NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(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, 2016 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year 2016. 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 fiscal year ended June 30, 2016, filed on October 5, 2016.
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 narcotic, pain-management, and addiction treatment pharmaceutical products.
As of September 30, 2016, 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, 2016, the Company owned 95% of the issued and outstanding common stock of Hebei.
Since 2002, Hebei has been engaged in developing narcotic, pain management, and addiction treatment pharmaceutical 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 CFDA to assure the strictly regulated availability to medical professionals throughout China of its narcotic drugs and pain medicines.
In April, 2008, Hebei completed the acquisition of 100% of the registered capital of Lerentang ("LRT"). LRT was engaged in the manufacture and distribution of Chinese traditional medicines focusing on pain management related therapeutics within China. By 2011 the manufacturing operations of LRT had been completely integrated into Hebei. Currently over 90% of the Company's revenues derive from one herbal extraction, obtained from the acquisition of LRT, which is used to alleviate oral/dental and bone pain.
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 Aoxing has a 51% stake in API, 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 is located on the Hebei campus in Xinle City, 200 kilometers southwest of Beijing. On March 10, 2010, the joint venture obtained a business license from the City Industry & Commercial Administrative Bureau. The Company accounts for its investment in the Joint Venture under the equity method of accounting.
2
BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible assets
Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The Company evaluates the continuing value of the intangibles at each balance sheet date and records write-downs if the continuing value has become impaired. An impairment is determined to exist if the anticipated undiscounted future cash flow attributable to the asset is less than its carrying value. The asset is then reduced to the net present value of the anticipated future cash flow.
Definite lived intangible assets include the drug permits acquired in 2008 when the Company purchased LRT. Definite lived intangible assets are recorded at cost less accumulated amortization and any recognized impairment loss. The drug permits are amortized over their estimated useful life of 15 years on a straight-line basis. In addition, the Company acquired the technologies for Lorcaserin Hydrochloride, caffeine tablets and caffeine buccal tablets, and buprenorphine/naloxone in January 2016 in exchange for shares of the Company's stock. These three technologies are not amortized as the technologies are determined to carry their value with no termination dates at this point.
An intangible asset that is subject to amortization shall be reviewed for impairment in accordance with Accounting Standards Codification ("ASC") Topic 360-10-5, "Impairment or Disposal of Long-Lived Assets", pursuant to which the Company performs an intangible asset impairment test for its definite-lived intangibles whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The intangible assets balance as of September 30, 2016 and June 30, 2016 were $ 1,862,139 and $1,878,299 respectively. The intangible assets subject to amortization are listed in the following table:
|
Registration and Trademark
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
June 30,
2016
|
|
|
Cost Basis
|
|
$
|
1,714,345
|
|
|
$
|
1,720,988
|
|
|
Less: accumulated amortization
|
|
|
1,342,206
|
|
|
|
1,332,689
|
|
|
|
|
|
372,139
|
|
|
|
388,299
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
June 30,
2016
|
|
|
Cost Basis
|
|
|
12,838
|
|
|
|
12,887
|
|
|
Less: accumulated amortization
|
|
|
12,838
|
|
|
|
12,887
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles, net
|
|
$
|
372,139
|
|
|
$
|
388,299
|
|
2
BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
For the above intangible assets that are subject to amortization, estimated amortization expense for each of the fiscal years are follows for the years ending June 30:
|
|
|
Amount
|
|
|
2017
|
|
$
|
58,644
|
|
|
2018
|
|
58,444
|
|
|
2019
|
|
56,446
|
|
|
2020
|
|
|
56,246
|
|
|
2021 and thereafter
|
|
157,020
|
|
|
|
|
$
|
386,800
|
|
For intangible assets not subject to amortization, the total amount is $1,490,000 as of September 30, 2016, which is related to the three technologies acquired in January, 2016.
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, fair value of purchase option derivative liability and warranty liability, 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 significantly from those estimates.
Impairment of long lived assets
In accordance with the provisions of ASC Topic 360-10-5, "Impairment or Disposal of Long-Lived Assets," all long-lived assets such as property, plant and equipment, land use rights and intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount 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 company 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.
Fair value measurements
The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
2
BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The carrying amount of cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short term nature of these items and classified within Level 1 of the fair value hierarchy.
