Attached files
file | filename |
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EX-31.2 - Linkwell CORP | v202554_ex31-2.htm |
EX-31.1 - Linkwell CORP | v202554_ex31-1.htm |
EX-32.1 - Linkwell CORP | v202554_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2010
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ________ to __________
Commission
File Number: 000-24977
LINKWELL
CORPORATION
|
(Exact
name of small business issuer as specified in
charter)
|
FLORIDA
|
65-1053546
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
1104
Jiatong Road, Jiading District, Shanghai, China 201807
|
(Address
of principal executive offices)
|
(86)
21-5566-6258
|
(Issuer's
telephone number)
|
not
applicable
|
(Former
name, former address and former fiscal year,
|
if
changed since last report)
|
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for shorter period that the registrant was required
to submit and post such files). Yes o No o
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.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do not check if
a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
LINKWELL
CORPORATION AND SUBSIDIARIES
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
INDEX
Page
|
|||||
PART
I - FINANCIAL INFORMATION
|
|||||
Item
1.
|
Financial
Statements.
|
5 | |||
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
27 | |||
Item
4.
|
Controls
and Procedures.
|
36 | |||
PART
II - OTHER INFORMATION
|
|||||
Item
1.
|
Legal
Proceedings.
|
37 | |||
Item
6.
|
Exhibits.
|
37 | |||
Signature
|
38 |
2
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
Certain
statements in this report contain or may contain forward-looking statements that
are subject to known and unknown risks, uncertainties and other factors which
may cause actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous assumptions and other
factors that could cause our actual results to differ materially from those in
the forward-looking statements. These factors include, but are not limited to,
the risk of doing business in the People's Republic of China, or the PRC, our
ability to implement our strategic initiatives, our access to sufficient
capital, the effective integration of our subsidiaries in the PRC into a U.S.
public company structure, economic, political and market conditions and
fluctuations, government and industry regulation, Chinese and global
competition, and other factors. Most of these factors are difficult to
predict accurately and are generally beyond our control. You should consider the
areas of risk described in connection with any forward-looking statements that
may be made herein. Readers are cautioned not to place undue reliance on
these forward-looking statements and readers should carefully review this report
in its entirety. Except for our ongoing obligations to disclose material
information under the Federal securities laws, we undertake no obligation to
release publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated events. These
forward-looking statements speak only as of the date of this report and you
should not rely on these statements without also considering the risks and
uncertainties associated with these statements and our business.
OTHER
PERTINENT INFORMATION
As used
herein, unless the context indicates otherwise, the terms:
“Linkwell”,
the “Company”, “we” and “us” refers to Linkwell Corporation,
a Florida
corporation;
“Linkwell
Tech” refers to our 90% owned subsidiary Linkwell Tech Group, Inc.,
a Florida
corporation;
“LiKang
Disinfectant” refers to Shanghai LiKang Disinfectant High-Tech Company,
Limited,
a
wholly-owned subsidiary of Linkwell Tech;
“LiKang
Biological” refers to Shanghai LiKang Biological High-Tech Co.,
Ltd.,
a wholly
owned subsidiary of LiKang Disinfectant; and
“LiKang
International” refers to Shanghai LiKang International Trade Co.,
Ltd.,
formerly
a wholly owned subsidiary of LiKang Disinfectant which was sold to Linkwell
International Trading Co., Limited on May 31, 2008.
We also
use the following terms when referring to certain related parties:
“Shanhai”
refers to Shanghai Shanhai Group, a Chinese company which used to be the
minority owner of LiKang Disinfectant;
3
“Meirui”
refers to Shanghai LiKang Meirui Pharmaceuticals High-Tech Co., Ltd., a
company of which Shanhai is a majority shareholder; and
“ZhongYou”
refers to Shanghai ZhongYou Pharmaceutical High-Tech Co., Ltd., a company
owned by Shanghai Jiuqing Pharmaceuticals Company, Ltd., whose 65% owner is
Shanghai Ajiao Shiye Co. Ltd. Our Chairman and Chief Executive Officer Xuelian
Bian is a 60% shareholder of Shanghai Ajiao Shiye Co. Ltd.
The
People's Republic of China is herein referred to as China or the
PRC.
The
information which appears on our web site at www.linkwell.us is not part of this
report.
