental and highly sensitive. Following is a table of the key assumptions used in the valuation calculations for the options granted:
The expected volatility was determined based on the historic quoted market price of the common stock over the last 6 months. Risk free interest rate was determined based on the quoted US treasury rate under the same expected term with each corresponding financial instrument.
A summary of option activity as of June 30, 2011 and 2010, and changes during the years then ended is as following:
Options issued during the year ended June 30, 2010 and 2011 were fully vested as of June 30, 2011.
12 WARRANTS
In 2006 the Company issued the Series A, B, C and D Warrants in connection with issuance of 10% convertible debentures. The terms of the Series A, B, C and D Warrants require that whenever the Company issues common stock for a price less than $4.00 per share, an equitable adjustment to the exercise price be made in order to prevent dilution of the equity interests of the warrant holders. As a result of the private placement and loan conversion transactions in August 2009, the exercise price of the Series A, B, C and D Warrants was reduced, and accordingly, the number of shares that a warrant-holder may purchase was increased based on the terms of the warrants, effective on August 27, 2009. These warrants were issued in September 2006, are exercisable for five years and may be redeemed by the Company if the market price of its common stock exceeds 200% of the exercise price of the warrants.
FASB ASC 815-10 requires enhanced disclosures related to derivative and hedging activities and thereby seeks to improve the transparency of financial reporting. The fair value of embedded derivatives in connection with these warrants needs to be estimated. The accounting treatment of derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of the inception date of the debt agreements and at fair value as of each subsequent balance sheet date. The change of exercise price along with number of shares issuable upon exercise of these warrants would cause a change in the fair value of the warrants. Any change in fair value will be recorded as non-operating, non-cash income or expense at each balance sheet date. If the fair value of the derivatives was higher at the subsequent balance sheet date, the Company recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company recorded non-operating, non-cash income.
The following table summarizes the information relating to the revised exercise price and the number of shares that a warrant-holder may purchase in connection with the sales of convertible debentures referred to above. The following table is illustrated based on the share account post 1:2 reverse split which took place in March 2010:
13 STOCKHOLDERS’ EQUITY
Reverse Stock Split
Effective on March 19, 2010, the Company implemented a one-for-two reverse split of its outstanding common stock. All references in these financial statements to quantities of common stock or per share values have been adjusted to reflect the retroactive effect of the two-for-one reverse stock split.
Issuance of Common Stock
On August 6, 2009, the Company closed a private placement with a total of fifteen institutional and other accredited investors of 2,631,579 of shares of the Company’s common stock at a purchase price of $1.90 per share, for gross proceeds of $5 million.
On August 27, 2009, the Company issued 1,789,203 shares of common stock by exercising its option to pay the note from American Oriental Bioengineering, Inc. (“AOB”) and accrued interest in the total amount of 33 million RMB, or $4,830,847. As of June 30, 2011, AOB owns 16,789,203 shares, or 34.2% of the Company’s common stock.
On January 13, 2010, the Company issued 600,000 shares of restricted common stock, valued at 1.96 per share, to award the management and employees of the Company for their future services. The fair value of the shares is amortized over the next three years.
On April 2, 2011, the Company issued 200,000 shares of restricted common stock, valued at $2.20 per share, to award eight employees working in our research and development department for services rendered by them during the year ended June 30, 2011.
On April 10, 2010, the Company issued 60,000 shares of restricted common stock to three of the Company’s independent directors for the services rendered by them from November 2009 to October 2010.
On June 26, 2011, the Company issued 2,432,296 shares of common stock for the conversion of long-term debt and accrued interest of $6,567,200 (RMB 42,449,723), held by a group of related and third-party holders, into common equity. The shares are valued at $2.70 per share.
During the year ended June 30, 2011, the Company issued 31,756 shares of common stock to an independent director John O’shea for services rendered. Those shares were valued using the stock price at granted date. Total value of the compensation is $62,667.
