Aoxing Pharmaceutical (AOXG) 10-Q 2011 Q1 Quarterly report

United States

Securities and Exchange Commission

Washington, D. C. 20549

FORM 10-Q

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

             For the quarterly period ended September 30, 2010

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

For the transition period from _____ to _____

Commission File No. 1-32674

AOXING PHARMACEUTICAL COMPANY, INC.

(Exact Name of Registrant as Specified in its Charter)

Florida	65-0636168
(State or Other Jurisdiction of incorporation or organization)	(I.R.S. Employer I.D. No.)

15 Exchange Place, Suite 500, Jersey City, NJ 07302

(Address of Principal Executive Offices)

Issuer's Telephone Number: (646) 367-1747

Indicate  by check mark  whether the  Registrant  (1) has filed all reports required to be filed by Sections 13 or 15(d) of the  Securities Exchange Act of 1934  during  the  preceding  12 months  (or for such shorter  period  that the Registrant was required to file such reports),  and (2) has been subject to such filing requirements for the past 90 days.

Yes  X                    No ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes ____ No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filer _____ Accelerated filer ____  Non-accelerated filer ____ Smaller reporting company    X         

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes____  No    X    

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

November 15, 2010

Common Stock: 46,494,903

AOXING PHARMACEUTICALCOMPANY, INC.

QUARTERLY REPORT ON FORM 10Q

FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS

		Page No
Part I	Financial Information
Item 1.	Financial Statements:
	Condensed Balance Sheet – September 30, 2010 (unaudited) andJ une 30, 2009	2
	Condensed Statements of Operations and Other Comprehensive Income (Loss) – for the Three Ended September 30, 2010 and 2009 (Unaudited)	3
	Consolidated Statements of Cash Flows – for the Three Months Ended September 30, 2010 and 2009 (Unaudited)	4
	Notes to Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3	Quantitative and Qualitative Disclosures about Market Risk	14
Item 4.	Controls and Procedures	14
Part II	Other Information
Item 1.	Legal Proceedings	15
Items 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults upon Senior Securities	15
Item 4.	Reserved	15
Item 5.	Other Information	15
Item 6.	Exhibits	15
Signatures

AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
	September 30			June 30
	2010			2010
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	3,450,647		$	3,985,710
Accounts receivable, net		2,261,219			1,724,198
Loan receivable		415,545			748,790
Inventory		1,397,839			1,564,975
Deposits with suppliers		486,764			475,042
Prepaid expenses and sundry current assets		485,254			421,391
TOTAL CURRENT ASSETS		8,497,270			8,920,106
LONG - TERM ASSETS
Property and equipment, net of accummulated depreciation		26,460,534			25,569,782
Other intangible assets		1,426,137			1,431,182
Goodwill		19,279,940			19,012,321
Deferred tax assets		3,331,045			3,394,103
TOTAL LONG-TERM ASSETS		50,497,656			49,407,388
TOTAL ASSETS	$	58,994,927		$	58,327,494
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term borrowings	$	1,045,072		$	293,746
Accounts payable		3,122,749			2,965,514
Current portion of long term debt - other		47,775			46,999
Current portion of long term debt - related parties		96,228			94,760
Accrued expenses and taxes payable and other sundry current liabilities		2,113,302			2,076,555
Loan payable - Bank		8,211,284			8,078,019
TOTAL CURRENT LIABILITIES		14,636,410			13,555,593
LONG-TERM DEBT-- RELATED PARTIES		6,433,532			6,329,118
-- OTHER		2,258,598			2,221,943
WARRANT AND DERIVATIVE LIABILITIES		1,690,817			1,913,534
Common stock, par value $0.001, 100,000,000 shares authorized,
46,494,903 shares issued and outstanding  at September 30,2010 and June 30, 2010		46,495			46,495
Additional paid in capital		49,736,600			49,594,553
Accumulated deficit		(16,252,539	)		(15,598,600	)
Other comprehensive income		735,721			525,555
TOTAL STOCKHOLDERS' EQUITY OF THE COMPANY		34,266,277			34,568,003
NONCONTROLLING INTEREST IN SUBSIDIARIES		(290,707	)		(260,697	)
TOTAL EQUITY		33,975,570			34,307,306
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	58,994,927		$	58,327,494