4
LINKWELL
CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS
|
SEPTEMBER
30, 2010
|
DECEMBER
31, 2009
|
|||||||
(UNAUDITED)
|
(AUDITED)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalent
|
$ | 2,677,553 | $ | 2,144,360 | ||||
Accounts
receivable, net
|
3,882,666 | 4,033,718 | ||||||
Accounts
receivable - related parties, net
|
5,404,480 | 3,436,280 | ||||||
Due
from related party
|
1,689,991 | 2,362,088 | ||||||
Other
receivables
|
1,146,813 | 254,166 | ||||||
Inventories,
net
|
2,231,252 | 2,055,986 | ||||||
Prepaid
expenses and other current assets
|
266,687 | 263,643 | ||||||
Deposits
|
1,143,059 | 1,103,445 | ||||||
Total
current assets
|
18,442,501 | 15,653,686 | ||||||
NON-CURRENT
ASSETS
|
||||||||
Property,
plant and equipment, net
|
2,076,267 | 2,057,758 | ||||||
Construction
in progress
|
48,649 | - | ||||||
Intangible
assets
|
436,600 | 513,648 | ||||||
Total
non-current assets
|
2,561,516 | 2,571,406 | ||||||
TOTAL
ASSETS
|
$ | 21,004,017 | $ | 18,225,092 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Loans
payable
|
$ | 1,492,292 | $ | 380,774 | ||||
Accounts
payable and accrued expenses
|
2,702,047 | 2,092,995 | ||||||
Advances
from customers
|
144,834 | 142,138 | ||||||
Taxes
payable
|
282,376 | 257,824 | ||||||
Other
payables
|
36,078 | 154,673 | ||||||
Due
to related parties
|
235,243 | 518,631 | ||||||
Total
current liabilities
|
4,892,870 | 3,547,035 | ||||||
Put
option liability
|
2,400,000 | 2,400,000 | ||||||
Total
liability
|
7,292,870 | 5,947,035 | ||||||
COMMITMENT
AND CONTIGENCY
|
||||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Preferred
Stock (No par value; 10,000,000 authorized,
no
shares issued and outstanding at September 30, 2010
and
December 31, 2009, respectively)
|
- | - | ||||||
Common
Stock ($.0005 par value, 150,000,000 authorized,
86,605,475 shares
issued and outstanding at September 30,
2010
and December 31, 2009, respectively)
|
43,303 | 43,303 | ||||||
Additional
paid-in capital
|
7,474,020 | 7,474,020 | ||||||
Statutory
surplus reserve
|
802,749 | 802,749 | ||||||
Retained
earnings
|
4,165,102 | 3,250,115 | ||||||
Deferred
compensation
|
(158,667 | ) | (307,541 | ) | ||||
Accumulated
other comprehensive income
|
883,604 | 633,970 | ||||||
Total
company stockholders' equity
|
13,210,111 | 11,896,616 | ||||||
NONCONTROLLING
INTEREST
|
501,036 | 381,441 | ||||||
TOTAL
EQUITY
|
13,711,147 | 12,278,057 | ||||||
TOTAL
LIABILITIES AND EQUITY
|
$ | 21,004,017 | $ | 18,225,092 |
5
LINKWELL
CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
(UNAUDITED)
|
Nine
Months Ended September 30,
|
Three
Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
NET
SALES
|
||||||||||||||||
Non-related
companies
|
$ | 4,776,102 | $ | 7,125,602 | $ | 1,734,770 | $ | 2,930,306 | ||||||||
Related
companies
|
4,659,090 | 3,325,863 | 1,835,574 | 1,146,139 | ||||||||||||
Total
Net Sales
|
9,435,192 | 10,451,465 | 3,570,344 | 4,076,445 | ||||||||||||
COST
OF SALES
|
||||||||||||||||
Non-related
companies
|
(2,460,885 | ) | (3,051,232 | ) | (907,428 | ) | (1,366,350 | ) | ||||||||
Related
companies
|
(2,400,595 | ) | (1,424,157 | ) | (960,156 | ) | (534,425 | ) | ||||||||
Total
Cost of Sales
|
(4,861,480 | ) | (4,475,389 | ) | (1,867,584 | ) | (1,900,775 | ) | ||||||||
GROSS
PROFIT
|
4,573,712 | 5,976,076 | 1,702,760 | 2,175,670 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Selling
expenses
|
977,336 | 977,365 | 286,453 | 53,799 | ||||||||||||
General
and administrative
|
2,306,356 | 2,203,113 | 724,230 | 1,131,216 | ||||||||||||
Total
Operating Expenses
|
3,283,692 | 3,180,478 | 1,010,683 | 1,185,015 | ||||||||||||
INCOME
FROM OPERATIONS
|
1,290,020 | 2,795,598 | 692,077 | 990,655 | ||||||||||||
OTHER
INCOME (EXPENSES)
|
||||||||||||||||
Other
income
|
47,715 | 16,664 | 21,126 | 407 | ||||||||||||
Put
option expenses
|
- | 288,386 | - | 111,548 | ||||||||||||
Interest
income
|
133 | 3,415 | (31 | ) | 1,199 | |||||||||||
Interest
expense
|
(61,910 | ) | (42,838 | ) | (25,043 | ) | (13,100 | ) | ||||||||
Total
Other Income (Expenses), net
|
(14,062 | ) | 265,627 | (3,948 | ) | 100,054 | ||||||||||
INCOME
BEFORE INCOME TAX
|
1,275,958 | 3,061,225 | 688,129 | 1,090,709 | ||||||||||||
INCOME
TAX EXPENSE
|
(241,376 | ) | (459,953 | ) | (98,491 | ) | (160,788 | ) | ||||||||
NET
INCOME INCLUDING NONCONTROLLING INTEREST
|
1,034,582 | 2,601,272 | 589,638 | 929,921 | ||||||||||||
LESS:
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
|
(119,596 | ) | (288,386 | ) | (59,418 | ) | (111,548 | ) | ||||||||
NET
INCOME ATTRIBUTABLE TO LINKWELL CORP
|
914,986 | 2,312,886 | 530,220 | 818,373 | ||||||||||||
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||
Foreign
currency translation
|
249,634 | - | 178,336 | - | ||||||||||||
COMPREHENSIVE
INCOME
|
$ | 1,164,620 | $ | 2,312,886 | $ | 708,556 | $ | 818,373 | ||||||||
BASIC
AND DILUTED INCOME PER COMMON SHARE
|
||||||||||||||||
Basic
earnings per shares from continuing operation
|
$ | 0.01 | $ | 0.03 | $ | 0.01 | $ | 0.01 | ||||||||
Diluted
earnings per shares from continuing operation
|
$ | 0.01 | $ | 0.03 | $ | 0.01 | $ | 0.01 | ||||||||
