Aoxing Pharmaceutical Company Inc. Announces Third Quarter Fiscal 2012 Financial and Operational Results

JERSEY CITY, NJ--(Marketwire - May 15, 2012) - Aoxing Pharmaceutical Company, Inc. (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 its third fiscal quarter, which ended on March 31, 2012.

Financial Results:

Sales for the quarter ended March 31, 2012 were $1,807,284, representing an 11% increase over the sales of $1,628,627 realized during the third quarter of the last fiscal year. For the nine months ended March 31, 2012, sales were $5,461,685, a 3% increase from sales of $5,309,839 realized during the same period in 2011. Sales of the Company’s main product, Zhongtongan, increased significantly from the same periods in 2011, mainly due to increased promotional efforts. At the same time, sales of certain other products declined, as the Company has reduced promotional efforts on certain non-proprietary products.

For the quarter ended March 31, 2012, gross margin was 55.9%, significantly higher than the gross margin of 50.4% realized during the same period a year earlier. For the nine months ended March 31, 2012, gross margin was 57.8%, 3.2% higher than the gross margin of 54.6% for the same period a year earlier. During the nine months ended March 31, 2012, gross margin has been negatively influenced by higher raw material costs. However, the effect was more than offset by product mix shift (lower sales of low margin products) as well as overall manufacturing efficiency enhancement.

General and administrative expenses were $699,678 in the three months ended March 31, 2012, 48.7% lower than $1,364,117 incurred in the same period a year earlier. For the nine months ended March 31, 2012, general and administrative expenses were $2,210,489, 41.6% lower than $3,785,867 incurred during the nine months a year earlier. The main reasons for the decreases were the Company’s effort to reduce costs and lower bad debt expenses. The Company increased its efforts to collect outstanding receivables during the period. The result was a decrease in bad debt expenses by $235,676 and $693,027 for the three and nine months ended March 31, 2012 compared to the same periods in the prior year. Other factors contributing to the decrease in general and administrative expenses included lower consulting fees and office expenses.

During the quarter ended March 31, 2012, the Company recorded a full valuation allowance for its deferred tax asset balance related to China. The deferred tax assets are substantially related to loss carry forwards for the past 5 years under Chinese tax law. At the end of 2011, the local Food and Drug Administration implemented a Chinese medical reform program for certain essential medicines, which limits unit price. Over 50,000 state owned primary-level medical and health care institutions are using this basic drug program, and the selling price of the affected drugs decreased by 30%. In addition, on April 15, 2012, a famous Chinese TV program ‘Weekly Quality Report’ disclosed that certain pharmaceutical enterprises purchased capsule medication containing excessive amount of chromium, which is hazardous to human health. Immediately the State Food and Drug Administration (“SFDA”) began a nation-wide drug safety investigation. This resulted in the SFDA deferring all new drug approvals. The negative impact of these events on the selling prices of our current products and the expected delays in approval of our two new medicines caused the Company to reassess the forecasted future taxable income that is the basis for recording the deferred tax asset. Because of that reassessment, the Company provided a full valuation allowance of $2,815,771 for the deferred tax assets from China as of March 31, 2012, which increased the net loss for the three and nine month periods ending March 31, 2012 by that amount. Therefore, the after-tax net loss attributable to the shareholders was $3,204,384 for the three months ended March 31, 2012 and $4,309,388 for the nine months ended March 31, 2012.

Recent Highlights and Updates

• In the three months ended March 31, 2012, the Company’s subsidiary in China, Hebei Aoxing, received three local government subsidies totaling RMB 2,230,000 (approximately $351,185). In the same period in 2011, there was no such income. These government subsidies have no restrictions and are for operating activities.

• Last month the Company completed its submission of the New Drug Application (NDA) of Tongjingshule (TJSL) for the indication of Primary Dysmenorrha (“PD”), or menstrual pain, in adult women. TJSL is a capsule form of selected herbal medicine. The market for healthcare products to address menstrual pain is estimated at $3 billion per year in China.

Zhenjiang Yue, our Chairman and CEO, commented, “The Chinese pharmaceutical market remained challenging during the quarter. I am pleased with Aoxing’s operating results highlighted by continued growth in product sales and reduction of operating expenses.”