See notes to the financial statements

2

AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
(Unaudited)
	For the three months ended
	September 30,
	2010			2009
SALES	$	1,740,673		$	1,446,663
COST OF SALES		827,295			450,143
GROSS PROFIT		913,379			996,520
COSTS AND EXPENSES:
Research and development expense		85,448			113,303
General and administrative expenses		909,057			877,484
Selling expenses		511,821			260,894
Depreciation and amortization		152,044			109,217
TOTAL COSTS AND EXPENSES		1,658,370			1,360,898
LOSS FROM OPERATIONS		(744,991	)		(364,378	)
OTHER INCOME (EXPENSE):
Interest expense, net of interest income		(374,781	)		(592,084	)
Change in fair value of warrant and derivative liabilities		222,717			(2,142,159	)
Gain on foreign currency transactions		0			0
Loss on disposal of assets		0			(21,416	)
TOTAL OTHER INCOME (EXPENSE)		(152,064	)		(2,755,659	)
INCOME (LOSS) BEFORE INCOME TAXES		(897,055	)		(3,120,037	)
Income taxes (credit)		(202,596	)		(809,253	)
NET INCOME ( LOSS)		(694,459	)		(2,310,784	)
Net loss attributed to non-controlling interest		(40,519	)		(16,175	)
INCOME (LOSS) ATTRIBUTABLE TO THE SHAREHOLDERS OF THE COMPANY		(653,939	)		(2,294,609	)
OTHER COMPREHENSIVE INCOME ( LOSS) :
Foreign currency translation adjustment		220,674			37,678
COMPREHENSIVE INCOME (LOSS)		(433,266	)		(2,256,931	)
Other comprehensive income attributable to non-controlling interest		10,508			0
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY	$	(443,774	)		(2,256,931	)
BASIC AND DILUTED EARNINGS (LOSSES) PER COMMON SHARE	$	(0.01	)	$	(0.05	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING		46,475,780			43,705,662

See notes to the financial statements

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AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	For the three months ended
	September 30,
	2010			2009
OPERATING ACTIVITIES:
Net income (loss)	$	(653,939	)	$	(2,294,609	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		283,679			284,634
Deferred tax assets		(202,596	)		(809,253	)
Loss on desposal on assets		-			21,416
Non-cash interest expense related to
debentures and warrants		-			44,780
Stock issued for services		142,048			202,227
Change in fair value of warrants and derivative liability		(222,717	)		2,142,159
Loss attributable to non-controlling interest		(40,519	)		(16,175	)
Changes in operating assets and liabilities:
Accounts receivable		(509,708	)		(241,022	)
Inventories		192,954			(159,213	)
Prepaid expenses and sundry current assets		(59,890	)		(18,417	)
Accounts payable		108,312			115,423
Accrued expenses, taxes and sundry current liabilities		(15,265	)		485,074
NET CASH USED IN OPERATING ACTIVITIES		(977,641	)		(242,976	)
INVESTING ACTIVITIES:
Acquisition of property and equipment		(723,945	)		(293,018	)
Payments of loan to unrelated parties		345,597			-
Proceeds from sale of assets		-			950,626
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(378,3478	)		657,608
FINANCING ACTIVITIES:
Proceeds from bank loan		746,480
Other borrowings		-			(210,257	)
Repayment of loans from related party		-			(1,121	)
Sale of common stock		-			5,000,000
NET CASH PROVIDED BY FINANCING ACTIVITIES		746,480			4,788,622
EFFECT OF EXCHANGE RATE ON CASH		74,446			(57,895	)
INCREASE (DECREASE) IN CASH		(535,063	)		5,145,359
CASH – BEGINNING OF PERIOD		3,985,710			1,271,922
CASH – END OF PERIOD	$	3,450,647			6,417,281
Supplemental disclosures of cash flow information:
Non-cash financing activities:
Conversion of 33MM RMB AOB loan  and accrued interest into common stock		-			4,830,847

See notes to the financial statements

4

AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

1   BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The consolidated balance sheet as of June 30, 2010 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010. These interim financial statements should be read in conjunction with that report.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010 filed on October 4, 2010.

