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 December 31, 2009





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


For the
transition period from _____ to _____





Commission
File No. 0-24185





CHINA 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.





YesX                  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____ Small reporting companyX





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:


February
15, 2010


Common
Stock: 92,869,562









CHINA
      AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSDecember
      31,
            
            
            June
      30,2009
            
            
            2009(Unaudited)ASSETSCURRENT
      ASSETS:Cash
            
            $
            6,383,715
            
            
            $
            1,271,922Accounts
      receivable
            
            
            1,252,030
            
            
            
            1,064,381Inventory
            
            
            1,127,255
            
            
            
            712,521Deposits
      with suppliers
            
            
            378,432
            
            
            
            261,780Deferred
      tax assets
            
            
            2,119,730
            
            
            
            3,331,045Prepaid
      expenses and sundry current assets
            
            
            376,983
            
            
            
            302,449TOTAL
      CURRENT ASSETS
            
            
            11,638,145
            
            
            
            6,944,098LONG
      - TERM ASSETSProperty
      and equipment, net of accummulated depreciation
            
            
            24,438,138
            
            
            
            29,324,362Other
      intangible assets
            
            
            1,502,868
            
            
            
            1,549,497Goodwill
            
            
            18,944,464
            
            
            
            18,926,527TOTAL
      LONG-TERM ASSETS
            
            
            44,885,470
            
            
            
            49,800,386TOTAL
      ASSETS
            
            $
            56,523,615
            
            
            $
            56,744,484LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Short-Term
      borrowings
            
            $
            292,517
            
            
            $
            292,193Accounts
      payable
            
            
            3,056,835
            
            
            
            2,816,711Deposit
      payable
            
            
            -
            
            
            
            3,871,552Current
      portion of long term debt - other
            
            
            46,803
            
            
            
            144,635Current
      portion of long term debt - related party
            
            
            111,208
            
            
            
            4,494,629Accrued
      expenses and taxes payable and other sundry current
      liabilities
            
            
            1,025,402
            
            
            
            2,403,185Loan
      payable - Bank
            
            
            -
            
            
            
            6,094,428Convertible
      debentures
            
            
            1,113,294
            
            
            
            1,023,733TOTAL
      CURRENT LIABILITIES
            
            
            5,646,059
            
            
            
            21,141,066LONG-TERM
      DEBT-- RELATED PARTY
            
            
            4,825,431
            
            
            
            4,104,201--
      OTHER
            
            
            7,346,328
            
            
            
            3,491,113WARRANT
      AND DERIVATIVE LIABILITIES
            
            
            887,369
            
            
            
            3,368,901Common
      stock, par value $0.001,100,000,000
      shares authorized,91,669,562
      and 82,827,999 shares issued and outstandingat
      December 31,2009 and June 30, 2009, respectively
            
            
            91,670
            
            
            
            82,828Preferred
      stock, par value $0.001300,000
      shares authorized0 shares issued and outstandingat
      December 31,2009 and June 30, 2009, respectively
            
            
            -
            
            
            
            -Additional
      paid in capital
            
            
            49,200,045
            
            
            
            39,104,586Accumulated
      deficit
            
            
            (11,873,857
            )
            
            
            (14,791,039
            )Other
      comprehensive income
            
            
            470,951
            
            
            
            461,017TOTAL
      STOCKHOLDERS' EQUITY
            
            
            37,888,809
            
            
            
            24,857,392NONCONTROLLING
      INTEREST IN SUBSIDIARIES
            
            
            (70,381
            )
            
            
            (218,189
            )TOTAL
      EQUITY
            
            
            37,818,428
            
            
            
            24,639,203TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            56,523,615
            
            
            $
            56,744,484









1





CHINA
      AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
    (LOSS)(UNAUDITED)For
      the three months ended
            
            
            For
      the six months endedDecember
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008SALES
            
            $
            1,556,431
            
            
            $
            2,315,709
            
            
            $
            3,003,094
            
            
            $
            5,913,774COST
      OF SALES
            
            
            540,516
            
            
            
            1,331,695
            
            
            
            990,659
            
            
            
            3,269,040GROSS
      PROFIT
            
            
            1,015,915
            
            
            
            984,014
            
            
            
            2,012,435
            
            
            
            2,644,734COSTS
      AND EXPENSES:Research
      and development expense
            
            
            78,761
            
            
            