14 TAXES
The Company’s Chinese subsidiaries are governed by the Income Tax Law of the People’s Republic of China concerning private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
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, 2011 and 2010 are as follows:
15 CONCENTRATIONS
Sales to three major customers were 26%, 22% and 11% of total sales for the year ended June 30, 2011. Sales to two major customers were 31% and 11% for the year ended June 30, 2010.
Sales of one major product represented approximately 82% of total sales for the year ended June 30, 2011. Sales of three major products represented approximately 73%, 9% and 6% of total sales for the year ended June 30, 2010.
Three major customers accounted for 18%, 14% and 12% of outstanding accounts receivable as of June 30, 2011. Four major customers accounted for 14%, 12%, 11% and 11% of outstanding accounts receivable as of June 30, 2010.
16 VULNERABILITY DUE TO OPERATIONS IN PRC
The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.
Substantially all of the Company’s businesses are transacted in RMB, which is not freely convertible. The Peoples Bank of China or other banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the Peoples Bank of China. Approval of foreign currency payments by the Peoples Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.
Since the Company has its primary operations in the PRC, the majority of its revenues will be settled in RMB, not U.S. Dollars. Due to certain restrictions on currency exchanges that exist in the PRC, the Company’s ability to use revenue generated in RMB to pay any dividend payments to its shareholders outside of China may be limited.
The Company’s business depends on maintaining licenses of its current products from the China State Food and Drug Administration. Obtaining licenses for additional products can be expensive and is usually time consuming. Failure to obtain the necessary licenses when needed can cause the Company’s business plan to be delayed. If the delays prevent the Company from generating positive cash flow or introducing a significant number of products, there will be a material adverse effect on the Company.
In September 2006, PRC changed the laws regarding transfer of equity in PRC companies in exchange for equity in non-PRC companies. Approvals and registrations for such transfers are required and penalties may be imposed if the requirements are not met.
Other Risks
The core business of the Company is the manufacture and sale of narcotic drugs, which is highly regulated by the PRC government. The Company depends on obtaining licenses of its products from the China State Food and Drug Administration (SFDA). Obtaining these licenses can be expensive and is usually time consuming. Failure to obtain the necessary licenses when needed can cause the Company’s business plan to be delayed. If the delays prevent the Company from generating positive cash flow or introducing a significant number of products, there will be a material adverse effect on the Company.
17 SUBSEQUENT EVENTS
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 there was no material event that occurred after the date of the balance sheets included in this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable
Item 9A.
Item 9A. 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.
From July 2010 to June 2011, the Company conducted three self-assessments of our internal control procedures and found no material weakness. Based on the results of these self-assessments, our principal executive officer and principal financial officer concluded that Aoxing Pharma’s system of disclosure controls and procedures was effective as of June 30, 2011 for the purposes described in this paragraph.
Changes in Internal Controls.
There have been no changes in our internal control over financial reporting during the fourth quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. We have assessed the effectiveness of those internal controls as of June 30, 2011, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control - Integrated Framework as a basis for our assessment.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified no material weaknesses 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, 2011.
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. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers, and Corporate Governance.
The following individuals are the members of Aoxing Pharma’s Board of Directors and/or its executive officers as of September 15, 2011.
Name
Age
Position
Zhenjiang Yue
Chairman of the Board,
Chief Executive Officer
Min Jun
Director
John P. O’Shea
Director
Howard Sterling
Director
Guozhu Xu
Director
Bob Ai (1)
Chief Financial Officer
Yunlan Tang
Chief Engineer
Guoan Zhang
Senior Vice President of Finance
Qianli Hua (2)
Vice Present of Research & Development
___________________________
(1)
Appointed to the current position by the Board of Directors in February 2011.
(2)
Appointed to the current position in December 2010.
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, his resignation 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 (NYSE: AOB), which is the largest shareholder of Aoxing. 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.
John P. O'Shea is the Chairman of European American Equities, Inc. and a co-founding member and director of the Global Alliance Partners (“GAP”). In 2009, Mr. O’Shea served as Executive Vice President and Head of the Westminster Securities Division at Hudson Securities, Inc. Prior to its acquisition by Hudson Securities, Mr. O’Shea was the Chairman and CEO of Westminster Securities Corporation, which was a NYSE member firm. Mr. O’Shea is a non-executive director for two companies in the energy industry: BlueRock Energy Holdings Inc. and AllGreen Energy Pte. Limited. Mr. O’Shea holds Bachelor’s and Master’s degrees in Economics from the University of Cincinnati. Mr. O’Shea brings his extensive corporate finance, investment banking and capital market expertise to the Board of the Company.