As of September 30, 2016, the Company does not have any assets or liabilities that are measured on a recurring basis at fair value. The Company's short-term borrowings, loans payable, related party notes payable and unrelated party notes payable are considered Level 2 financial instruments measured at fair value on a non-recurring basis as of September 30, 2016.
The carrying amount of the common stock warrants is recorded at
fair value and is determined using the Black-Scholes option pricing model based on the Company's stock price at the measurement date, exercise price of the warrant, risk-free rate and historical volatility. The company also measures certain assets, including the long-term investments and intangible assets, at fair value on a nonrecurring basis when they are deemed to be impaired. The fair values of these investments and intangible assets are determined based on valuation techniques using the best information available, and may include management judgments, future performance projections, etc. The Company classified these instruments and assets as a Level 3 of the fair value hierarchy.
Recent accounting pronouncements
In May 2014, the FASB issued ASU No. 2014
-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" ("ASU 2015-14") in August 2015. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Further to ASU 2014-09 and ASU 2015-14, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" ("ASU 2016-08") in March 2016, ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" ("ASU 2016-10") in April 2016, and ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" ("ASU 2016-12"), respectively. The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. ASU 2016-10 clarifies guideline related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The updates in ASU 2016-10 include targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders. It seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. ASU 2016-12 addresses narrow-scope improvements to the guidance on collectibility, non-cash consideration, and completed contracts at transition. Additionally, the amendments in this ASU provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 are the same as ASU 2014-09. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09, ASU 2016-08, ASU 2016-10 and ASU 2016-12 on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition the amendments in this update eliminate the requirement for to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public entities. For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is not permitted. We do not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). The amendments in this update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early application of the amendments in ASU 2016-02 is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of the adoption of ASU 2016-15 on our consolidated financial statements.
3 GOING CONCERN
We have incurred operating losses in the past and had an accumulated
deficit of $55.9 million as of September 30, 2016. In addition, we had negative working capital of $9.7 million as of September 30, 2016, Compared to the negative working capital of $10.9 million as of June 30, 2016. Currently and historically, the Company has managed to operate the business with negative net working capital. The Company's negative working capital is primarily due to our accumulated deficit, which we funded by short-term bank loans.
3 GOING CONCERN (Continued)
The Company is able to operate with negative net working capital because of loans from banks and related parties that are rolled-over or replaced as needed. The Company believes future positive operating cash flows, continued support from related parties, and the ability to continue to roll over short-term debt, taken together, provide adequate resources to fund ongoing operations in the foreseeable future. The Company may also seek equity financing to replace both short-term and long-term debts. The Company believes that the market demand for its main product will recover in the near term and the sales from several new products in future years will produce substantial positive cash flow.
Management of the Company believes that the Company's large negative working capital will continue to improve during fiscal year 2017. Management expects the improvement to come from improved operating results, by extending short term into longer term loans, and by selling equity and converting debt to equity. Management anticipates that these improvements will enable the Company to reduce current high interest expenses and fund on-going operations. The management of the Company has taken a number of actions and will continue to address this situation in order to restore the Company to a sound financial position going forward.
4 INVENTORIES, NET
Inventories consist of the following:
|
|
September 30,
|
|
June 30,
|
|
|
|
2016
|
|
2016
|
|
|
|
|
|
|
|
|
Work in process
|
|
$
|
406,077
|
|
|
$
|
568,876
|
|
|
Raw materials
|
|
|
649,056
|
|
|
|
805,024
|
|
|
Finished goods
|
|
|
1,378,168
|
|
|
|
1,467,790
|
|
|
|
|
$
|
2,433,301
|
|
|
$
|
2,841,690
|
|
The allowance for obsolete inventory as of September 30, 2016 and June 30, 2016 was $696,097 and $584,674, respectively.
5
EQUITY-METHOD INVESTMENT IN JOINT VENTURE
The Company account for its investment in API (see Note 2), under the equity method of accounting.