            73,907
            
            
            
            192,064
            
            
            
            340,236General
      and administrative expenses
            
            
            825,503
            
            
            
            796,900
            
            
            
            1,702,987
            
            
            
            1,989,792Selling
      expenses
            
            
            287,404
            
            
            
            492,518
            
            
            
            548,297
            
            
            
            1,123,536Depreciation
      and amortization
            
            
            109,473
            
            
            
            87,424
            
            
            
            218,690
            
            
            
            231,882TOTAL
      COSTS AND EXPENSES
            
            
            1,301,141
            
            
            
            1,450,749
            
            
            
            2,662,038
            
            
            
            3,685,446LOSS
      FROM OPERATIONS
            
            
            (285,226
            )
            
            
            (466,735
            )
            
            
            (649,603
            )
            
            
            (1,040,712
            )OTHER
      INCOME (EXPENSE):Interest
      expense
            
            
            (451,070
            )
            
            
            (429,884
            )
            
            
            (1,043,155
            )
            
            
            (905,378
            )Change
      in fair value of warrant and derivative liabilities
            
            
            4,623,692
            
            
            
            (1,144,012
            )
            
            
            2,481,533
            
            
            
            (996,285
            )Gain
      on foreign currency transactions
            
            
            241
            
            
            
            60,481
            
            
            
            241
            
            
            
            263,518Loss
      on sale of assets
            
            
            0
            
            
            
            -
            
            
            
            (21,415
            )Forgiveness
      of debt
            
            
            3,579,085
            
            
            
            (555
            )
            
            
            3,579,085
            
            
            
            1,459,196TOTAL
      OTHER INCOME (EXPENSE)
            
            
            7,751,948
            
            
            
            (1,513,970
            )
            
            
            4,996,289
            
            
            
            (178,949
            )INCOME
      (LOSS) BEFORE INCOME TAXES
            
            
            7,466,722
            
            
            
            (1,980,705
            )
            
            
            4,346,686
            
            
            
            (1,219,661
            )Income
      taxes (credit)
            
            
            2,020,568
            
            
            
            18,994
            
            
            
            1,211,315
            
            
            
            98,687NET
      INCOME ( LOSS)
            
            
            5,446,154
            
            
            
            (1,999,699
            )
            
            
            3,135,371
            
            
            
            (1,318,348
            )Noncontrolling
      interest in subsidiaries
            
            
            163,984
            
            
            
            (26,712
            )
            
            
            147,808
            
            
            
            28,520INCOME
      (LOSS) ATTRIBUTABLE TO THE COMPANY
            
            
            5,282,170
            
            
            
            (1,972,987
            )
            
            
            2,987,563
            
            
            
            (1,346,868
            )OTHER
      COMPREHENSIVE INCOME ( LOSS) :Foreign
      currency translation adjustment
            
            
            (27,744
            )
            
            
            (408,127
            )
            
            
            9,934
            
            
            
            (381,778
            )COMPREHENSIVE
      INCOME (LOSS)
            
            $
            5,254,426
            
            
            $
            (2,381,114
            )
            
            $
            2,997,497
            
            
            
            (1,728,646
            )BASIC
      AND DILUTED EARNINGS (LOSSES) PER COMMON SHARE
            
            
            0.06
            
            
            
            (0.02
            )
            
            
            0.03
            
            
            
            (0.02
            )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING
            
            
            91,669,562
            
            
            
            82,771,294
            
            
            
            89,540,442
            
            
            
            81,988,536





2





CHINA
      AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)For
      the six months endedDecember
      31,2009
            
            
            2008OPERATING
      ACTIVITIES:Net
      income (loss)
            
            $
            2,987,563
            
            
            $
            (1,346,868
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            538,657
            
            
            
            601,310Deferred
      tax assets
            
            
            1,211,315
            
            
            
            -Loss
      on sale of assets
            
            
            21,416
            
            
            
            -Forgiveness
      of debt
            
            
            (3,640,718
            )
            
            
            (1,459,196
            )Non-cash
      interest expense related todebentures
      and warrants
            
            
            89,561
            
            
            
            125,810Stock
      issued for services
            
            
            273,454
            
            
            
            520,187Change
      in fair value of warrants and derivative liability
            
            
            (2,481,533
            )
            
            
            996,285Minority
      interest
            
            
            147,808
            
            
            
            28,520Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (189,611
            )
            