Howard David Sterling brings to the Board over 40 years of experience in the financing of healthcare and other high-tech enterprises. Mr. Sterling was formerly Managing Director at Hudson Securities, Inc. From 2006 until April 2008, Mr. Sterling was employed as Managing Director of National Securities Corporation, specializing in the healthcare industry. From 2005 to 2006 Mr. Sterling was employed in a similar position by Carter Securities. From 2003 until 2005 Mr. Sterling was employed as Managing Director of the Laurus Funds, where he arranged in excess of $50 million in financings for emerging growth companies. He holds a Bachelor’s of Science degree in Economics from Columbia University with honors (1962) and an LLB, magna cum laude, from Harvard Law School in 1965. Mr. Sterling provides legal and related insights to the Board and its committees.
Dr. Guozhu Xu has, since 1990, been employed as Director of the China National Drug Dependence Institute at Beijing University, with responsibility for clinical management. Until recently, Dr. Xu served as a Committee Member of the Center for Drug Evaluation at the China State Food and Drug Administration (“SFDA”). In that role, Dr. Xu was the primary investigator for over seventy clinical programs in pain management, representing over 80% of new pain management drugs approved by the SFDA. Dr. Xu is an associate director of China Drug Abuse Prevention magazine and has published over 100 articles regarding drug research and development. Dr Xu received his medical degree from Beijing Medical University in 1970. Dr. Xu brings his technical, industry and operational expertise to the Board.
Bob Ai was appointed to the office of Chief Financial Officer in February 2011. Bob Ai has over 10 years' experience on Wall Street and an additional 15 years' experience in scientific research and academia. Most recently, from 2007 to 2011, Mr. Ai was a Principal in Merlin Nexus, a private equity firm that invests in life sciences companies, where his responsibilities included analysis and evaluation of investment decisions. From 2006 to 2007, Mr. Ai served as Vice President for Wall Street Access, a broker-dealer, where he was responsible for industry research. From 2004 to 2005, Mr. Ai was employed as a Senior Equity Analyst by Bennett Lawrence, an asset management firm. From 2001 to 2004, Mr. Ai was employed as an Analyst at Merlin Biomed, also an asset management firm. Prior to entering the financial sector, Mr. Ai was engaged for seven years as a research associate and post-doctoral research scholar at the University of Pennsylvania. Mr. Ai was awarded an MBA from Penn State University in 2001 and a PhD in Molecular and Cell Biology by Penn State University in 1992. Mr. Ai brings a combination of experience in the areas of capital raising, investor relations, financial management and analysis, and business strategy as well as technical expertise to the Board and the Company.
Yunlan Tang was appointed to the Chief Engineer of Aoxing Pharma in 2007. She has served as the General Manager of Hebei Aoxing since 2002. Prior to joining the Company, Ms. Tang was Senior Engineer of Technology and Quality at Northern China Pharmaceutical Company from 1968 and 1980. Ms. Tang brings over 30 years of experience in project management, new drug development, quality control and operation of pharmaceutical business. She received a degree in Chemical Engineering at Beijing University of Chemical Engineering in 1968. Yunlan Tang brings project management, new drug development, quality control and operation of pharmaceutical business expertise to the Board.
Qianli Hua was appointed Vice President of Research & Development in December 2010, overseeing new product development, registration, and external collaborations. He joined Hebei Aoxing in 2004 and has played various roles in research and development. He is a key innovator for the two Chinese patents granted to Hebei Aoxing (naloxone sublingual film and midazolam oral membrane). He graduated from Hebei University of Science and Technology in 2002.