Summarized financial information for our investment in API assuming a 100% ownership interest is as follows:
|
|
|
September 30,
2016
|
|
|
June 30,
2016
|
|
|
Current assets
|
|
$
|
9,370
|
|
|
$
|
9,602
|
|
|
Noncurrent assets
|
|
640,406
|
|
|
654,213
|
|
|
Current liabilities
|
|
$
|
743,874
|
|
|
$
|
710,148
|
|
|
Noncurrent liabilities
|
|
-
|
|
|
-
|
|
|
Equity
|
|
$
|
(94,098
|
)
|
|
$
|
(46,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
Revenue
|
|
|
-
|
|
|
|
-
|
|
|
General and administrative expenses
|
|
$
|
47,967
|
|
|
$
|
166,229
|
|
|
Net loss
|
|
$
|
(47,967
|
)
|
|
$
|
(166,229
|
)
|
6
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and taxes consist of the following:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2016
|
|
Accrued salaries and benefits
|
|
$
|
1,484,184
|
|
|
$
|
1,168,653
|
|
|
Accrued interest
|
|
|
2,956,169
|
|
|
|
2,602,674
|
|
|
Accrued taxes
|
|
|
3,269,320
|
|
|
|
2,619,533
|
|
|
Deposit payable
|
|
|
578,099
|
|
|
|
588,905
|
|
|
Due to employee
|
|
|
43,149
|
|
|
|
43,316
|
|
|
Advance from customers
|
|
|
334,405
|
|
|
|
413,848
|
|
|
Other accounts payable
|
|
|
713,906
|
|
|
|
572,013
|
|
|
Other accrued expenses and current liabilities
|
|
|
2,027,420
|
|
|
|
1,624,808
|
|
|
|
|
$
|
11,406,652
|
|
|
$
|
9,633,750
|
|
7
SHORT-TERM BORROWING
Short-term borrowing consists of the following:
|
|
|
September 30
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2016
|
|
|
Shijiazhuang Finance Bureau (a)
|
|
$
|
-
|
|
|
$
|
75,241
|
|
|
Shijiazhuang Construction Investment Group Co., Ltd (b)
|
|
|
4,796,839
|
|
|
|
4,815,426
|
|
|
Hebei Henghui Investment Management Co., Ltd (c)
|
|
|
-
|
|
|
|
2,117,283
|
|
|
TianJin Heng Xing Mirco Finance Bureau (d)
|
|
|
3,747,530
|
|
|
|
3,762,052
|
|
|
Xinle SASAC Office (e)
|
|
|
-
|
|
|
|
300,964
|
|
|
Total
|
|
$
|
8,544,369
|
|
|
$
|
11,070,966
|
|
(a) A non-interest bearing note payable to Shijiazhuang Finance Bureau, an agency of a local government, due on demand. This has been reclassified as current portion of loan payable – others since Shijiazhuang Finance Bureau is not a financial institution.
(b) A one-year loan from Shijiazhuang Construction Investment Group, disbursed through China Construction Bank. The notes bear an annual interest rate of 12%. $1,798,815 was due on October 25, 2015 and was extended to February 25, 2017. $2,998,024 was due on July 12, 2015 and was extended to February 28, 2017. The notes were secured by certain registered trademarks and renewal certificates relating to Aoxing's Zhongtong'an capsule.
(c) A six-month term loan from Hebei Henghui Investment Management Co., Ltd. The note bears an annual interest rate of 10% and has been extended to
February 22, 2017. This has been reclassified as current portion of loan payable – others since Hebei Henghui Investment Management Co., Ltd. is not a financial institution.
(d) A short term loan from TianJin Heng Xing Mirco Finance Bureau. The note bears an annual interest rate of 20.04%, and was extended to February 17, 2017.
(e) A short term loan from Xinle State-Owned Assets Supervision and Administration Commission. This loan bears an annual interest rate of 9.6%. The term was from January 25, 2016 to June 25, 2016 and was extended to March 31, 2017. This has been reclassified as current portion of loan payable – others since Xinle State-Owned Assets Supervision and Administration Commission is not a financial institution.
8
LOAN PAYABLE - BANK
Loan payable – bank consist of the following loans collateralized by assets of the company:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2016
|
|
|
Bank Note in the amount of 30 million RMB with Shijiazhuang Huirong Rural Cooperative Bank bearing an annual interest rate of 10% made on September 23, 2014. The note matured on November 22, 2014 and was extended to January 14, 2017
|
|
$
|
4,497,037
|
|
|
$
|
4,514,462
|
|
Bank Note in the amount of 25.7 million RMB with Postal Savings Bank bearing an annual interest rate of 6.09%, made on July 22, 2014 for one year maturing on July 21, 2015 and was extended toApril 6, 2017.
|
|
|
3,844,966
|
|
|
|
3,859,865
|
|
|
Bank Note in the amount of 20 million RMB with China Merchant Bank bearing an annual floating rate of 5.98%, initially made on December 27, 2013 and extended to April 4, 2017.