            
            237,456Inventories
            
            
            (413,919
            )
            
            
            (32,383
            )Prepaid
      expenses and sundry current assets
            
            
            (187,396
            )
            
            
            (200,211
            )Accounts
      payable
            
            
            122,885
            
            
            
            28,006Accrued
      expenses, taxes and sundry current liabilities
            
            
            922,215
            
            
            
            (1,569,960
            )NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
            
            
            (598,303
            )
            
            
            (2,071,044
            )INVESTING
      ACTIVITIES:Acquisition
      of property and equipment
            
            
            (420,692
            )
            
            
            (1,021,280
            )Cash
      received from sale of assets
            
            
            950,626
            
            
            
            -NET
      CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
            
            
            529,934
            
            
            
            (1,021,280
            )FINANCING
      ACTIVITIES:Repayment
      of bank loan
            
            
            (4,270,485
            )Proceeds
      Other borrowings
            
            
            3,753,122
            
            
            
            2,989,634Loans
      from related party
            
            
            715,504
            
            
            
            -Sale
      of common stock
            
            
            5,000,000
            
            
            
            -NET
      CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            5,198,141
            
            
            
            2,989,634EFFECT
      OF EXCHANGE RATE ON CASH
            
            
            (17,979
            )
            
            
            (342,551
            )INCREASE
      (DECREASE) IN CASH
            
            
            5,111,793
            
            
            
            (445,241
            )CASH
      – BEGINNING OF PERIOD
            
            
            1,271,922
            
            
            
            1,565,513CASH
      – END OF PERIOD
            
            $
            6,383,715
            
            
            
            1,120,272Supplemental
      disclosures of cash flow information:Non-cash
      financing activities:Conversion
      of AOB loan  and accrued interest into common
    stock
            
            
            4,830,847
            
            
            
            -Conversion
      of convertible debentures into common stock
            
            
            -
            
            
            
            290,000Common
      stock issued as payment for accrued interest
            
            
            -
            
            
            
            25,570




3
  CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009
 (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, 2009 was derived from the audited
consolidated financial statements included in the Company’s Annual Report on
Form 10-K. 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, 2009 filed on October 14, 2009.
   2         BUSINESS
DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
  China Aoxing
Pharmaceutical Co., Inc. (“the Company” or ‘China Aoxing”) is a specialty
pharmaceutical company specializing in research, development, manufacturing and
distribution of a variety of narcotics and pain-management products. As of
December 31, 2009, 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”).  During the year ended June 30, 2009, Hebei integrated into
itself the business operations of Shijazhuang Lerentang Pharmaceutical Company,
Ltd. (“LRT”), which had been an operating subsidiary acquired by Hebei in May
2008.
  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
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 from those
estimates.
  4
 
 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 (see Note 7 and 8).  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 six
months ended December 31, 2009, the Company recognized other income of
approximately $2,481,533, as compared to other losses of $996,285 for the six
months ended December 31, 2008, relating to recording the changes in fair value
of warrant and derivative liabilities.  At December 31, 2009 and 2008
there were approximately $887,369 and $4,992,370 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  December 31,
2009:
 
 Estimated
      dividends
              
              NoneExpected
      volatility
              
              
              62.60
              %Risk-free
      interest rate
              
              
              0.20
      – 1.14
              %Expected
      term (years)
              
              
              0.33
      – 1.71
  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.
 
 
 New
Accounting Pronouncements
 
 In
May 2009, FASB issued new guidance establishing general standards of
accounting for disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued, or
subsequent events. An entity should apply the requirements to interim or annual
financial periods ending after June 15, 2009. Adoption of this standard
does not have a material impact on the Company’s results of operations or
financial position.
  5
  In June 2009,
FASB established Accounting Standards Codification TM (“ASC”) as the singlesource of authoritative
accounting principles recognized by the FASB in the preparation of financial
statements in conformity with the GAAP. The Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. The Codification is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. We adopted the new guidance for the quarter ended September 30, 2009,
which changed the way we reference accounting standards in our disclosures.
Adoption of the Codification is not expected to have a material impact on the
Company’s results of operations or financialposition.
 
 In August
2009, the FASB updated the accounting standards to provide additional guidance
on estimating the fair value of a liability in a hypothetical transaction where
the liability is transferred to a market participant. The standard is effective
for the first reporting period, including interim periods, beginning after
issuance. The Company does not expect the adoption to have a material effect on
its consolidated results of operations and financial condition.
 