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING:
|
||||||||||||||||
Basic
|
86,605,475 | 79,076,063 | 86,605,475 | 81,304,926 | ||||||||||||
Diluted
|
86,605,475 | 79,076,063 | 86,605,475 | 81,460,073 |
6
LINKWELL
CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(UNAUDITED)
|
Nine
Months Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Income
including noncontrolling interest
|
$ | 1,034,582 | $ | 2,601,272 | ||||
Adjustments
to reconcile income including noncontrolling
|
||||||||
Interest
to net cash provided by (used in) operating activities:
|
||||||||
Derivative
liabilities
|
- | (288,386 | ) | |||||
Deferred
compensation
|
148,875 | - | ||||||
Depreciation
and amortization
|
268,242 | 136,401 | ||||||
Allowance
for doubtful accounts
|
- | 14,692 | ||||||
Allowance
for doubtful accounts-related party
|
- | 914 | ||||||
Loss
from disposal of fixed assets
|
1,092 | (161,114 | ) | |||||
Increase(decrease)
in current assets
|
||||||||
Accounts
receivable
|
224,027 | (1,155,496 | ) | |||||
Accounts
receivable - related party
|
(1,968,200 | ) | 972,990 | |||||
Other
receivables
|
(874,484 | ) | (416,289 | ) | ||||
Inventories
|
(134,157 | ) | 502,928 | |||||
Deposits,
prepaid expenses and other current assets
|
(23,057 | ) | (316,887 | ) | ||||
Increase(decrease)
in current liabilities
|
||||||||
Accounts
payable, accrued expenses and other payables
|
441,197 | (1,863,940 | ) | |||||
Advances
from customers
|
- | 139,073 | ||||||
Taxes
payable
|
19,357 | 115,154 | ||||||
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
(862,526 | ) | 281,312 | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Cash
acquired from acquisition of Likang Biological
|
- | 145,517 | ||||||
Construction
in progress
|
(47,894 | ) | - | |||||
Purchase
of property, plant and equipment
|
(171,874 | ) | (877,514 | ) | ||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(219,768 | ) | (731,997 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
(Decrease)
increase in due to related parties
|
(199,484 | ) | 288,218 | |||||
Decrease
in due from related parties
|
680,062 | 241,829 | ||||||
Repayment
of short-term loans
|
(381,971 | ) | ||||||
Proceeds
from loans payable
|
1,469,135 | - | ||||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
1,567,742 | 530,047 | ||||||
EFFECT
OF EXCHANGE RATE ON CASH
|
47,745 | 139,722 | ||||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
533,193 | 219,084 | ||||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
2,144,360 | 2,072,687 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 2,677,553 | $ | 2,291,771 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid for:
|
||||||||
Interest
|
$ | 31,806 | $ | 42,838 | ||||
Income
taxes
|
$ | 262,552 | $ | 425,145 |
7
LINKWELL
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Linkwell
Corporation (formerly Kirshner Entertainment & Technologies, Inc.) (the
“Company”) was incorporated in the State of Colorado on December 11, 1996. On
May 31, 2000, the Company acquired 100% of HBOA.com, Inc. On December 28, 2000,
the Company formed a new subsidiary, Aerisys Incorporated (“Aerisys”), a Florida
corporation, to handle commercial private business. In June 2003, the Company
formed its entertainment division and changed its name to reflect this new
division. Effective as of March 31, 2003, the Company discontinued its
entertainment division and its technology division, except for the Aerisys
operations that continue on a limited basis.
On May 2,
2005, the Company entered into and consummated a share exchange with all of the
shareholders of Linkwell Tech Group, Inc. (“Linkwell Tech”). Pursuant to the
share exchange, the Company acquired 100% of the issued and outstanding shares
of Linkwell Tech's common stock, in exchange for 36,273,470 shares of our common
stock, which at closing represented approximately 87.5% of the issued and
outstanding shares of the Company’s common stock. As a result of the
transaction, Linkwell Tech became our wholly-owned subsidiary. For financial
accounting purposes, the exchange of stock was treated as a recapitalization of
Kirshner with the former shareholders of the Company retaining 7,030,669 or
approximately 12.5% of the outstanding stock. The consolidated financial
statements reflect the change in the capital structure of the Company due to the
recapitalization and in the operations of the Company and its subsidiaries for
the periods presented.
Linkwell
Tech was founded on June 22, 2004, as a Florida corporation. On June 30, 2004,
Linkwell Tech acquired 90% of Shanghai LiKang Disinfectant High-Tech Company,
Ltd. (“LiKang Disinfectant”), a PRC company, through a stock exchange. This
transaction resulted in the formation of a U.S. holding company by the
shareholders of LiKang Disinfectant as it did not result in a change in the
underlying ownership interest of LiKang Disinfectant. LiKang Disinfectant is a
science and technology enterprise founded in 1988. LiKang Disinfectant is
involved in the development, production, marketing and sale, and distribution of
disinfectant health care products.