Guoan Zhang was appointed to the Office of Senior Vice President of Finance in June 2010. Mr. Zhang has served as the Chief Accounting Officer of the Company since March 2010. From November 1, 2010 through February 1, 2011, Guoan Zhang also served as interim Chief Financial Officer of the Company. Prior to the appointment of Mr. Zhang as the Company’s Chief Accounting Officer, 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 Helongjiang School of Business and he is a Certified Public Accountant in China.
There are no material 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. 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.
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.
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.
*
Designates membership.
**
Designates chairmanship or acting chairmanship.
(1)
Audit Committee financial expert.
Audit Committee
Howard David Sterling currently serves as Chairman of the Audit Committee. The Board has determined that Howard David Sterling 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 is the other member of the Audit Committee. The Board has determined that each of the members of the Audit Committee satisfies the independence requirements of the AMEX.
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:
· the Company’s accounting financial reporting processes and the integrity of its financial statements;
· the audits of the Company’s financial statements and the appointment, compensation, qualification, independence and performance of the Company’s independent auditors;
· the Company’s compliance with legal and regulatory requirement; and
· the performance of the Company’s internal audit function and internal control over financial reporting.
Compensation Committee
John P. O’Shea serves as Chairman of the Compensation Committee. Guozhu Xu is the other member of this Committee. The Board has determined that each of the members of the Compensation Committee satisfies the independence requirements of the NYSE Amex. 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:
· annually review the Company’s corporate goals and objectives relevant to the CEO’s compensation;
· evaluate the CEO’s performance in light of such goals and objectives; and, either as a Compensation Committee or, together with the other independent directors (as directed by the Board), determine and approve the CEO’s compensation level based on this evaluation; annually review and make recommendations to the Board with respect to non-CEO executive officer and independent director compensation to assist the Board in making the final determination as to non-CEO executive officer and independent director compensation;
· establish measurements that will ensure that the Company’s compensation program is effective in attracting and retaining key employees, reinforce business strategies and objectives for enhanced stockholder value, and administer the compensation program in a fair and equitable manner consistent with established policies and guidelines;
· make recommendations to the Board with respect to the Company’s incentive-compensation plans and equity-based plans that are subject to the Board’s approval;
· make recommendations to the Board regarding approval, disapproval, modification, or termination of existing or proposed employee benefit plans; approve any stock option award or any other type of award as may be required for complying with any tax, securities, or other regulatory requirement, or otherwise determined to be appropriate or desirable by the Compensation Committee or Board;
· review and assess the adequacy of this charter annually; review and approve the compensation disclosure and analysis prepared by the Company’s management, as required to be included in the Company’s proxy statement or annual report on Form 10-K filed with the SEC;
· produce a Compensation Committee report on executive officer compensation as required by the SEC to be included in the Company’s proxy statement or annual report on Form 10-K filed with the SEC.
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
The Nominating and Corporate Governance Committee has the following responsibilities as set forth in its charter:
· to review and recommend to the Board with regard to policies for the composition of the Board;
· to review any director nominee candidates recommended by any director or executive officer of the Company, or by any shareholder if submitted properly;
· to identify, interview and evaluate director nominee candidates and have sole authority to retain and terminate any search firm to be used to assist the Committee in identifying director candidates and approve the search firm’s fees and other retention terms;
· to recommend to the Board the slate of director nominees to be presented by the Board;
· to recommend director nominees to fill vacancies on the Board, and the members of each Board committee;
· to lead the annual review of Board performance and effectiveness and make recommendations to the Board as appropriate; and
· to review and recommend corporate governance policies and principles for the Company, including those relating to the structure and operations of the Board and its committees.
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 E0xhibit 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, except for Bob Ai’s Form 3 filing on February 14, 2011, John P. O’Shea’s Form 4 filings on January 20, 2011, February 11, 2011, March 4, 2011 and April 12, 2011, and Zhenjiang Yue’s Form 4 filing on May 23, 2011, none of the Forms 3, 4 or 5 required to be filed pursuant to Section 16(a) have been filed by the executive officers, directors and security holders since such persons had become subject to reporting requirements. All such filings have been made as of the date of this report.
Item 11.
