China Aoxing Pharmaceutical Reports Fiscal Year 2008 Financial Results

Oct 15, 2008

China Aoxing Pharmaceutical Company, Inc. (OTCBB: CAXG) ("China Aoxing"), a China-based pharmaceutical company specializing in research, development, manufacturing and distribution of narcotic and pain-management products, today announced financial results for the fiscal year ended June 30, 2008.

Revenues for our fiscal year ended June 30, 2008 were $7,065,015, representing a 264% increase from revenues of $1,938,639 for our fiscal year ended June 30, 2007. The increase reflects (a) the organic growth of existing products, from $1,938,639 in 2007 to $4,320,990 in fiscal year 2008, representing a growth of 123%, driven by our increased marketing efforts, improved brand recognition, effective pricing strategy as well as expanding coverage to previously unaddressed markets; and (b) the contribution of $2,744,025 to fiscal 2008 revenue by our newly acquired Shijiazhuang Lerentang Pharmaceutical Company Limited ("LRT"). LRT became our subsidiary on April 16, 2008. Among the products contributing to revenue were Naloxone Hydrochloride injectable, Shuanghuanglian Capsules, Zhongtongan, as well as other prescription and OTC pharmaceutical products. The Company currently markets over 40 products.

Gross profit in the year ended June 30, 2008 increased by $2,329,957, or 259%, from gross profit during the year ended June 30, 2007. The increase in gross profit was a result of higher sales, improved operating cost management, and sourcing and operating efficiencies.

Research and development expenses increased from $270,720 in 2007 to $700,202 in 2008, a 159% increase, primarily due to our increased investment in clinical development, as several pipeline products entered clinical trials in 2008, including Tilidine, Codeine phosphate and other narcotics and pain management programs.

General and administrative expenses increased from $1,204,031 in fiscal 2007 to $4,001,282 in fiscal 2008, as a result of our business expansion in many segments. Included in fiscal 2008 expenses was a non-cash expense of $1,258,485 attributable to the amortization of common stock issued as compensation to employees and consultants. The company currently employs 465 employees, vs. 180 in 2007, as a result of acquiring LRT as well as establishing a sales and marketing office in Beijing.

Loss from our operations was $3,578,966 in 2008 as compared to the loss of $1,407,486 in 2007, an increase of 154%, primary due to the increasing expenditures associated with our business expansion.

Net cash outflows from operations during fiscal year ended June 30, 2008 amounted to $982,947, representing a 7.5% improvement compared with net cash outflows from operations of $1,062,573 in the 2007 fiscal year. Our cash flows used in investing activities amounted to $17,135,612 in 2008. During that period, we paid $12,232,123 and $3.42m respectively to acquire 100% equity ownership of LRT and 35% of equity ownership of Hebei Aoxing Pharmaceutical Group Company, our main operating subsidiary in China. We also paid $1,483,489 for purchases of plant and equipment. Our cash flows from financing activities amounted to $18,420,673 and we raised $17,100,000 net of expenses from sales of common stock and repaid $4,895,950 bank loans in fiscal 2008. Subsequent to the end of that period, we reached a new bank loan agreement with Bank of China with additional repayment of $1,459,000.

According to the accounting treatment of embedded derivative instruments required by the US GAAP, the Company recognized other income of approximately $8,547,000 and $3,078,000 during the years ended June 30, 2008 and 2007 respectively, as a result of marking-to-market the value of warrants and derivative liabilities related to the convertible debentures issued by the Company in earlier periods. As a result, the net income for the fiscal year 2008 was $3,646,859, or $0.08 per fully diluted share, compared to a net loss of $14,022,395, or ($0.35) per fully diluted share, in the prior year.

Mr. Zhenjiang Yue, Chairman and Chief Executive Officer of China Aoxing, commented, "We are very pleased with our 2008 fiscal year financial and business results. We revised our capital structure and improved our financial condition significantly, with the strategic investment made by American Oriental Bioengineering, a leading pharmaceutical company in China's healthcare market. We are delighted and optimistic with the opportunities provided by this strategic partnership for co-developing and commercializing narcotics and pain medicine products. Our clinical development team achieved significant progress toward finishing several clinical trials of narcotic products by December 31, 2008, involving many leading medical doctors, multiple large hospitals and hundreds of recruited patients. In addition, we are very optimistic that we could receive new production licenses and approvals from the China State Food and Drug Administration (SFDA) in the next few months. Finally, we are pleased with the progress of integrating our newly acquired subsidiary, LRT, a well-known, pain-management focused company with 127 SFDA-approved products in China and we believe that it will form the basis of our future expansion. Looking forward, we are optimistic about our new products development and we expect to receive a few new narcotic drug approvals in the coming year, which would lead us to a new commercialization era in the company history."

During the 2008 fiscal year, the Company determined that the manner in which it had historically accounted for the conversion feature and embedded option in certain of its convertible debentures during the 2006 and 2007 fiscal years was not in accordance with SFAS No. 133, as amended, and EITF Issue No. 00-19. The appropriate accounting treatment for derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of the inception date of the convertible debenture agreements and at fair value as of each subsequent balance sheet date. Any change in fair value was required to 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 was required to record a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company was required to record non-operating, non-cash income. Accordingly, in connection with the restatement adjustments, the Company has approximately reflected the non-operating, non-cash income or expense resulting from the changes in fair value. The Company had previously not recorded the embedded derivative instruments as liabilities and did not record the related changes in fair value. The company expects in the near future to amend its prior filings to record the non-operating, non-cash items related to derivative financial instruments based on the appropriate accounting treatment.

About China Aoxing Pharmaceutical Company, Inc.

China Aoxing Pharmaceutical Company, Inc. (OTCBB: CAXG) is a pharmaceutical company located in China specializing in research, development, manufacturing and distribution of a variety of narcotics and pain-management products. Headquartered in Shijiazhuang City, the pharmaceutical capital of China, outside of Beijing, the Company has China's largest product pipeline and largest manufacturing facility (1.2 million sq. ft.) 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 narcotics medicines. The Company has two drugs on the market and has received China SFDA licenses for research and clinical development of seven more medications, including Oxycodone, Tilidine, Buprenorphine and Pholcodine. The Company is working closely with the Chinese government and SFDA to assure the strictly regulated availability to medical professionals of its narcotic drugs and pain medicines throughout China.