LiKang
Disinfectant has developed a line of disinfectant product offerings which are
utilized by the hospital and medical industry in China. LiKang Disinfectant has
developed a line of disinfectant product offerings. LiKang Disinfectant regards
hospital disinfectant products as the primary segment of its business and has
developed and manufactured several series of products in the field of skin
mucous disinfection, hand disinfection, surrounding articles disinfection,
medical instruments disinfection and air disinfection.
On June
30, 2005, the Company's Board of Directors approved an amendment of its Articles
of Incorporation to change the name of the Company to Linkwell Corporation. The
effective date of the name change was after close of business on August 16,
2005.
8
On April
6, 2007, the Company’s subsidiary, Linkwell Tech, entered into two material
stock purchase agreements as follows:
i)
Linkwell Tech entered into an agreement (the “Biological Stock Purchase
Agreement”) to acquire a 100% equity interest in Shanghai LiKang Biological
High-Tech Company, Ltd. (“LiKang Biological”), a Chinese company, in a related
party transaction with Mr. Xuelian Bian, the Company’s Chief Executive Officer,
Mr. Wei Guan, the Company’s Vice-President and Director, and Shanghai Likang
Pharmaceuticals Technology Co., Ltd. (“LiKang Pharmaceutical”), a PRC company.
Before the Company entered into the Biological Stock Purchase Agreement, Mr.
Bian and Mr. Guan owned 90% and 10% of LiKang Pharmaceutical, respectively. Mr.
Bian and LiKang Pharmaceutical owned 60% and 40% of LiKang Biological,
respectively. Pursuant to the terms of the Biological Stock Purchase Agreement,
Mr. Bian and LiKang Pharmaceutical were to receive 1,000,000 shares of Linkwell
Corporation’s restricted common stock.
Due to
restrictions under PRC law that prohibited the consideration contemplated by the
Biological Stock Purchase Agreement, the agreement did not close. As a result,
on March 25, 2008, the parties agreed to enter into an amendment to the
Biological Stock Purchase Agreement (“Biological Amendment”) in an effort to
complete the stock purchase transaction. Pursuant to the terms of the Biological
Amendment, the only material change to the Biological Stock Purchase Agreement
related to the consideration paid by Linkwell Tech to Xuelian Bian and LiKang
Pharmaceutical, which was changed from 1,000,000 shares of the Company’s common
stock to 500,000 shares of common stock and $200,000. As of December 31,
2008, the Biological Stock Purchase Agreement was pending and required further
approval from the PRC Ministry of Commerce. Due to the time consuming and
complicated nature of the approval procedure, the parties agreed to enter into a
second amendment to
the Biological Stock Purchase Agreement (“Second Amendment”) in order
to complete the purchase transactions timely and properly. Pursuant to the terms
of the Second Amendment, the purchaser was changed from Linkwell Tech to LiKang
Disinfectant, and, in addition, the consideration changed to RMB 2,000,000,
approximately $292,500, and 500,000 shares of common stock. These changes
were pertinent because an approval from the Ministry of Commerce in the People’s
Republic of China would not be necessary if LiKang Disinfectant acquired
100% of the equity interest in LiKang Biological, as both companies are
registered in the PRC. This transaction closed on March 5, 2009. During the
quarter ended September 30, 2009, LiKang Disinfectant increased its investment
into Likang Biological by injecting RMB 2.5 million cash and RMB 5.5 million in
intangible assets (patents). Likang Biological is mainly engaged in
producing the disinfectant concentrate.
ii)
Linkwell Tech, which already owned a 90% equity interest in LiKang Disinfectant,
entered into an agreement to purchase the remaining 10% equity
interest of LiKang Disinfectant from Shanghai Shanhai Group (“Shanhai”), a
non-affiliated Chinese entity (the “Disinfectant Stock Purchase Agreement”).
Pursuant to the terms of the Disinfectant Stock Purchase Agreement, Shanhai was
to receive 3,000,000 shares of Linkwell Corporation restricted common
stock.
Due to
restrictions under PRC law that prohibited the consideration then contemplated
by the Disinfectant Stock Purchase Agreement, the agreement did not close. As a
result of this, on March 25, 2008, the parties agreed to enter into an amendment
to the Disinfectant Stock Purchase Agreement (“Disinfectant Amendment”) in an
effort to complete the stock purchase transaction. Pursuant to the terms of the
Disinfectant Amendment, the only material change to the Disinfectant Stock
Purchase Agreement related to the consideration paid by Linkwell Tech to the
Shanghai Shanhai Group for the remaining 10% equity interest, which was changed
from 3,000,000 shares of Common Stock to 1,500,000 shares of Common Stock for
$380,000. Due to the fluctuation of the applicable exchange rate, the cash
consideration was increased to $399,057. The other terms of the Disinfectant
Stock Purchase Agreement remained in full force and effect.