Item 11. Executive Compensation
The following table sets forth all compensation paid by Aoxing Pharma and its subsidiaries to Zhenjiang Yue for services as Chief Executive Officer during the year ended June 30, 2011 and 2010 and as Chief Executive Officer and Chief Financial Officer during the years ended June 30, 2009. The table also sets forth the compensation paid by Aoxing Pharma and its subsidiaries to Bob Ai for services as Chief Financial Officer during the year ended June 30, 2011. There were no other executive officers whose total salary and bonus for the fiscal year ended June 30, 2011 exceeded $100,000.
Summary Compensation Table
________________________________
(1)
The dollar equivalent of 1,000,000 RMB, based on the exchange rate of 6.6367 RMB per dollar
(2)
The dollar equivalent of 1,000,000 RMB, based on the exchange rate of 6.8493 RMB per dollar
(3)
Represents value of the stock option award granted to the Mr. Yue during our fiscal year 2011, calculated in accordance with FASB ASC Topic 718. For the purposes of calculating the value of this option grant, the following assumptions were made: (a) expected life (years) - 4; (b) volatility - 49.3% ; (c) dividend yield - none; and (d) risk-free interest rate - 2.24%.
(4)
The Company agreed to issue 20,000 shares of common stock to Mr. Yue for services during the period from January 1, 2010 to December 31, 2012.
(5)
Represents the full grant date fair value of restricted stock award.
(6)
Represents the compensation of Mr. Ai received for service from February 1, 2011 when he was appointed by our Board to serve as Chief Financial Officer to June 30, 2011. The value of the stock option grants was calculated in accordance with FASB ASC Topic 718. The following assumptions were made: (a) expected life (years) - 5; (b) volatility - 53.05% ; (c) dividend yield - none; and (d) risk-free interest rate - 2.38%.
None of our named executives participates in or have account balances in qualified or non-qualified defined benefit, defined contribution or other deferred compensation plans sponsored by us.
Employment Contracts, Termination of Employment and Change-in-Control Arrangements
The Company has employment agreements with the following named executive officers. The following is a description of these 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$146,000). 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 ends on January 13, 2013, but it will be 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 three months’ severance pay if it terminates in the first year of the term and six months’ severance pay if it terminates thereafter. 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.
Employment Agreement dated as of February 1, 2011 with Bob Ai. This agreement provides that Mr. Ai will serve as the Company’s Chief Financial Officer. The Company agreed to pay Mr. Ai an annual salary of $200,000. The Company may also pay him a year-end stock bonus of 20,000 shares of common stock for each year in which Mr. Ai satisfied the performance targets to be set for him by the Board. The agreement also contains a grant of five year options for 50,000 shares of common stock at the beginning of each year in the term of employment with the exercise price of each option being the average closing price for the Company’s common stock for the last 20 trading days before option is granted, the initial grant of options vesting after August 31, 2011 and the two subsequent grants vesting immediately. The term of the agreement ends on January 31, 2014. The Company can terminate the agreement at any time without cause, but will be liable for four months’ severance pay.
Equity Grants in 2011
The following tables set forth certain information regarding the stock options acquired by the Company’s Executive Officer and Chief Financial Officer during the year ended June 30, 2011 and those options held by them on June 30, 2011.
Option Grants in the Last Fiscal Year
(1) Represents value of the stock option award granted to the Mr. Yue for our fiscal year 2011, calculated in accordance with FASB ASC Topic 718. For the purposes of calculating the value of this option grant, the following assumptions were made: (a) expected life (years) - 4; (b) volatility - 49.3% ; (c) dividend yield - none; and (d) risk-free interest rate - 2.24%.
(2) Represents the compensation of Mr. Ai received for service from February 1, 2011 when he was appointed by our Board to serve as Chief Financial Officer to June 30, 2011. The value of the stock option grants was calculated in accordance with FASB ASC Topic 718. The following assumptions were made: (a) expected life (years) - 5; (b) volatility - 53.05% ; (c) dividend yield - none; and (d) risk-free interest rate - 2.38%.
