Aoxing Pharmaceutical Company Inc. Announces Fiscal Year 2011 Financial and Operational Results

JERSEY CITY, NJ--(Marketwire - September 28, 2011) - Aoxing Pharmaceutical (NYSE Amex: AXN) (“Aoxing Pharma”), a specialty pharmaceutical company focusing on research, development, manufacturing and distribution of narcotic, pain-management, and addiction treatment pharmaceuticals, today announced its financial and operational results for the fiscal year ended June 30, 2011.

Financial Results:

Revenues for the year ended June 30, 2011 were $6,651,048, representing an 8.8% increase from the revenues of $6,115,774 realized during the fiscal year ended June 30, 2010. The increase in revenue is due to increased product sales of 5.8%. Foreign currency translation changes contributed 2.8% to sales growth. At the beginning of the fiscal year, the Company increased selling efforts and adjusted its marketing strategy, which had a positive effect on sales. However, the significant increase in the price of raw materials since January 2011 made some of the Company’s products, included in the government’s Essential Drug List, non-profitable. The Company therefore stopped promotional efforts on these product lines with unattractive gross margins, which had an adverse impact on its total sales. During 2011, these products accounted for only 6.8% of total sales.

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 decreased from 61.7% to 50%. The rise in cost of raw materials, as mentioned previously, is the primary reason for the decrease in gross margin. Increased cost of labor also had a negative impact on gross margin.

Gross profit was $3,323,325 for the year ended June 30, 2011, 12% lower than the gross profit of $3,774,579 from the previous year, reflecting the combined effects of higher sales and lower gross margin ratio.

Research and development expenses were $929,598 for the year ended on June 30, 2011, representing a 40% decline from $1,540,744 incurred in the previous year. R&D expenses could fluctuate significantly from period to period, reflecting the progress and timing of the Company’s various drug development projects.

General and administrative expenses consist primarily of employee compensation and benefits payable to general management, finance and administrative staff, professional and legal fees, and bad debt expenses. In the year ended June 30, 2011, general and administrative expenses were $4,787,346, or 25.8% higher than $3,804,972 incurred from the previous year. Among the significant contributors to the increase in general and administrative expense were the following:

(i) In fiscal year 2011, the Company incurred cash compensation expenses of $902,425 in its subsidiary in China, which is 74.8% higher than $516,258 incurred in fiscal year 2010. There was significant wage inflation across the country (PRC) during 2011. A strong RMB also contributed to the increase by 2.8%. The Company increased wages for many employees accordingly, in order to attract and retain talented employees.

(ii) Bad debt expenses. The Company performs accounts receivable aging analysis of each customer periodically. As a result of the periodic review and continuous efforts to collect accounts receivable, it had charges of bad debt expense of $917,958 and $216,440 for the year ended June 30, 2011 and 2010, respectively. The Company sells 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 later.

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 sales and marketing personnel, which contributed positively to 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 the Company sold the remaining fixed assets after the Lerentang relocation during the fiscal year 2010. There were no depreciation expenses associated with those assets in 2011.

As a result of these expenses and the reduction of gross profit, loss from operations increased 28% from $3,584,138 incurred in fiscal year 2010 to $4,591,453 in fiscal year 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 AXN common stock had 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 AXN common stock. The decrease was recorded as other income for the year. In the previous fiscal year ended on June 30, 2010, a 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.

The Company realized a net loss of $5,203,101 for the fiscal year ended June 30, 2011. However, because the Company owns 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 was recorded as other income, which partially reduced 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 in fiscal year 2010.

Recent Highlights and Updates

• In June 2011, the Company reached agreement with six debt holders to convert certain outstanding notes and accrued interest totaling 6.6 million into 2,432,296 shares of common stock at $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.

• We have recently completed the Phase III trials of Tongjingshule (TJSL), a capsule form of selected herbal medicine, for Capsules for Primary Dysmenorrha (“PD”), or menstrual pain, in adult women, under the protocol approved by the China SFDA. TJSL is a capsule form of selected herbal medicines. 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 market size of healthcare product to address menstrual pain is estimated at $3 billion per year in China.