9
Linkwell
Tech paid $395,800 to the Shanghai Shanhai Group on February 21, 2008 and paid
$3,257 on April 18, 2008. A total of 1,500,000 shares were expected to be issued
before the end of May 2008. The parties, however, agreed to extend the share
issuance date until October 20, 2008. The Company valued the acquisition
using the fair value of common shares at $0.19 per share and recorded an
investment of $285,000. Including the cash payment of $399,057, the total
investment for acquiring 10% equity interest in LiKang Disinfectant was
$684,057. The cumulative minority interest of 10% equity interest in LiKang
Disinfectant at March 25, 2008 was approximately $557,779. The difference
between the total investment and the cumulative minority interest of $126,278
was deducted from retained earnings as dividends to the 10% minority
shareholder, Shanghai Shanhai Group. As a result of the closing of the
Disinfectant Stock Purchase Agreement, as amended, as of March 25, 2008, our 90%
owned subsidiary Linkwell Tech owns 100% of the equity interest in LiKang
Disinfectant.
On
February 15, 2008, the Company entered into a stock purchase agreement with
Ecolab Inc., a Delaware corporation (“Ecolab”), pursuant to which Ecolab agreed
to purchase 888,889 of shares of Linkwell Tech, or 10% of the issued and
outstanding capital stock of Linkwell Tech, for $2,000,000. On March 28, 2008
and June 4, 2008, Linkwell Tech received $200,000 and $1,388,559,
respectively from Ecolab. Including a $400,000 loan that Linkwell Tech received
from Ecolab and accrued interest thereon of $11,441, Linkwell Tech received a
total investment of $2,000,000 from Ecolab. On May 31, 2008, the Company,
Linkwell Tech and Ecolab entered into a Linkwell Tech Group Inc. Stockholders
Agreement, whereby both the Company and Ecolab are subject to, and beneficiaries
of, certain pre-emptive rights, transfer restrictions and take along rights
relating to the shares of Linkwell Tech that the Company and Ecolab each hold.
As of May 31, 2008, the principal and accrued interest of $11,441 on the
short-term $400,000 loan became part of Ecolab’s investment and does not need to
be repaid.
On May
31, 2008, LiKang Disinfectant entered into a stock purchase agreement under
which it sold 100% of the capital stock of its wholly-owned subsidiary, LiKang
International, to Linkwell International Trading Co., Ltd, a company registered
in Hong Kong which is 100% owned by Mr. Wei Guan, the Company’s Vice President
and Director. Pursuant to the terms of the agreement, LiKang Disinfectant
received $291,754 (RMB 2,000,000) after the agreement was approved by the PRC
Ministry of Commerce on March 27, 2008.
The
unaudited financial statements included herein have been prepared
by the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) that are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally present in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”) have been omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the
audited financial statements and footnotes included in the Company’s
2009 audited financial statements included in the Company’s Annual Report
on Form 10-K. The results for the nine months ended September 30, 2010 are
not necessarily indicative of the results to be expected for the full year
ending December 31, 2010.
BASIS
OF PRESENTATION
The
financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America and are
expressed in US dollars. All material intercompany transactions and
balances have been eliminated in the consolidation.
Certain
reclassifications have been made to the prior year to conform to current year’s
presentation. The consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United States of America
(“U.S. GAAP”). The consolidated financial statements of the Company include the
accounts of its 90% owned subsidiary, Linkwell Tech, and 100% owned
subsidiaries LiKang Disinfectant and Likang Biological. All significant
inter-company balances and transactions have been eliminated.
10
USE
OF ESTIMATES
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates. Significant estimates in the nine and three months ended September
30, 2010 and 2009 include the allowance for doubtful accounts, stock-based
compensation, useful life of property and equipment, inventory reserve and
option value.
NON-CONTROLLING
INTEREST
Effective
January 1, 2009, the Company adopted Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,”
which established new standards governing the accounting for and reporting of
noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and
the loss of control of subsidiaries. Certain provisions of this standard
indicate, among other things, that NCIs (previously referred to as minority
interests) be treated as a separate component of equity, not as a liability (as
was previously the case), that increases and decreases in the parent’s ownership
interest that leave control intact be treated as equity transactions rather than
as step acquisitions or dilution gains or losses, and that losses of a partially
owned consolidated subsidiary be allocated to the NCI even when such allocation
might result in a deficit balance. This standard also requires changes to
certain presentation and disclosure requirements. Losses attributable to the NCI
in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The
excess attributable to the NCI is attributed to those interests. The NCI shall
continue to be attributed its share of losses even if that attribution results
in a deficit NCI balance.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
For
certain of the Company’s financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses,
advances from customers, short-term loans payable and amounts due from or to
related parties, the carrying amounts approximate their fair values due to their
short maturities. ASC Topic 820, “Fair Value Measurements and
Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value,
and establishes a three-level valuation hierarchy for disclosures of fair value
measurement that enhances disclosure requirements for fair value measures.
The carrying amounts reported in the consolidated balance sheets for receivables
and current liabilities each qualify as financial instruments and are a
reasonable estimate of their fair values because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels of valuation hierarchy
are defined as follows:
Level 1
inputs to the valuation methodology are quoted prices for identical assets or
liabilities in active markets.
Level 2
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instruments.
Level 3
inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
11
The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.
As of
September 30, 2010, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair value.
CASH
AND CASH EQUIVALENTS
For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less and
money market accounts to be cash equivalents.