2              BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

Aoxing Pharmaceutical Co., Inc. (“the Company” or ‘Aoxing Pharma”) is a specialty pharmaceutical company specializing in research, development, manufacturing and distribution of a variety of narcotics and pain-management products.  In March 2010, the Company changed to its current name from “China Aoxing Pharmaceutical Co., Inc.”

As of September 30, 2010, 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 September 30, 2010 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, Hebei now has China's largest and the most advanced manufacturing facility for highly regulated narcotic medicines, addressing a very under-served and fast-growing market in China. Its facility is one of the few GMP facilities licensed for manufacturing narcotics medicines. The Company is working closely with the Chinese government and SFDA to assure the strictly regulated availability to medical professionals throughout China of its narcotic drugs and pain medicines.

Use of estimates in the preparation of financial statements

The preparation of the unaudited 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 condensed 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 co mpensation 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.

.

5

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.

Derivative financial instruments

The Company’s derivative financial instruments consist of embedded derivatives related to the convertible debentures and warrants.  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 was 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.

For the three months ended September 30, 2010, the Company recognized other income of approximately $222,717 as compared to other loss of $2,142,159 for the three months ended September 30, 2009, relating to recording the changes in fair value of warrant and derivative liabilities.  At September 30, 2010 and 2009 there were approximately $1,690,817 and $5,511,061 of warrant and derivative liabilities, as the related debt instruments were not settled.

The Company’s derivative instruments were valued using the Black-Scholes option pricing model, based on the following historic data and assumptions on September 30, 2010:

Estimated dividends	None
Expected volatility	66.83%
Risk-free interest rate	0.19%
Expected term (years)	0.96

The expected volatility was determined based on the historic quoted market price of the common stock.  Risk free interest rate was determined based on the quoted US treasury rate under the same expected term with each corresponding financial instrument.

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3             SHORT-TERM BORROWINGS

Short-term borrowing consists of (a) anon-interest bearing note payable to Shi Jia Zhuang Finance Bureau, and agency of a local government, due three months after the Company is listed on NASDAQ, and (b) a short term note payable to Bo Hai International Trust, bearing interest at 30% per annum and due on March 2, 2011.

	September 30		June 30
	2010		2010
Shi Jia Zhuang Finance Bureau (a)	$	298,592	$	293,746
Bo Hai International Trust (b)		746,480		0
	$	1,045,072	$	293,746

4             LOAN PAYABLE - BANK

Loans payable – bank consist of the following:

	September 30		June 30
	2010		2010
Bank Note in the amount of 30 million RMB with Bank of Communications of China bearing an annual floating rate of  5.841%, set to be 10% higher than the interest rate of the China People Bank rate, maturing April 22, 2011	$	4,478,882	$	4,406,192
Bank Note in the amount of 25 million RMB with China Citic Bank bearing an annual floating rate of  5.841%, set to be 10% higher than the interest rate of the China People Bank rate, maturing May 4, 2011	$	3,732,402	$	3,671,827
	$	8,211,284	$	8,087,019

5             LONG-TERM DEBT – OTHER

Long-term debt – other consists of the following:

	September 30		June 30
	2010		2010
Loans payable bearing interest at 10% and 20%per annum and maturing on March and September 2012	$	2,258,598	$	2,221,943
Loans from unrelated third parties maturing on various dates through August 2011 and bearing interest at an average rate of 10%		47,775		46,999
	$	2,306,373	$	2,268,942
Less current portion		47,775		46,999
	$	2,258,598	$	2,221,943

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6             LONG-TERM DEBT – RELATED PARTIES

Loan from related parties consists of the following:

	September 30		June 30
	2010		2010
Loans maturing between March and December 31, 2012 bearing interest from 5% to 25% per annum	$	6,433,532	$	6,329,118
Loans maturing on various dates through August 17, 2011, bearing interest at an average rate of 10%		96,228		94,760
	$	6,529,760	$	6,423,878
Less current portion		96,228		94,760
	$	6,433,532	$	6,329,118

7             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 comparison of income tax expense at the U.S statutory rate of 35% in 2010 and 2009, to the company’s effective tax rate is as follows:

	Three months ended September 30,
	2010			2009
U.S. Statutory rate	$	(313,969	)	$	(1,092,013	)
Tax rate difference between China and U.S.		81,038			8,088
Operating loss, 100% valuation allowance		30,335			274,672
Effective tax rate		(202,596	)		(809,253	)

The provisions for income taxes are summarized as follows:

	Three months ended September 30,
		2010		2009
Current		-		-
Deferred - United States		(30,335	)	(274,672	)
Deferred - China		(202,596	)	(809,253	)
Valuation allowance - United States		30,335		274,672
Total		(202,596	)	(809,253	)

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8             CONCENTRATIONS

Sales to two major customers were 26% and 12% for the three months ended September 30, 2010, and 37% and 14% for the three months ended September 30, 2009.

Sales of three major products represented approximately 77%, 5% and 5% of total sales for the three months ended September 30, 2010, and 73%, 15% and 12% of total sales for the three months ended September 30, 2009.

9             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 were no material events that occurred after the date of the balance sheets included in this report.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “Aoxing Pharma believes,” “management believes” and similar language. The forward-looking statements are based on the current expectations of Aoxing Pharma and are subject to certain risks, uncertainties and assumptions, including those set forth in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 under Item 1A:  “Risk Factors.” Actual results may differ materially from results anticipate d in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.

Outline of Our Business

Aoxing Pharmaceutical Company, Inc. (the “Company” or “Aoxing Pharma”) is a Florida incorporated specialty pharmaceutical company with its main operations in China, specializing in research, development, manufacturing and distribution of a variety of narcotics and pain-management products.  Its common stock is currently trading at NYSE AMEX.  Our 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.

In April 2010 Aoxing Pharma and Johnson Matthey Plc entered into an agreement to establish a joint venture through affiliated companies 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 Pharmaceutical Group Company, Ltd (“Hebei Aoxing”), the operating subsidiary of Aoxing Pharma, will contribute capital, fixed assets and related API manufacturing licenses.  The joint venture company will be called Hebei Aoxing API Pharmaceutical Company, Ltd.  Hebei Aoxing will have a 51% stake in the Company, while Macfarlan Smith (Hong Kong) Ltd, (a wholly owned subsidiary of Johnson Matthey Pacific Ltd), will hold 49%.  Each company will have equal representation on a board of directors that will oversee a management team responsible for corporate st rategies and operations.

The new joint venture is located on the Hebei Aoxing campus in Xinle City, 200 kilometers south west of Beijing.  The joint venture will seek GMP approval by the China SFDA for a dedicated manufacturing facility by the end of 2010 and plans to begin manufacturing in 2011.

10

In February 2010, Aoxing Pharma and QRx Pharma Ltd. announced a strategic alliance to collaborate in the development of two proprietary narcotic drugs in China and ex-China markets: MoxDuo®IV, an intravenous formulation, as well as MoxDuo®IR, an immediate release capsule presently in pivotal Phase 3 studies in the United States.  Both products are based on QRxPharma’s patented morphine and oxycodone Dual-Opioid™ technology for the acute treatmen t of moderate to severe pain.  Under the terms of the agreement, Aoxing Pharma will fund the development of MoxDuo®IV and MoxDuo®IR for the China market in exchange for exclusive marketing rights in China.  QRxPharma will retain ownership of both products and may use the clinical work completed by Aoxing Pharma for product registration purposes outside of China.  Extensive clinical studies have demonstrated QRxPharma’s Dual-Opioids™ provide as good or better pain relief than either morphine or oxycodone alone with significantly fewer side effects, giving doctors and patients more options in the t reatment of moderate to severe pain from the hospital to the home.