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:
·
No compensation for Zhenjiang Yue or Jun Min
·
US$4000 per month and 20,000 shares of common stock annually for Messrs. O’Shea and Sterling
·
RMB 4000 per month and 20,000 shares of common stock annually for Guozhu Xu
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, 2011. The Board members have the option of receiving fees earned in cash or restricted stock.
(1)
The Company issued 40,000 shares of restricted common stock to Messrs. O’Shea, Sterling and Xu each for services during the period from October 1, 2008 through October 31, 2010.
(2)
Including $62,667 of restricted stocks using the stock price at granted date, for fees earned.
(3)
Commencing in November 2010, the Company has been paying an additional sum of $3,333 per month to Mr. O’Shea to compensate him for his services as a consultant to the Company.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Set forth below is information regarding the beneficial ownership of our common stock as of September 15, 2011, by:
·
each person known to us that beneficially owns more than 5% of our outstanding shares of common stock;
·
each of our directors;
·
each of our named executive officers; and
·
all of our current directors and executive officers as a group.
There were 49,158,955 shares of our common stock issued and outstanding as of September 15, 2011. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below have sole voting power and investment power with respect to their shares, subject to community property laws where applicable.
___________________
*Less than 1%
(1)
For purposes of determining the amount of securities beneficially owned, share amounts include all common stock owned outright plus all shares of common stock issuable upon conversion of convertible notes, or the exercise of options or warrants currently exercisable, or exercisable within 60 days of the record date. The Percent of Class is based on the number of shares of the Company’s common stock outstanding as of the record date. Shares of common stock issuable upon conversion of convertible notes, or the exercise of options or warrants currently exercisable, or exercisable within 60 days of the record date, are deemed outstanding for the purpose of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing the percentage ownership of any other owners. The address of all persons named in this table is: c/o Aoxing Pharmaceutical Company, Inc., 15 Exchange Place, Suite 500, Jersey City, NJ 07302.
(2)
Includes (i) 2,570,000 shares of common stock held by Mr. Yue and (ii) 1,500,000 shares of common stock held of record by Mr. Yue’s spouse, Cuiying Hao.
(3)
Does not include 16,789,203 shares owned of record by American Oriental Bioengineering, Inc., of which Mr. Min is Vice President and a member of the Board of Directors.
(4)
The Company’s Chief Financial Officer. Represents options to purchase shares of the Company’s common stock. The options are not vested until September 1, 2011.
(5)
Represents shares of common stock held by American Oriental Bioengineering, Inc. The address for AOB is c/o Aoxing Pharmaceutical Company, 15 Exchange Place, Suite 500, Jersey City, NJ 07302.
(6)
The information in the table is based solely on the Schedule 13G/A filed with the SEC on February 14, 2011 reflecting beneficial ownership of the reported entities and their affiliates. Wellspring Management, LLC (“Wellspring Management”), a Delaware limited liability company, which serves as general partner of Wellspring Capital, L.P. (“Wellspring Capital”), a Delaware limited partnership, and investment manager for a separately managed account for Blackwell Partners LLC (“Blackwell Partners”), a Georgia limited liability company. George M. White, a United States citizen, as managing member of Wellspring Management, with respect to the shares of common stock beneficially owned by Wellspring Management, and with respect to the shares of common stock directly owned by Mr. White, the shares of common stock beneficially owned by Mr. White as trustee of certain trusts, and the shares of common stock directly owned by Robert C. Gilliland, who is a non-managing member of Wellspring Management. Mr. White, as managing member of Wellspring Management, may be deemed to beneficially own common stock beneficially owned by Wellspring Management for purposes of SEC Rule 13d-3 insofar as he may be deemed to have the power to direct the voting or disposition of common stock. Additionally, certain common stock is owned by either Mr. White directly, or by various trusts of which Mr. White is the trustee. As trustee of said trusts, Mr. White may be deemed to indirectly beneficially own common stock directly owned by said trusts. Mr. White may also be deemed to indirectly beneficially own common stock that is directly owned by Mr. Gilliland, a non-managing member of Wellspring Management. None of the reporting persons set forth in the Schedule 13G/A individually own more than 5% of the Company’s outstanding common stock; however, in the aggregate, the reporting persons own the amount set forth in the table above.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
Except as set forth below, during the 2011 fiscal year, we were not involved in any related party transactions subject to Item 404 of Regulation S-K. Pursuant to Board policies, our executive officers and directors, and principal shareholders, including their immediate family members and affiliates, are not permitted to enter into a related party transaction without the prior consent of the Board. Any request for such related party transaction with an executive officer, director, principal stockholder, or any of such persons’ immediate family members or affiliates, in which the amount involved exceeds $120,000 must first be presented to the Audit Committee and the Board for review, consideration and approval. All of our directors, executive officers and employees are required to report to the Board any such related party transaction. In approving or rejecting the proposed agreement, the Board will consider the relevant facts and circumstances available and deemed relevant to the Board which will approve only those agreements that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as the Board determines in the good faith exercise of its discretion.