Cash and
Cash Equivalent include short term investments which represent the Company’s
investment into two banking products similar to short term Certificates of
Deposits with flexibility in redemption. The Company invested $1,492,000 (RMB
10,000,000) in one product with an annualized interest rate of 2.15% on August
10, 2010 that matured on September 16, 2010, and the Company invested $895,300
(RMB 6,000,000) in another product with an annualized interest rate of 2.2% on
September 30, 2010 that matured on October 8, 2010.
ACCOUNTS
RECEIVABLE
The
Company has a policy of reserving for uncollectible accounts based on its best
estimate of the amount of probable credit losses in its existing accounts
receivable. The Company periodically reviews its accounts receivable to
determine whether an allowance is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization of an account
may be in doubt. Account balances deemed to be uncollectible are charged to the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. As of September 30, 2010 and December 31,
2009, the Company had established that, based on a review of its third party
accounts receivable outstanding balances, allowances for doubtful accounts in
the amounts of $485,529 and $476,491, respectively. As of September 30, 2010 and
December 31, 2009, the Company had established that, based on a review of its
related party accounts receivable outstanding balances, allowances for doubtful
accounts in the amounts of $325,255 and $319,200, respectively.
INVENTORIES
Inventories,
consisting of raw materials, work in process and finished goods related to the
Company’s products are stated at the lower of cost or market utilizing the
weighted average method. The valuation of inventory requires the Company
to estimate obsolete or excess inventory based on analysis of future demand for
our products. Due to the nature of the Company’s business and our target market,
levels of inventory in the distribution channel, changes in demand due to price
changes from competitors and introduction of new products are not significant
factors when estimating the Company’s excess or obsolete inventory. If inventory
costs exceed expected market value due to obsolescence or lack of demand,
inventory write-downs may be recorded as deemed necessary by management for the
difference between the cost and the market value in the period that impairment
is first recognized. As of September 30, 2010 and December 31, 2009, the reserve
for obsolete inventory amounted to $0.
12
PROPERTY
AND EQUIPMENT
Property
and equipment are carried at cost. Depreciation is provided using the
straight-line method over the estimated economic lives of the assets, which
range from five to twenty years. The cost of repairs and maintenance are
expensed as incurred; major replacements and improvements are capitalized. When
assets are retired or disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gains or losses are included in the
income statement in the year of disposition.
IMPAIRMENT
OF LONG-LIVED ASSETS
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily determinable.
Based on its review, the Company believes that, during the nine and three months
ended September 30, 2010 and 2009, there were no significant impairment of its
long lived assets.
ADVANCES
FROM CUSTOMERS
As of
September 30, 2010 and December 31, 2009, advances from customers were $144,834
and $142,138, respectively. These advances consisted of prepayments
from third party customers to the Company for merchandise that had not yet been
shipped by the Company. The Company will recognize the prepayments as revenue as
customers take delivery of the goods, in compliance with its revenue recognition
policy.
INCOME
TAXES
The
Company utilizes Statement of Financial Accounting Standards ("SFAS") No. 109,
“Accounting for Income Taxes,” (codified in Financial Accounting Standard Board
(“FASB”) Accounting Standard Codification (“ASC” Topic 740), which requires
recognition of deferred tax assets and liabilities for expected future tax
consequences of events that were included in the financial statements or tax
returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The
Company adopted the provisions of the Financial Accounting Standards Board's
("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
(codified in FASB ASC Topic 740). When tax returns are filed, it is highly
certain that some positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority.
13
BASIC
AND DILUTED EARNINGS PER SHARE
The
Company presents net income (loss) per share (“EPS”) in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per
Share” (codified in FASB ASC Topic 740). Accordingly, basic income (loss) per
share is computed by dividing income (loss) available to common shareholders by
the weighted average number of shares outstanding, without consideration for
common stock equivalents. Diluted net income per share is computed by dividing
the net income by the weighted-average number of common shares outstanding as
well as common share equivalents outstanding for the period determined using the
treasury-stock method for stock options and warrants and the if-converted method
for convertible notes. The Company has made an accounting policy election to use
the if-converted method for convertible securities that are eligible to common
stock dividends, if declared. If the if-converted method was anti-dilutive (that
is, the if-converted method resulted in a higher net income per common share
amount than basic net income per share calculated under the two-class method),
then the two-class method was used to compute diluted net income per common
share, including the effect of common share equivalents. Diluted earnings per
share reflects the potential dilution that could occur based on the exercise of
stock options or warrants, unless such exercise would be anti-dilutive,
with an exercise price of less than the average market price of the Company’s
common stock.
REVENUE
RECOGNITION
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 480). The Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectibility is reasonably assured. The
following policies reflect specific criteria for the various revenue streams of
the Company. The Company's revenues from the sale of products are recorded when
the goods are shipped, title passes, and collectibility is reasonably
assured.
The
Company's revenues from the sale of products to related parties are recorded
when the goods are shipped to the customers from our related parties. Upon
shipment, title passes, and collectibility is reasonably assured. The Company
receives purchase orders from our related parties on an as need basis from the
related party customers. Generally, the related party does not hold the
Company’s inventory. If the related party has inventory on hand at the end of a
reporting period, the sale is reversed and the inventory is included on the
Company’s balance sheet.