|
|
$
|
2,998,024
|
|
|
$
|
2,991,584
|
|
|
Bank Note in the amount of 19.9 million RMB with China Everbright Bank bearing 5.655% interest per annum made on January 16, 2015 for one year maturing on January 15, 2016 and was extended to February 24, 2017.
|
|
|
2,996,525
|
|
|
|
3,006,719
|
|
|
|
|
$
|
14,336,552
|
|
|
$
|
14,372,630
|
|
9 LOAN PAYABLE – RELATED PARTIES
Loan payable – related parties bears interest at an average rate of 10.0% per annum as of September 30, 2016 and June 30, 2016.
10 LOAN PAYABLE – OTHER
Loan payable – other consist of loans from unrelated third-parties, bearing interest at an average rate of 10.0% per annum as of September 30, 2016 and June 30, 2016.
11 ISSUANCE OF COMMON STOCK
On September 10, 2015, the Company issued 60,000 shares of common stock to independent directors at $2.01 per share for services rendered by them.
On September 30, 2015 the Company issued 2,352,941 shares of common stock and 1,764,706 common stock purchases warrants pursuant to a securities purchase agreement dated as of September 24, 2015. The purchaser was an institutional investor. Each warrant will permit the holder to purchase one share of common stock from the Company for a price of $1.74 per share. The warrants will be exercisable from March 31, 2016 until March 31, 2021. Cashless exercise of the warrants is permitted only if there is no effective registration statement permitting resale of the common shares underlying the warrants.
The proceeds from the offerings were $2,739,000, net of issuance costs of $261,000 paid to the placement agent. The warrants were classified as equity at the date of issuance. They contained no provision that would require liability classification, and can be exercised on a cashless basis. Accordingly, they were classified as equity at the date of issuance. The proceeds were allocated between common stock and warrant, based on relative fair value. The issuance cost was recorded as a reduction of additional paid in capital.
11
ISSUANCE OF COMMON STOCK (Continued)
In connection with the aforesaid sale, the Company issued to the placement agent and its affiliates warrants to purchase 141,176 shares of common stock. The warrants issued to the placement agent and its affiliates are substantially identical to the warrants sold to the institutional investor. The fair value of these warrants, which amounted to $175,150, was classified as equity at the date of issuance and recorded as an offset to the proceeds from the issuance of the shares and warrants.
The fair value of the warrants issued was estimated by using the Black-Scholes-Merton Option Pricing Model with the following assumptions:
|
|
|
For the
quarter ended
September 30,
2016
|
|
|
|
Investor
|
|
|
Stock price
|
|
$
|
0.80
|
|
|
Exercise price
|
|
$
|
0.64
|
|
|
Expected life in years
|
|
$
|
5.00
|
|
|
Annualized Volatility
|
|
|
139.66
|
%
|
|
Annual Rate of Quarterly Dividends
|
|
|
0
|
|
|
Discount Rate - Bond Equivalent Yield
|
|
|
1.73
|
|
The Company applied its best judgment to estimate key assumptions in determining the fair value of the warrants on the date of issuance. The Company used historical data to estimate stock volatilities. The risk-free rates are consistent with the terms of the warrants and are based on the United States Treasury yield curve in effect at the time of issuance.
The weighted average fair value of warrants granted for the period ended September 30, 2015 was $1.24 per share. No warrants were exercised, cancelled or expired during the period ended December 31, 2015.
On November 4, 2015, the Company reached agreement with three of its creditors to convert $2.66 million high interest bearing debt into 2,046,995 shares of common stock. The shares were valued at $1.30 per share and will be restricted under Rule 144.
On January 5, 2016 the Board of Directors approved three technology acquisition agreements made by the Company during December 2015. Pursuant to the agreements, the Company (a) issued 800,000 shares of common stock and paid $123,000 to acquire technology relating to the formulation of Lorcaserin Hydrochloride, for $0.66 per each stock, (b) issued 500,000 shares of common stock and paid $77,000 to acquire certain technology relating to the formulation of caffeine tablets, for $0.66 per each stock, and (c) issued 500,000 shares of common stock and paid $77,000 to acquire certain technology relating to the formulation of Buprenorphine/Naloxone, for $0.71 per each stock. The share price was determined by the Company's stock price at the issuance date.