 3         INVENTORIES
 
 Inventories
are summarized as follows:
  
 December
      31
              
              
              
              June
      302009
              
              
              
              2009Raw
      materials
              
              $
              621,996
              
              
              $
              454,374Low-value
      consumption goods
              
              
              24,535
              
              
              
              24,208Work
      in progress
              
              
              83,619
              
              
              
              24,533Finished
      goods
              
              
              397,105
              
              
              
              209,406$
              1,127,255
              
              
              $
              712,521
 
 
  4         RESTRUCTURING
OF BANK OF CHINA LOAN
 
 In October
2009, the Company reached a restructuring agreement with Eastern Asset
Management Company “(“EAMC”), a nationwide investment company based in China
which acquired the ownership of the loan from Bank of China.  Prior to
the restructuring, the outstanding balance of the debt was $7,911,560
(approximately 54,092,916 RMB), including $6,101,203 (or 41,715,142 RMB) of
principal and $1,748,724 (or 11,961,278 RMB) of accrued
interest.  Under the restructuring agreement, the Company received the
forgiveness from EAMC in the amount of $3,579,085 (or 24,475,820 RMB), including
$1,830,361 (or 12,514,542 RMB) of principal and $1,748,724 (or 11,961,278 RMB)
of accrued interest. The total outstanding balance of the debt was reduced to
$4,270,842 (approximately 29,200,600 RMB) as of October 1, 2009. The Company
repaid this debt on October 1, 2009 with the proceeds of RMB32,000,000 36-month
bridge loan.
 
 In order to
restructure the Bank of China loans, on October 1, 2009, the Company obtained a
bridge loan (“Bridge Loan”) in the principal amount of $4,680,278 (or 32 million
RMB) from a group of seven individuals.  The maturity date of the loan
is September 30, 2012.  The Bridge Loan bears interest at 12% for the
six month period ended March 31, 2010, then the interest rate is reduced to 9.6%
per annum until the maturity date of September 30, 2012.   The
Company has the option to pay part or the entirety of the loan prior to the
maturity date without penalty.  The loan is collateralized with two
buildings by Hebei Aoxing’s facility.   One of the loan holders
is a relative of our CEO, who invested $716,668 in the Bridge Loan.
  6
  5         LOANS
PAYABLE – OTHER
 
 Loans payable
– other consists of the following:
 
 December
      31,
              
              
              June
      30,2009
              
              
              2009(Unaudited)Loans
      payable bearing interest at 10% per annum and maturing on March
      2012
              
              $
              3,382,718
              
              
              $
              3,491,113Loans
      payable bearing interest at 12% for the six month period ended March 31,
      2010, then the interest rate is 9.6% until maturing on September 30
      2012.
              
              
              3,963,610
              
              
              
              -Loans
      from unrelated third parties maturing on various dates through June 30,
      2010 and bearing interest at an average rate of 10%
              
              
              46,803
              
              
              
              144,6357,393,131
              
              
              
              3,635,748Less
      current portion
              
              
              46,803
              
              
              
              144,635$
              7,346,328
              
              
              $
              3,491,113
 
 6         LOAN
FROM STOCKHOLDERS
 
 Loan from
stockholders consists of the following:
 
 December
      31,
              
              
              June
      30,2009
              
              
              2009(Unaudited)Short-term
      borrowing from AOB bearing interest at 8% per annum, converted to common
      stock as of August 27, 2009.
              
              
              -
              
              
              $
              4,382,418Loans
      maturing on December 31, 2011 bearing interest of 10% per
      annum
              
              $
              4,108,764
              
              
              
              4,104,201Loans
      payable bearing interest at 12% for the six month period ended March 31,
      2010, then the interest rate is 9.6% until maturing on September 30
      2012.
              