On June 26, 2011, the Company entered into a Debt Conversion Agreement with certain holders of its promissory notes, in which the Holders, including Mr. Zhenjiang Yue, Chairman of the Board and Chief Executive Officer of the Company, agreed to convert the aggregate outstanding principal and accrued and unpaid interest they hold under the Notes, totalling approximately USD$6.57 million, into shares of common stock of the Company at the conversion price of $2.70 per share. On June 24, 2011, the closing price for the Company’s securities as reported on the NYSE Amex was $1.40 per share. As a result of this conversion, the Holders will receive a total of 2,432,296 shares of common stock of the Company. The terms of this conversion transaction were reviewed and approved unanimously by independent members of the Board of Directors.
Director Independence
Our Board is subject to the independence requirements of the NYSE Amex LLC (AMEX). Pursuant to the requirements, the Board reviews director independence. During this review, the Board considers transactions and relationships between each director or any member of his immediate family and Aoxing and its affiliates, including those transactions that are contemplated under Item 404(a) of Regulation S-K. The purpose of this review was to determine whether any such relationships or transactions existed that were inconsistent with a determination that the director is independent. Based on this review, the Board has determined that all but two of our directors are “independent” as defined by the listing standards of the AMEX Company Guide (Mr. Zhenjiang Yue also serves as our Chief Executive Officer, and Mr. Jun Min is not considered independent, respectively, and neither Mr. Yue nor Mr. Jun serves on the Audit, Nominating, or Compensation Committees). The Board has also determined that the members of the Audit Committee are also “independent” for purposes of Section 10A-3 of the Exchange Act and Section 803 of the AMEX Company Guide. The Board based these determinations primarily on a review of the responses of the directors and executive officers to questions regarding employment and transaction history, affiliations and family and other relationships and on discussions with the directors. None of our directors engages in any transaction, relationship, or arrangement contemplated under Item 404(a) of Regulation S-K.
Item 14.
Item 14. Principal Accountant Fees and Services
The following table presents fees for professional services rendered by Paritz & Company, P.A. for the fiscal years 2011 and 2010:
(1)
Audit fees represent fees billed for professional services provided in connection with the audit of the Company’s annual financial statements, reviews of its quarterly financial statements, and audit services provided in connection with statutory and regulatory filings for those years. All work on Paritz’ engagement to audit the Company’s financial statements for the year ended June 30, 2011 was performed by full-time permanent employees of Paritz.
(2)
Audit-related fees represent fees billed primarily for assurance and related services not reported under Audit fees.
(3)
Tax fees principally represent fees billed for tax preparation, tax advice and tax planning services.
(4)
All other fees principally would include fees billed for products and services provided by the accountant, other than the services reported under the three captions above.
Our Audit Committee has the sole authority to pre-approve all audit and non-audit services provided by our independent auditors. The Audit Committee on an annual basis reviews audit and non-audit services performed by the independent auditors. All audit and non-audit services are pre-approved by the Audit Committee, which considers, among other things, the possible effect of the performance of such services on the auditors’ independence. As permitted under the Sarbanes-Oxley Act of 2002, the Audit Committee may delegate pre-approval authority to one or more of its members. Any service pre-approved by a delegate must be reported to the Audit Committee at the next scheduled quarterly meeting. The Audit Committee considered whether the provision of the auditors’ services, other than for the annual audit and quarterly reviews, is compatible with its independence and concluded that it is compatible. In 2011 and 2010, all such services were pre-approved by the Audit Committee.