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 economic, competitive, governmental, technological and other risk factors identified in the Company’s filings with the Securities and Exchange Commission, specifically, Item 1A, “Risk Factors,” in 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 BALANCE SHEETS March 31, June 30, 2012 2011 (unaudited) ------------- ------------- ASSETS CURRENT ASSETS: Cash $ 3,902,723 $ 2,770,744 Accounts receivable, net of allowance for doubtful accounts of $574,768 and $543,697, respectively 2,681,589 2,008,024 Inventory, net 1,577,500 1,469,417 Prepaid expenses and other current assets 1,732,411 1,130,010 ------------- ------------- TOTAL CURRENT ASSETS 9,894,223 7,378,195 ------------- ------------- LONG-TERM ASSETS: Property and equipment, net 26,758,871 26,669,156 Deferred income tax - 2,614,817 Goodwill 20,293,321 19,916,128 Other intangible assets, net 1,328,246 1,388,704 Investment in joint venture 425,748 521,541 ------------- ------------- TOTAL LONG-TERM ASSETS 48,806,186 51,110,346 ------------- ------------- TOTAL ASSETS $ 58,700,409 $ 58,488,541 ============= ============= LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 2,592,242 $ 2,659,727 Short-term borrowing 3,241,260 232,055 Loan payable - bank 8,696,065 8,508,663 Current portion of loan payable - related parties 213,569 5,793 Current portion of loan payable - other 161,905 23,515 Accrued expenses and other current liabilities 3,489,817 3,206,009 ------------- ------------- TOTAL CURRENT LIABILITIES 18,394,858 14,635,762 ------------- ------------- LONG-TERM LIABILITIES: Loan payable - related parties, net of current portion 3,497,001 3,696,210 - others, net of current portion 1,688,934 1,831,838 Warrant liabilities - 1,161 ------------- ------------- TOTAL LONG-TERM LIABILITIES 5,185,935 5,529,209 ------------- ------------- Common stock, par value $0.001, 100,000,000 shares authorized, 49,469,837 and 49,158,955 shares issued and outstanding on March 31, 2012 and June 30, 2011, respectively 49,470 49,159 Additional paid in capital 57,870,858 57,382,109 Accumulated deficit (24,834,760) (20,525,372) Other comprehensive income 2,638,402 1,885,531 ------------- ------------- TOTAL SHAREHOLDERS’ EQUITY OF THE COMPANY 35,723,970 38,791,427 ------------- ------------- Non-controlling interests in subsidiaries (604,354) (467,857) ------------- ------------- TOTAL EQUITY 35,119,616 38,323,570 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 58,700,409 $ 58,488,541 ============= ============= AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS) (Unaudited) For the three months For the nine months ended ended March 31, March 31, 2012 2011 2012 2011 SALES $ 1,807,284 $ 1,628,627 $ 5,461,685 $ 5,309,839 COST OF SALES 796,681 807,492 2,302,576 2,410,633 ----------- ----------- ----------- ----------- GROSS PROFIT 1,010,603 821,135 3,159,109 2,899,206 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Research and development expense 103,237 70,362 364,177 347,760 General and administrative expenses 699,678 1,364,117 2,210,489 3,785,867 Selling expenses 496,192 354,600 1,226,016 1,228,492 Depreciation and amortization 148,448 155,960 442,197 458,266 ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 1,447,555 1,945,039 4,242,879 5,820,385 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (436,952) (1,123,904) (1,083,770) (2,921,179) ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense, net of interest income (507,758) (451,782) (1,345,302) (1,211,890) Change in fair value of warrant and derivative liabilities - 726,567 1,161 1,843,590 Equity in loss of joint venture (27,527) - (106,457) - Subsidy income 351,185 663,675 265,514 ----------- ----------- ----------- ----------- TOTAL OTHER INCOME (EXPENSE) (184,100) 274,785 (786,923) 897,214 ----------- ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (621,052) (849,119) (1,870,693) (2,023,965) Income taxes (benefit) 2,735,675 (280,004) 2,614,817 (672,214) ----------- ----------- ----------- ----------- NET LOSS (3,356,727) (569,115) (4,485,510) (1,351,751) Net loss attributed to non-controlling interest in subsidiaries (152,343) (56,001) (176,122) (134,443) ----------- ----------- ----------- ----------- LOSS ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY (3,204,384) (513,114) (4,309,388) (1,217,308) OTHER COMPREHENSIVE INCOME : Foreign currency translation adjustment 238,131 91,017 792,496 961,649 ----------- ----------- ----------- ----------- COMPREHENSIVE LOSS (2,966,253) (422,097) (3,516,892) (255,659) =========== =========== =========== =========== Other comprehensive income attributable to non-controlling interest 11,907 4,334 39,625 45,793 ----------- ----------- ----------- ----------- COMPREHENSIVE LOSS ATTRIBUTABLE TO THE COMPANY $(2,978,160) $ (426,431) $(3,556,517) $ (301,452) =========== =========== =========== =========== BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.06) $ (0.01) $ (0.09) $ (0.03) =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 49,433,638 46,505,576 49,290,772 46,498,409 =========== =========== =========== =========== AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the nine months ended March 31, 2012 2011 ------------- ------------- OPERATING ACTIVITIES: Net income (loss) $ (4,309,388) $ (1,217,308) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 887,166 875,303 Deferred income tax 2,614,817 (672,214) Inventory markdown 11,155 - Bad debts 18,949 714,242 Common stock issued for services 489,059 415,612 Change in fair value of warrants and derivative liability (1,161) (1,843,590) Equity loss of joint venture, net 106,457 - Net loss attributable to non-controlling interests (176,122) (134,443) Changes in operating assets and liabilities: Accounts receivable (643,460) (1,389,515) Inventories (86,294) (350,696) Prepaid expenses and other current assets (573,463) (236,548) Accounts payable (179,633) 601,753 Accrued expenses and other current liabilities 298,305 723,922 ------------- ------------- NET CASH USED IN OPERATING ACTIVITIES (1,543,613) (2,513,482) ------------- ------------- INVESTING ACTIVITIES: Acquisition of property and equipment (195,472) (1,136,634) Proceeds from unrelated parties - 292,896 ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (195,472) (843,738) ------------- ------------- FINANCING ACTIVITIES: Short-term borrowings 2,981,047 (76,102) Proceeds from (repayment of) other borrowings (45,029) 2,381,565 Repayment of loans from related party (72,283) - ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,863,735 2,305,463 ------------- ------------- EFFECT OF EXCHANGE RATE ON CASH 7,329 183,834 ------------- ------------- INCREASE (DECREASE) IN CASH 1,131,979 (867,923) CASH - BEGINNING OF YEAR 2,770,744 3,985,710 ------------- ------------- CASH - END OF PERIOD $ 3,902,723 $ 3,117,787 ============= ============= Supplemental disclosures of cash flow information: Cash paid for interest $ 1,600,040 $ 879,437 ============= ============= Cash paid for income taxes - - ============= =============