STATEMENT
OF CASH FLOWS
In
accordance with SFAS No. 95, “Statement of Cash Flows,” codified in FASB ASC
Topic 230, cash flows from the Company's operations are calculated based upon
the local currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheets.
CONCENTRATION
OF BUSINESS AND CREDIT RISK
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. The Company
places its cash with high credit quality financial institutions in the U.S. and
in China. The majority of the Company’s bank accounts in banks located in the
PRC are not covered by any type of protection similar to that provided by the
FDIC on funds held in U.S banks. As of September 30, 2010 and December 31, 2009,
the Company maintains cash in the U.S., in a financial institution insured by
the FDIC that has approximately $13,300 and $142,230,
respectively.
14
Almost
all of the Company's sales are credit sales which are primarily to customers
whose ability to pay is dependent upon the industry economics prevailing in
these areas; however, concentrations of credit risk with respect to trade
accounts receivables are limited due to generally wide distribution of our
products and shorter payment terms than customary in the PRC. The Company also
performs ongoing credit evaluations of its customers to help further reduce
credit risk. For the nine months ended at September 30, 2010 and 2009, sales to
related parties accounted for 18% and 32% of net revenue, respectively. For the
three months ended at September 30, 2010 and 2009, sales to related parties
accounted for 6% and 28% of net revenue, respectively.
The
Company is operating in People’s Republic of China, which may give rise to
significant foreign currency risks from fluctuations and the degree of
volatility of foreign exchange rates between the U.S. dollar and the
RMB.
Payments
of dividends may be subject to some restrictions.
FOREIGN
CURRENCY TRANSLATION AND COMPREHENSIVE INCOME
The
Company primarily operates in the PRC. The financial position and results of
operations of the subsidiaries are determined using the local currency
(“Renminbi” or “RMB”) as the functional currency.
Translation
from RMB into United States dollars (“USD” or “$”) for reporting purposes is
performed by translating the results of operations denominated in foreign
currency at the weighted average rates of exchange during the reporting periods.
Assets and liabilities denominated in foreign currencies at the balance sheet
dates are translated at the market rate of exchange in effect at that date. The
registered equity capital denominated in the functional currency is translated
at the historical rate of exchange at the time of capital contribution. All
translation adjustments resulting from the translation of the financial
statements into USD are reported as a component of accumulated other
comprehensive income in shareholders’ equity. The exchange rates used in
translation from RMB to USD amount were published by People’s Bank of the
People’s Republic of China
For
the periods ended September 30, 2010
|
For
the periods ended September 30, 2009
|
||||||
three
months
|
nine
months
|
three
months
|
nine
months
|
||||
Balance
sheet items, except for the registered and paid-in capital and retained
earnings, as of the three and nine months ended September 30, 2010 and
2009
|
US$1=RMB6.7011
|
US$1=RMB6.7011
|
US$1=RMB6.8290
|
US$1=RMB6.8290
|
|||
Statements
of operations and statements of cash flows for the three and nine months
ended September 30, 2010 and 2009
|
US$1=RMB6.7462
|
US$1=RMB6.8067
|
US$1=RMB6.8321
|
US$1=RMB6.8310
|
15
SHIPPING
COSTS
Shipping
costs are included in selling expenses and totaled $304,301 and $304,423 for the
nine months ended September 30, 2010 and 2009, respectively. Shipping costs were
approximately $92,800 and $157,000, respectively, for the three months ended
September 30, 2010 and 2009.
ADVERTISING
Incurred
and included advertising expenses include selling expenses. For the nine months
ended September 30, 2010 and 2009, advertising expenses amounted to $51,577 and
$102,105, respectively. For the three months ended September 30, 2010 and 2009,
advertising expenses amounted to approximately $18,300 and $45,900,
respectively.
STOCK-BASED
COMPENSATION
The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No.
123” (codified in FASB ASC Topics 718 & 505). The Company recognizes in
the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and non-employees.
NON-EMPLOYEE
STOCK BASED COMPENSATION
The cost
of stock-based compensation awards issued to non-employees for services are
recorded at either the fair value of the services rendered or the instruments
issued in exchange for such services, whichever is more readily determinable,
using the measurement date guidelines enumerated in Emerging Issues Task Force
Issue, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services”.
REGISTRATION
RIGHTS AGREEMENTS
The
Company accounts for payment arrangements under registration rights agreement in
accordance with FASB Staff Position EITF 00-19-2 (codified in FASB ASC Topic
815), which requires the contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, be separately recognized and measured in
accordance with FASB Statement No. 5, Accounting for Contingencies (codified in
FASB ASC Topic 450).
The
Company has adopted “Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument. Accordingly, the Company classifies as liability
instruments, the fair value of registration rights agreements when such
agreements (i) require it to file, and cause to be declared effective under the
Securities Act, a registration statement with the SEC within contractually fixed
time periods, and (ii) provide for the payment of liquidating damages in the
event of its failure to comply with such agreements. Accordingly, (i)
registration rights with these characteristics are accounted for as derivative
financial instruments at fair value and (ii) contracts that are (a) indexed to
and potentially settled in an issuer's own stock and (b) permit gross physical
or net share settlement with no net cash settlement alternative are classified
as equity instruments.