              
              716,667Loans
      maturing on various dates through June 30, 2010, bearing interest at an
      average rate of 10%
              
              
              111,208
              
              
              
              112,2114,936,639
              
              
              
              8,598,830Less
      current portion
              
              
              111,208
              
              
              
              4,494,629$
              4,825,431
              
              
              $
              4,104,201
  7
  7 CONVERTIBLE
DEBENTURES
  In 2006, the
Company issued 10% convertible debentures for $2,116,000 and the Series A, B, C
and D Warrants. The 10% convertible debentures were converted to common stock by
September 30, 2008.  The Series A, B, C and D Warrants are exercisable
for five years at prices ranging from $2.50 to $5.50 and may be redeemed by the
Company if the market price of its common stock exceeds 200% of the exercise
price of the warrants.
  During the
year ended June 30, 2008, the Company sold $1,173,000 of convertible debentures,
which bear interest at 8% per annum, are payable semi-annually and are due May
1, 2010.  Interest will accrue on the principal amount at 8% per annum
and will be payable on January 1st and
July 1st each
year.  The holder may convert the principal and accrued interest into
the Company’s common stock at a conversion price per share equal to the greater
of (a) $5.00, or (b) 75% of the average of the closing bid prices reported for
the five trading days preceding the date of conversion.
    Convertible
      debentures outstanding as of December 31, 2009, are as
      follows:Convertible
      debentures issued
              
              
              3,289,000Less
      amounts converted to common stock
              
              
              (2,116,000
              )1,173,000Less
      debt discount
              
              
              (59,706
              )Balance
      – December 31, 2009
              
              
              1,113,294
 
 The terms of
the convertible debentures and warrants include certain features that are
considered embedded derivative financial instruments, such as a conversion
feature which provides for the conversion of the debentures into shares of the
Company’s common stock at a rate which is variable. Because the debentures are
not conventional convertible debt, the Company is required to record the
derivative financial instruments and the warrants issued in connection with the
convertible debentures at their fair values as of the issuance date of each of
the debentures.
  8         WARRANTS
 
 In 2006 the
Company issued the Series A, B, C and D Warrants in connection with issuance of
10% convertible debentures.  The terms of the Series A, B, C and D
Warrants require that whenever the Company issues common stock for a price less
than $2.00 per share, an equitable adjustment to the exercise price be made in
order to prevent dilution of the equity interests of the warrant
holders.  As a result of the private placement and loan conversion
transactions in August 2009, the exercise price of the Series A, B, C and D
Warrants was reduced, and accordingly, the number of shares that a
warrant-holder may purchase was increased based on the terms of the warrants,
effective on August 27, 2009. These warrants were issued in September 2006, are
exercisable for five years and may be redeemed by the Company if the market
price of its common stock exceeds 200% of the exercise price of the
warrants.
 
 As discussed
in Note 3, FASB ASC 815-10 requires enhanced disclosures related to derivative
and hedging activities and thereby seeks to improve the transparency of
financial reporting.  The fair value of embedded derivatives in
connection with these warrants needs to be estimated. 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.  The change of exercise price along with number of shares issuable
upon exercise of these warrants would cause a change in the fair value of the
warrants.  Any change in fair value will 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
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.
  8
  The following
table summarizes the information relating to the revised exercise price and the
number of shares that a warrant-holder may purchase in connection with the sales
of convertible debentures referred in Note 10 above:
 
 
 Original
      Exercise
                Price
              
              
              Revised
      Exercise
                Price
              
              
              Original
      Number
                of
      Outstanding
              
              
              Revised
      Number
                of
      Outstanding
              
              
              Weighted
      Average
                Remaining
      Contractual
                Life
      (Years)December
      31,2009Series
      A
              
              $
              2.5000
              
              
              $
              1.5721
              
              
              
              1,058,000
              
              
              
              1,682,463
              
              
              
              1.71Series
      B
              
              
              3.5000
              
              
              
              2.0202
              
              
              
              1,058,000
              
              
              
              1,832,987
              
              
              
              1.71Series
      C
              
              
              4.5000
              
              
              
              2.4683
              
              
              
              1,058,000
              
              
              
              1,928,858
              
              
              
              1.71Series
      D
              
              
              5.5000
              
              
              
              2.9164
              
              
              
              1,058,000
              
              
              
              1,995,268
              
              
              
              1.71Placement
      Agent
              
              
              2.0000
              
              
              
              2.0000
              
              
              
              423,200
              
              
              
              423,200
              
              
              
              1.717,862,776
 
 
 9         SALES
OF ASSETS
 
 On July 15,
2009, the Company completed the sale of LRT’s facility in connection with the
relocation of LRT’s operation and manufacturing function into Hebei for
$4,822,178 (approximately RMB 33 million). Proceeds of $3,871,552 were received
in June 2009 (shown as deposit payable on the June 30, 2009 balance sheet) and
$950,626 on July 2009. No gain or loss has been recorded during the six months
ended December 31, 2009 since the company incurred an impairment charge of
$2,345,420 during the year ended June 30, 2009 reducing the carrying value to
the sales price.
 