Pharmaceutical Market in China: The pharmaceutical industry in China was approximately $147 billion in 2009 and China is expected to become the world’s fifth largest pharmaceutical market by 2010, which includes western medicine and traditional Chinese medicine. This growth is being 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 afford able and accessible to the whole population.

Narcotics Industry in China: 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.

Regulatory and Quality Control: 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 p roducts, 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.

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Results of Operations

Revenues for the three months ended September 30, 2010 were $1,740,673, representing a 20% increase over the revenues of $1,446,663 realized during the three months ended September 30, 2009, reflecting the positive impact of our recent expansion of sales team.  Revenues continue to be negatively affected by our need to obtain GMP re-certification for each of our products.  We are currently in the final stage of passing the GMP re-certification of pill formulation production.  So we expect that additional sales from pill based formulation will again contribute to our revenue in 2011.

Cost of sales was $827,295 for three months ended September 30, 2010, which was 84% higher than the $450,143 in costs incurred during the three month ended September 30, 2009.   The gross margin ratio decreased from 69% in the three months ended September 30, 2009 to 52% in the three months ended September 30, 2010.  The primary reason for the decrease in gross margin was higher raw material cost along with increased labor and utility costs.  For these reasons, our gross profit of $913,379 during the three months ended September 30, 2010 was 8% lower than the $996,520 gross profit realized during the three months ended September 30, 2009.

Research and development expenses were $85,448 during the three months ended September 30, 2010, representing a 25% decrease from $113,303 incurred during the three months ended September 30, 2009.  Our R&D expenses will fluctuate from period to period, reflecting the progress of our various development projects.

General and administrative expenses were $909,057 in the three months ended September 30, 2010, or 4% higher than the $877,484 expenses incurred in the three months ended September 30, 2010.  During the three months ended September 30, 2010, stock-based compensation for services was $142,048, which was 30% less than the $202,227 incurred during the three months ended September 30, 2009.

Selling expenses in the amount of $511,821 during the three months ended September 30, 2010 were a 96% increase from the $260,894 spent on selling during the three months ended September 30, 2009.  The increase was primarily due to the recent expansion of our sales and marketing team and product promotion activities.  We expect such expansion activities will continue to the end of calendar year 2010, with the result that selling expenses for fiscal year 2011 will be significantly higher than in fiscal 2010.

Our loss from operations increased to $744,991 during the three months ended September 30, 2010 from $364,378 during the three months ended September 30, 2009.  The 104% increase in the loss was primarily due to the reduced gross margin on our sales and to the expenses resulting from the ongoing expansion of our sales and marketing team and product promotion.

Interest expense was $374,781 for the three months ended September 30, 2010, a 37% decrease from the interest expense of $592,084 for the three months ended September 30, 2009. The reduction of interest expense was due to our recent efforts to replace high yield bonds with lower yield financing.

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Primarily due to the decrease in the market price of our common stock during the recent quarter, the fair value of our outstanding warrant and derivative liabilities decreased by $222,717.  The decrease was recorded as other income for the three months ended September 30, 2010.   On the other hand, we reported other loss of $2,142,159 during the three months ended September 30, 2009, caused by the increase in the fair value of outstanding warrant and derivative liabilities in that period. The fair value of these financial derivatives will fluctuate along with volatility of the market price for our common stock.

The operating losses that our Chinese subsidiary is currently incurring provide it a tax benefit, as we expect it will be able to offset the losses against future income.  Our U.S. corporate parent also incurs losses, but we do not expect to realize any tax benefit from those losses.  In addition, we are subject to different income tax rates in the US and China, as well as different rules for the recognition of income for tax purposes.  For these reasons, the income tax credits that we record do not directly correspond to the pre-tax income that we record.  As a result, for the three months ended September 30, 2010,  we recorded an  income tax credit of $202,596 on a pre-tax loss of $897,055, while for the three months ended September 30, 2009, we recorded an income tax credit o f $809,253 on a pre-tax loss of $3,120,037.