On January 5, 2016, the Board of Directors granted options for a total of 590,000 shares of common stock to 25 employees of the Company. The options are exercisable at a price of $.64 per share, which was the closing price for the common stock on January 4, 2016. Each option has a term of five years. The options will not vest until they have been approved by the shareholders of the Company.
On January 5, 2016 the Board of Directors approved two consulting agreements pursuant to which a total of 110,000 shares of common stock were issued in exchange for media and investor relations consulting services, for $0.66 per each stock based on the Company's stock price at the issuance date.
12
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 Company's Chinese subsidiaries have a favorable statutory tax rate of 15% due to its high-tech enterprise status.
The reconciliation of income tax at the U.S. statutory rate to the Company's effective tax rate is as follows:
|
|
|
Three months Ended
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Tax at U.S. Statutory rate
|
|
$
|
364,992
|
|
|
$
|
802,282
|
|
|
Tax rate difference between China and U.S.
|
|
|
(186,443
|
)
|
|
|
(604,938
|
)
|
|
Change in Valuation Allowance
|
|
|
130,583
|
|
|
|
(239,774
|
)
|
|
Net operating loss expired
|
|
|
-
|
|
|
|
-
|
|
|
Stock and option compensation
|
|
|
2,940
|
|
|
|
42,148
|
|
|
Impairment loss on goodwill
|
|
|
-
|
|
|
|
|
|
|
Effective tax rate
|
|
$
|
312,072
|
|
|
$
|
-
|
|
The provisions of income taxes (credit) are summarized as follows:
|
|
|
Three months Ended
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
312,072
|
|
|
$
|
|
|
|
Deferred - U.S.
|
|
|
(143,296
|
)
|
|
|
|
|
|
Deferred – China
|
|
|
351,718
|
|
|
|
1,183,295
|
|
|
Valuation allowance - U.S.
|
|
|
143,296
|
|
|
|
|
|
|
Valuation allowance – China
|
|
|
(12,713
|
)
|
|
|
(239,492
|
)
|
|
Total
|
|
$
|
651,077
|
|
|
$
|
943,803
|
|
The tax effects of temporary differences that give rise to the Company's net deferred tax asset as of September 30, 2016 and 2015 are as follows:
|
|
|
Three months Ended
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Net operating loss carryforward - China
|
|
$
|
0
|
|
|
$
|
106
,
396
|
|
|
Net operating loss carryforward - US
|
|
|
2,562,206
|
|
|
|
1,907,037
|
|
|
Allowance for doubtful accounts and inventory
|
|
|
489,536
|
|
|
|
692,605
|
|
|
Others
|
|
|
1,042,963
|
|
|
|
958,106
|
|
|
|
|
|
4,094,705
|
|
|
|
3,664,144
|
|
|
Less: valuation allowance- U.S.
|
|
|
-2,562,206
|
|
|
|
-1,907,037
|
|
|
valuation allowance- China.
|
|
|
0
|
|
|
|
-22,091
|
|
|
Deferred tax assets
|
|
|
1,532,499
|
|
|
|
1,735,016
|
|
12 TAXES (Continued)
As of September 30, 2016, the Company has a full valuation allowance for its deferred tax asset balance related to China and the US. The Company restated the prior year financial statements to provide a full valuation allowance for deferred tax assets. The Company's loss carry forwards for the past 5 years already have no influence on the deferred tax assets and due to certain negative indicators that were present as of September 30, 2016, the Company determined it was appropriate under US GAAP to restate the prior year financial statements and provide a 100% valuation allowance for the deferred tax assets.
For the three month ended September 30, 2016 and 2015, the Company did not have any interest and penalties associated with tax positions. As of September 30, 2016 and 2015, the Company did not have any significant unrecognized uncertain tax positions.
13 CONCENTRATIONS
Sales to two major customers accounted for 9.5% and 9.0% of total sales for the three months ended September 30, 2016. Sales to two major customers accounted for 9% and 6% of total sales for the three months ended September 30, 2015. As of September 30, 2016, two major customers accounted for 6.0% and 4.9% of Company's accounts receivable balance. As of September 30, 2015, two major customers accounted for 7% and 5% of Company's accounts receivable balance.
Sales of two major products represented approximately 92.8% and 2.5% of total sales for the three months ended September 30, 2016. Sales of two major products represented approximately 88.1% and 6.9% of total sales for the three months ended September 30, 2015.
14 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.