 
 10       STOCKHOLDERS’
EQUITY
 
 On August 6,
2009, the Company completed a private placement with 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, for gross
proceeds of $5 million.
 
 On August 15,
2008, the Company issued to American Oriental Bioengineering Inc. (“AOB”) a
convertible term note dated May 26, 2008 in the principal amount of 30 million
RMB (approximately $4.4 million U.S. dollars) bearing interest at 8% per annum,
with an extended maturity date of  August 26, 2009. On August 27,
2009, the Company exercised its option to pay the AOB note and accrued interest
in the total amount of 33 million RMB, or $4,830,847, in the form of 3,578,405
shares of common stock at a price of $1.35 per share.  As of September
28, 2009, AOB owns 33,578,405 shares, or 37% of the Company’s common
stock.
 
  11       SUBSEQUENT
EVENTS
 
 Effective on
January 6, 2010, China Aoxing filed with the Florida Secretary of State Articles
of Amendment to its Articles of Incorporation.  The amendment increased the
number of shares of authorized common stock from 100,000,000 shares, $0.001 par
value, to 200,000,000 shares, $0.001 par value.
 
 On January
13, 2010, the Company issued 1,200,000 shares of restricted common stock, valued
at 0.98 per share, to award the management and employees of the Company for
their future services, which will be amortized for the next three
years.
 
 In accordance
with ASC 855, “Subsequent Events”, the Company evaluated subsequent events
through February 15, 2010.


9




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,”
“China Aoxing believes,” “management believes” and similar language. The
forward-looking statements are based on the current expectations of China Aoxing
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,
2009 under Item 1A:  “Risk Factors.” Actual results may differ
materially from results anticipated 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





We
are a specialized pharmaceutical company focusing on research, development,
manufacturing and marketing of a broad range of narcotics and pain management
pharmaceutical products. 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.






Pharmaceutical
Industry in China: According to a recent ISI Emerging Markets Report, the
pharmaceutical industry in China was approximately $27.7 billion in 2005 and
China is forecast to become the world’s fifth largest pharmaceutical market by
2010. This growth is being driven by several factors, including improving
standards of living,an increase in
disposable income fueled by the growing economy, the aging population, the
increasing participation in the State Basic Medical Insurance System, as well as
the increase in government spending on public health care. The Chinese
government pledged $4 billion for healthcare spending in 2007, an 81% increase
from the $2.2 billion in 2006.







In August, 2009, the Ministry of Health
(MoH) of China released an Essential Drug List of 300 drugs to be sold at
controlled prices as part of its US$124 billion health care reform. The EDL
includes both Western and Chinese medicines, targeting common antibiotics, pain
relievers, high blood pressure, and etc.  Thirty one products of our
company are listed on the EDL.  The Company, therefore, expects sales
to MoH-related agencies to represent a significant source of revenue growth in
future periods.  The Company is working closely and negotiating with
related government agencies on the product supply and purchase in the next
several years.




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 the narcotic drug producers in
China.


10









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 products, 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.







Results
of Operations




Revenues
for the three months ended December 31, 2009 were $1,556,431, a 33% decrease
from the revenues of $2,315,709 realized during the three months ended December
31, 2008.  The decrease in revenue was caused by the impact of our
relocation of the LRT manufacturing facility in the summer of
2009.  The consolidation of the LRT facility with our own necessitated
that we obtain GMP re-certification of six formulations at the new
facility.  This has delayed our fulfillment of the purchase orders for
those formulations.   As of December 31, 2009, our new facility
has successfully passed the GMP re-certification on capsule, tablet, granule and
oral solution formulations while we are preparing for recertification on pill
and tincture formulations.





For the
six months ended December 31, 2009, the revenues were $3,003,094, a 49% decrease
from the revenues of $5,913,774 realized during the six months ended December
31, 2008.  The decrease in revenue was caused by the delayed GMP
re-certification discussed above.