Item 15.
Item 15. Exhibit List and Financial Statement Schedules
(a) Financial Statements
Report of Independent Registered Accounting Firm
Balance Sheets - June 30, 2011 and 2010
Consolidated Statements of Operations - Years Ended June 30, 2011 and 2010
Consolidated Statement of Changes in Stockholders’ Equity - Years Ended June 30, 2011 and 2010
Consolidated Statements of Cash Flows - Years ended June 30, 2011 and 2010
Notes to Consolidated Financial Statements
(b) Exhibit List
3-a(1)
Certificate of Incorporation, as amended through December 29, 2005 - filed as an exhibit to the Annual Report on Form 10-KSB for the year ended June 30, 2006 and incorporated herein by reference.
3-a(2)
Certificate of Amendment of the Certificate of Incorporation effective on July 6, 2010 - filed as an exhibit to the Current Report on Form 8-K filed on July 13, 2006 and incorporated herein by reference.
3-a(3)
Certificate of Amendment of the Certificate of Incorporation effective on January 6, 2010 - filed as an exhibit to the Current Report on Form 8-K filed on January 7, 2010 and incorporated herein by reference.
3-a(4)
Articles of Amendment of the Certificate of Incorporation effective on March 19, 2010 - filed as an exhibit to the Current Report on Form 8-K filed on March 29, 2010 and incorporated herein by reference.
3-b
Amended and Restated Bylaws - filed as an exhibit to the Current Report on Form 8-K filed on November 16, 2009 and incorporated herein by reference.
4.1
Form of Series A Common Stock Purchase Warrant issued as of September 28, 2006 (Filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2006 and incorporated herein by reference). .
4.2
Form of Series B Common Stock Purchase Warrant issued as of September 28, 2006 (Filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2006 and incorporated herein by reference).
4.3
Form of Series C Common Stock Purchase Warrant issued as of September 28, 2006 (Filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2006 and incorporated herein by reference).
4-4
Form of Series D Common Stock Purchase Warrant issued as of September 28, 2006 - filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2006 and incorporated herein by reference.
10.1
Joint Strategic Alliance and Securities Purchase Agreement dated April 15, 2008 between China Aoxing Pharmaceutical Company, Inc. and American Oriental Bioengineering, Inc. (Filed as an exhibit to the Company’s Current Report on Form 8-K dated April 15, 2008 and incorporated by reference herein).
10.2
Amended Junior Subordinated Promissory Note dated May 1, 2008 and amended on August 12, 2008, issued to Zhenjiang Yue (Filed as an exhibit to the Company’s Current Report on Form 8-K dated August 12, 2008 and incorporated by reference herein)..
Code of Ethics of China Aoxing Pharmaceutical Company, Inc. (Filed as an Exhibit to the Current Report on Form 8-K filed on November 30, 2009 and incorporated herein by reference)
21.1
List of Subsidiaries *
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act 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.*
*
Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Aoxing Pharmaceutical Company, Inc.
Date: September 28, 2011
By: /s/ Zhenjiang Yue
Zhenjiang Yue, Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below on September 28, 2011 by the following persons on behalf of the Registrant and in the capacities indicated.
/s/ Zhenjiang Yue
Date: September 28, 2011
Zhenjiang Yue, Director,
Chief Executive Officer
/s/ Bob Ai
Date: September 28, 2011
Bob Ai, Chief Financial Officer
(Principal Accounting and Financial Officer)
/s/ John O’Shea
Date: September 28, 2011
John O’Shea, Director
/s/ Howard David Sterling
Date: September 28, 2011
Howard David Sterling, Director
/s/ Jun Min
Date: September 28, 2011
Jun Min, Director
/s/ Guozhu Xu
Date: September 28, 2011
Guozhu Xu, Director
* * * * *