• In June 2011, the Company was granted a patent by the State Intellectual Property Office of The People’s Republic of China for midazolam maleate oral film. The Chinese patent, ZL2006.1.0075080.2, covers an oral film formulation of midazolam maleate that can be dissolved rapidly under the tongue. Midazolam maleate is a kind of psychotropic drug and derived from thebaine, a constituent of opium.

• In May 2011, the Company was granted a patent by the State Intellectual Property Office of The People’s Republic of China for naloxone sublingual film. The Chinese patent, ZL2005.1.0125279.7, covers a sublingual film formulation of naloxone that can be dissolved rapidly under the tongue. Naloxone is an opioid receptor antagonist that is used clinically to relieve life-threatening depression of the central nervous system and respiratory system, caused by overdose of morphine and other opioids. It may also be used as an adjunctive therapy to increase blood pressure in the treatment of septic shock. The sublingual film developed by Aoxing Pharma can be dissolved in under 30 seconds and allows the drug to diffuse into the blood through tissues under the tongue. The rapid and more efficient absorption of the formulation makes it a convenient alternative to injection.

Zhenjiang Yue, Aoxing’s Chairman and CEO, commented, “During fiscal year 2011, despite the macro challenges in the economy, we have laid the foundation for success in the coming year. We continued to focus our efforts to grow Aoxing Pharma and our brand through additional sales initiatives and further progress to expand our diverse pipeline in narcotic, pain management, and addiction treatment pharmaceuticals as we await SFDA approval of our key narcotic drug opportunities. We received key additional patents and continued to make important progress in our joint venture with Macfarlan Smith, the subsidiary of Johnson Mathey. We look forward to continued success in the years ahead.”

About Aoxing Pharmaceutical Company, Inc.
Aoxing Pharmaceutical Company, Inc. is a US incorporated specialty pharmaceutical company with its operations in China, specializing in research, development, manufacturing and distribution of a variety of narcotics and pain-management products. Headquartered in Shijiazhuang City, outside Beijing, Aoxing has the largest and most advanced manufacturing facility in China for highly regulated narcotic medicines. Its facility is one of the few GMP facilities licensed for the manufacture of narcotic medicines by the China State Food and Drug Administration (SFDA). It has a joint venture collaboration with Johnson Matthey Plc to produce and market narcotics and neurological drugs in China. It also has strategic alliance partnerships with QRxPharma, and Phoenix PharmaLabs, Inc. For more information, please visit: www.aoxingpharma.com.

Safe Harbor Statement from Aoxing Pharmaceutical Company, Inc.
Certain statements made in this press release are forward-looking and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. All forward-looking statements included herein are based upon information available to the Company as of the date hereof and, except as is expressly required by the federal securities laws, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, changed circumstances or future events or for any other reason. To the extent that any statements made here are not historical, these statements are essentially forward-looking. The Company uses words and phrases such as “guidance,” “forecasted,” “projects,” “is expected,” “remain confident,” “will” and/or similar expressions to identify forward-looking statements in this press release. Undue reliance should not be placed on forward-looking information. The Company may also make written or oral forward-looking statements in its periodic reports filed with the U.S. Securities and Exchange Commission and other written materials and in oral statements made by its officers, directors or employees to third parties. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by these forward-looking statements. The economic, competitive, governmental, technological and other risk factors identified in the Company’s filings with the Securities and Exchange Commission, including the Form 10-K for the year ended June 30, 2011, may cause actual results or events to differ materially from those described in the forward looking statements in this press release. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise.

 AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS For the Years Ended June 30, ---------------------------- 2011 2010 ------------ ------------ SALES $ 6,651,048 $ 6,115,774 COST OF SALES 3,327,723 2,341,195 ------------ ------------ GROSS PROFIT 3,323,325 3,774,579 ------------ ------------ OPERATING EXPENSES: Research and development expense 929,598 1,540,744 General and administrative expenses 4,787,346 3,804,972 Selling expenses 1,603,114 1,367,997 Depreciation and amortization 594,720 645,004 ------------ ------------ TOTAL OPERATING EXPENSES 7,914,778 7,358,717 ------------ ------------ LOSS FROM OPERATIONS (4,591,453) (3,584,138) ------------ ------------ OTHER INCOME (EXPENSE): Interest expense, net of interest income (1,744,735) (2,427,675) Change in fair value of warrant and derivative liabilities 1,912,373 1,455,368 Forgiveness of debt - 3,648,616 ------------ ------------ TOTAL OTHER INCOME (EXPENSE) 167,638 2,676,309 ------------ ------------ LOSS BEFORE INCOME TAXES (4,423,815) (907,829) Income taxes (credit) 779,286 (63,058) ------------ ------------ NET LOSS (5,203,101) (844,771) Net loss attributed to non-controlling interest in subsidiaries (276,329) (12,612) ------------ ------------ LOSS ATTRIBUTABLE TO THE SHAREHOLDERS OF THE COMPANY (4,926,772) (832,159) OTHER COMPREHENSIVE INCOME: Foreign currency translation adjustment 1,429,145 59,240 ------------ ------------ COMPREHENSIVE LOSS (3,497,627) (772,919) ============ ============ Other comprehensive income attributable to non-controlling interest 69,169 2,696 ------------ ------------ COMPREHENSIVE LOSS ATTRIBUTABLE TO THE COMPANY $ (3,566,796) $ (775,615) ============ ============ BASIC AND DILUTED LOSSES PER COMMON SHARE $ (0.11) $ (0.02) ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 46,578,400 45,581,724 ============ ============ AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, June 30, 2011 2010 ------------ ------------ ASSETS CURRENT ASSETS: Cash $ 2,770,744 $ 3,985,710 Accounts receivable, net of allowance for doubtful accounts of $543,697 and $2,575,177, respectively 2,008,024 1,723,198 Inventory 1,469,417 1,564,975 Prepaid expenses and other current assets 1,130,010 1,646,223 ------------ ------------ TOTAL CURRENT ASSETS 7,378,195 8,920,106 ------------ ------------ LONG-TERM ASSETS: Property and equipment, net of accummulated depreciation 26,669,156 25,569,782 Deferred income tax 2,614,817 3,394,103 Goodwill 19,916,128 19,012,321 Other intangible assets 1,388,704 1,431,182 Investment in joint venture 521,541 - ------------ ------------ TOTAL LONG-TERM ASSETS 51,110,346 49,407,388 ------------ ------------ TOTAL ASSETS $ 58,488,541 $ 58,327,494 ============ ============ LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Short-term borrowings $ 232,055 $ 293,746 Accounts payable 2,659,727 2,458,941 Loan payable - bank 8,508,663 8,078,019 Current portion of loan payable - related parties 5,793 94,760 Current portion of loan payable - other 23,515 46,999 Accrued expenses and other current liabilities 3,206,009 2,583,128 ------------ ------------ TOTAL CURRENT LIABILITIES 14,635,762 13,555,593 ------------ ------------ LONG-TERM LIABILITIES: Loan payable - related parties 3,696,210 6,329,118 - others 1,831,838 2,221,943 Warrant and derivative liabilities 1,161 1,913,534 ------------ ------------ TOTAL LONG-TERM LIABILITIES 5,529,209 10,464,595 ------------ ------------ Common stock, par value $0.001, 100,000,000 shares authorized, 49,158,955 and 46,494,903 shares issued and outstanding on June 30, 2011 and 2010, respectively 49,159 46,495 Additional paid in capital 57,382,109 49,594,553 Accumulated deficit (20,525,372) (15,598,600) Other comprehensive income 1,885,531 525,555 ------------ ------------ TOTAL SHAREHOLDERS’ EQUITY OF THE COMPANY 38,791,427 34,568,003 NONCONTROLLING INTEREST IN SUBSIDIARIES (467,857) (260,697) ------------ ------------ TOTAL EQUITY 38,323,570 34,307,306 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 58,488,541 $ 58,327,494 ============ ============