Cost of
sales was $540,516 for three months ended December 31, 2009, which was 41% less
than the $1,331,695 in costs incurred during the three month ended December 31,
2008.   The gross margin ratio was increased from 42% in the three
months ended December 31, 2008 to 65% in the three months ended December 31,
2009.  The primary reason for the improvement in gross margin was that
Zhongtongan, our leading product for dental pain in the market, became a much
more significant contributor to our revenue for the three months ended December
31, 2009, due to our inability to fulfill sales of other products, pending
re-certification.  Zhongtongan has a much higher gross margin compared
to some other products.





During
the six months ended December 31, 2009, our cost of sales was $990,659, which
was 70% less than the $3,269,040 in costs incurred during the six month ended
December 31, 2008.   The gross margin ratio was increased from 45% in
the six months ended December 31, 2008 to 67% in the six months ended December
31, 2009 as Zhongtongan became a a much more significant contributor to our
revenue with higher gross margin for the three months ended December 31,
2009.


11




Gross
profit was $1,015,915 during the three months ended December 31, 2009, or 3%
higher than the $984,014 gross profit realized during the three months ended
December 31, 2008, reflecting higher profit margin and larger contribution of
Zhongtongan product during the three months ended December 31,
2009.





During
the six months ended December 31, 2009, gross profit was $2,012,435, which was
24% less than the $2,644,734 in gross profit realized during the six months
ended December 31, 2008, reflecting higher profit margin and larger contribution
of Zhongtongan product during the six months ended December 31,
2009.





Research
and development expenses were $78,761 during the three months ended December 31,
2009, similar to $73,907 occurred during the three months ended December 31,
2008.  Our R&D expenses could fluctuate from period to period,
reflecting the progress of our various development projects.





During
the six months ended December 31, 2009, our research and development expenses
were $192,064, 44% less than $340,236 spent for six months ended December 31,
2008. Our R&D expenses could fluctuate from period to period, reflecting the
progress of our various development projects.




General
and administrative expenses were $825,503 in the three months ended December 31,
2009, similar to $796,900 in the three months ended December 31,
2008.   However, during the three months ended December 31, 2009,
the stock-based compensation for service decreased to $71,227, from $304,277 in
the three months ended December 31, 2008.  The increase in cash spend
on general and administrative expenses reflects our ramp-up of operations in
anticipation of growth in sales.





For the six months ended December 31,
2009, general and administrative expenses was $1,702,987,  14% less
than $1,989,792 spent during six months ended December 31, 2008, reflecting
lower stock-based compensation for service incurred during the recent
period.





Selling
expenses in the amount of $287,404 during the three months ended December 31,
2009 were a 42% decrease from the $492,518 spent on selling during the three
months ended December 31, 2008.  The decrease was primarily due to the
consolidation of LRT’s selling expenses with ours and the ongoing general cost
control measures undertaken by the Company.





For the
six months ended December 31, 2009, selling expenses in the amount of $548,297
were a 51% decrease from the $1,123,536 spent on selling during the six months
ended December 31, 2008.  The decrease was primarily due to the
consolidation of LRT’s selling expenses with ours and the ongoing general cost
control measures undertaken by the Company.





12


Our loss
from operations decreased to $285,225 during the three months ended December 31,
2009 from $466,735 during the three months ended December 31,
2008.  The 39% decrease in the loss was primarily due to the ongoing
improvement of operational efficiency as well as the reduction in stock-based
compensation.





For the
six months ended December 31, 2010, loss from operations decreased to $649,603
from $1,040,712 during the six months ended December 31, 2008.  The
38% decrease in the loss was primarily due to the ongoing improvement of
operational efficiency, cost cutting on selling expenses as well as the
reduction in stock-based compensation.





Interest
expense was $451,070 for the three months ended December 31, 2009, which was
comparable to interest expense of $429,884 for the three months ended December
31, 2008.





Due to
the volatility in the share price of our common stock during the recent quarter,
the fair value of our outstanding warrant and derivative liabilities decreased
by $4,623,692.  The decrease was recorded as other income for the
three months ended December 31, 2009, as compared to an expense of $1,144,012
caused by the increased of fair value of the above mentioned derivative
liabilities during the three months ended December 31, 2008. The fair value of
these financial derivatives will fluctuate along with volatility of the market
price for our common stock.