The Company realized a net loss of $694,459 for the three months ended September 30, 2010.  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 three months ended September 30, 2010 was $653,939 attributable to the shareholders of Aoxing Pharmaceutical.  In comparison, during the three months ended September 30, 2009, the net loss attributable to the Company’s shareholders was $2,294,609 after deducting income attributable to the 5% minority interest in Hebei Aoxing.

Liquidity and Capital Resources

Our operations during the three months ended September 30, 2010 used $977,641 in cash, as compared to $242,976 used for operations during the three months ended September 30, 2009.  The primary reason for the increased use of cash in the recent quarter was the $509,708 increase in accounts receivable during the quarter, due to sales near the end of the quarter.

Our investing activities used $378,348 in cash during the three months ended September 30, 2010.  We purchased additional property and equipment in the amount of $732,945, although that expenditure was partially offset by $345,597, representing partial repayment of loans we made to unrelated parties.

Our cash flows from financing activities amounted to $746,480 during the three months ended September 30, 2010.  On September 2, 2010, we completed a 6-month loan financing in the total amount of $746,480 (RMB 5 million) to improve our working capital situation.  The short-term loan, which matures on March 2, 2011, is expected to be extended after that date.  In the first quarter of fiscal year 2010, specifically in August 2009, we completed a private placement to a total of fifteen institutional and other accredited investors of 5,263,158 of shares of the Company’s common stock at a purchase price of $0.95 per share, which yielded gross proceeds of $5 million.  We continue seeking additional funding to support our business operation and to further improve our capital structure.   A t the present time we have no commitment from any source for additional funds.

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As a result of the several debt refinancing during fiscal 2010 and the first quarter of fiscal 2011, our debt service obligations at September 30, 2010 were:

Contractual Obligations	Total		Less than 1 Year		1-3 Years		4-5 Years	After 5 Years
Loans Payable –
Banks	$	8,211,284	$	8,211,284	$	-
Affiliates		9,881,205		1,189,075		8,692,130
TOTAL	$	18,092,489	$	9,400,359	$	8,692,130

We continue to explore various alternatives in order to secure sources of financing and improve our financial position.  Among the possibilities being considered are new credit facilities, a new equity raise, arrangements to license intellectual property, and a sale of selected property rights.  At the present time we have no commitment from any source for additional funds.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2010.  Pursuant to Rule13a-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, “disclosure controls and procedures” means controls and other procedures that are designed to insure that information required to be disclosed by Aoxing Pharmaceutical 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& #8221; include, without limitation, controls and procedures designed to insure that information Aoxing Pharmaceutical is required to disclose in the reports it files with the Commission is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.  Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that Aoxing Pharmaceutical’s system of disclosure controls and procedures was effective as of September 30, 2010 for the purposes described in this paragraph.

Changes in Internal Controls.  There was no change in internal controls over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act or 1934) identified in connection with the evaluation described in the preceding paragraph that occurred during Aoxing Pharmaceutical’s first fiscal quarter that has materially affected or is reasonably likely to materially affect China Aoxing’s internal control over financial reporting.

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PART II   -   OTHER INFORMATION

Item 1.     Legal Proceedings.

                 None.

Item 1A.  Risk Factors.

                There have been no material changes from the risk factors included in the Annual Report on Form 10-K for the year ended June 30, 2010.

Item 2.    Unregistered Sale of Securities and Use of ProceedsRegistrant

(a) Unregistered sales of equity securities

None.

 (c) Purchases of equity securities

The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the 1st quarter of fiscal 2011.

Item 3.     Defaults Upon Senior Securities.

                 None.

Item 4.     Reserved.

Item 5.     Other Information.

                 None.

Item 6.     Exhibits

      31.1 Rule 13a-14(a) Certification – CEO

      31.2 Rule 13a-14(a) Certification – CFO

   32 Rule 13a-14(b) Certification 

SIGNATURES

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

AOXING PHARMACEUTICAL COMPANY, INC.

Date: November 15, 2010	By: /s/	Zhenjiang Yue
	Zhenjiang Yue, Chief Executive Officer
Date: November 15, 2010	By: /s/	Guoan Zhang
	Guoan Zhang, Chief  Financial Officer

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