During
the three months ended December 31, 2009, a forgiveness of debt was recorded in
the amount of $3,579,085 as a result of restructuring and refinancing of the
outstanding Bank of China loan.  In October 2009, the Company reached
a restructuring agreement with Eastern Asset Management Company “(“EAMC”), a
nationwide investment company based in China which acquired the ownership of the
loan from Bank of China.  Under the restructuring agreement, the
Company received forgiveness of debt and accrued interest in the total amount of
$3,579,085 while the total outstanding balance of the debt was reduced to
$4,270,592 (approximately 29,200,600 RMB) as of October 1, 2009. The Company
paid off this debt in October 2009 after it refinanced with a 36-month bridge
loan.





Net
income for the three months ended December 31, 2009 was $5,446,154, and income
attributable to the Company after 5% minority interest was $5,282,170, mainly
attributable to (1) the decrease in the fair value of our outstanding financial
derivatives by the amount of $4,623,692 and (2) the forgiveness of debt related
to Bank of China loan in the amount of $3,579,085.    In
comparison, during the three months ended December 31, 2008, the net loss was
recorded in the $1,999,699, and the Company recorded net loss in the amount of
$1,972,987 after 5% minority interest.  This, however, included an
expense of $1,144,012 attributable to the increase in the fair value of our
outstanding financial derivatives.





During
the six months ended December 31, 2009, net income was $3,135,371, as compared
to a net loss of $1,318,348 occurred for the six months ended December 31,
2008.  Excluding the 5% minority interest, the income attributable to
the Company was  $2,987,563 for the six months ended December 31,
2009, as compared to a loss of $1,346,868 attributable to the Company for the
six months ended December 31, 2008.





We expect
that the change of fair value of financial derivatives could continue to
significantly impact our net income or loss over the next 24 months, depending
on the volatility of the market price for our common stock.


13




Liquidity and Capital
Resources




Our
operations during the six months ended December 31, 2009 used $598,303 in cash,
as compared to $2,071,044 used for operations during the six months ended
December 31, 2008.





Our cash
flows from investing activities amounted to a gain of $529,934 during the six
months ended December 31, 2009.  We purchased additional property and
equipment in the amount of $420,692 while we received the final portion of the
proceeds from the sales of LRT assets in the amount of $950,626.





Our cash
flows from financing activities amounted to $5,198,142 during the six months
ended December 31, 2009.  During that period, we completed a private
placement for a gross proceeds of $5 million with 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.  In
addition, we secured a bridge loan of approximately $4,486,567 in connection
with the restructuring of Bank of China loan.




During the six months ended December
31, 2009, we significantly improved our working capital position. As of December
31, 2009, we had working capital of $5,992,086 as compared to a working capital
deficit of $14,196,968 at June 30, 2009.  The improvement of our
working capital condition was attributable to (1) the $5 million private
placement in August 2009; (2) conversion to common stock of $4,830,847 owed on
account of a note that we issued to American Oriental Bioengineering, (3) cash
realization through the divesture of the land and building of
LRT,  (4) forgiveness of debt and accrued interest amounted to
$3,579,085 in connection with the restructuring of Bank of China loan and (5)
refinancing Bank of China loan with a new loan secured on October 1, 2009 in the
amount of $4,680,278 maturing on September 30, 2012, which changed a current
liability into a long-term liability.  We expect to continue to
improve our liquidity as well as our capital structure in the coming
year.





The
capital injection and restructuring efforts over the last six months greatly
improved the liquidity of the Company as we continue to develop our
pharmaceutical products.  Nevertheless, we will continue to explore various
alternatives to improve our financial position and secure sources of
financing.  Among the possibilities being explored are new credit
facilities, a new equity raise, new 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.




14


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 December 31, 2009.  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 China Aoxing 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” include, without
limitation, controls and procedures designed to insure that information China
Aoxing 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 China Aoxing’s system of disclosure
controls and procedures was effective as of December 31, 2009 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 China Aoxing’s second
fiscal quarter that has materially affected or is reasonably likely to
materially affect China Aoxing’s internal control over financial
reporting.





PART
II   -   OTHER INFORMATION





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, 2009.





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 2nd quarter of fiscal
2010.





Item
2.                 Exhibits





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


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


32
            Rule
      13a-14(b) Certification




15





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.





CHINA
      AOXING PHARMACEUTICAL COMPANY, INC.





Date:
      February 15, 2009
            By:
      /s/ Zhenjiang
      YueZhenjiang Yue, Chief Executive OfficerDate:
      February 15, 2009
            By:
      /s/ Hui
      ShaoHui Shao, Chief  Financial
Officer










16