16
RESEARCH AND DEVELOPMENT
COST
Research
and development costs are expensed as incurred and included in general and
administrative expenses. These costs primarily consist of cost of materials used
and salaries paid for the development department of the Company and fees paid to
third parties. Research and development costs for the nine months ended
September 30, 2010 and 2009 were approximately $164,300 and $164,100,
respectively. Research and development costs for the three months ended
September 30, 2010 and 2009 were approximately $60,800 and $43,900,
respectively.
SEGMENT
REPORTING
SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(codified in FASB ASC Topic 280) requires use of the “management approach” model
for segment reporting. The management approach model is based on the way a
company's management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company.
SFAS 131
has no effect on the Company's financial statements as substantially all of the
Company's operations are conducted in one industry segment. All of the Company's
assets are located in the PRC.
RECENT
ACCOUNTING PRONOUNCEMENTS
On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments
based on Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01
re-defines authoritative GAAP for nongovernmental entities to be only comprised
of the FASB Accounting Standards Codification (“Codification”) and, for SEC
registrants, guidance issued by the SEC. The Codification is a
reorganization and compilation of all then-existing authoritative GAAP for
nongovernmental entities, except for guidance issued by the SEC. The
Codification is amended to effect non-SEC changes to authoritative
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of GAAP in Notes to the Consolidated Financial
Statements.
On
February 25, 2010, the FASB issued ASU No. 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of US GAAP. The FASB believes these amendments remove
potential conflicts with the SEC’s literature. The adoption of this ASU did not
have a material impact on the Company’s consolidated financial
statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have
a material impact on the Company’s consolidated financial
statements.
17
In April
2010, the FASB codified the consensus reached in Emerging Issues Task Force
Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU
No. 2010-17 provides guidance on defining a milestone and determining when
it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. FASB ASU No. 2010-17 is
effective for fiscal years beginning on or after June 15, 2010, and is
effective on a prospective basis for milestones achieved after the adoption
date. The Company does not expect this ASU will have a material impact on
its financial position or results of operations when it adopts this update on
January 1, 2011.
In April
2010, the FASB issued an authoritative pronouncement on the effect of
denominating the exercise price of a share-based payment award in the currency
of the market, in which the underlying equity securities trades and that
currency is different from the (1) entity's functional currency, (2) functional
currency of the foreign operation for which the employee provides services, and
(3) payroll currency of the employee. The pronouncement clarifies that an
employee share-based payment award with an exercise price denominated in the
currency of a market in which a substantial portion of the entity's equity
securities trades should not be considered to contain a condition that is not a
market, performance, or service condition, and therefore should be considered an
equity award assuming all other criteria for equity classification are met. The
pronouncement is for interim and annual periods beginning on or after December
15, 2010, and will be applied prospectively. Affected companies will be required
to record a cumulative catch-up adjustment for all awards outstanding as of the
beginning of the annual period in which the guidance is adopted. This amendment
is not expected to have a material impact on the Company’s financial
statements.
A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to the consolidated statements.
NOTE
2 – INVENTORIES
A summary
of inventories by major category as of September 30, 2010 and December 31, 2009
are as follows:
|
September
30,
|
December 31,
|
||||||
2010
(Unaudited)
|
2009
(Audited)
|
|||||||
Raw
materials
|
$
|
863,738
|
$
|
870,559
|
||||
Work-in-process
|
44,359
|
2,604
|
||||||
Finished
goods
|
1,323,155
|
1,182,823
|
||||||
Net
inventories
|
$
|
2,231,252
|
$
|
2,055,986
|
18
NOTE
3 – PROPERTY AND EQUIPMENT
At
September 30, 2010 and December 31, 2009, property and equipment consisted of
the following:
|
Estimated Useful Life
(In years)
|
September
30, 2010 |
December 31, 2009 |
|||||||
(Unaudited)
|
(Audited)
|
|||||||||
Office
equipment and furniture
|
3-7
|
$
|
393,414
|
$
|
356,950
|
|||||
Autos
and trucks
|
5
|
323,647
|
294,554
|
|||||||
Manufacturing
equipment
|
2-10
|
739,377
|
637,910
|
|||||||
Building
|
5-20
|
1,567,228
|
1,528,404
|
|||||||
Subtotal
|
3,023,666
|
2,817,818
|
||||||||
Less:
Accumulated depreciation
|
(947,399
|
)
|
(760,060
|
)
|
||||||
Property
and equipment, net
|
$
|
2,076,267
|
$
|
2,057,758
|
For the
nine months ended September 30, 2010 and 2009, depreciation expenses amounted to
approximately $191,195 and $136,400, respectively.
NOTE
4 - INTANGIBLE ASSETS
At
September 30, 2010, intangible assets consisted of customers lists arising from
the acquisition of Likang Biological, amortizing over 5 years. Net intangible
assets as of September 30, 2010 totaled $436,600. Amortization
expenses for the nine months ended September 30, 2010 and 2009 were $77,047 and
$0, respectively. Amortization expenses for the three months ended September 30,
2010 and 2009 were $25,682 and $0, respectively. Annual amortization
expenses for the next five years from September 30, 2010 are expected to be:
$102,730, $102,730, $102,730, $102,730, and $25,681.
NOTE
5 - DEPOSITS
Deposits
mainly represented prepaid application fee of $570,056 for acquiring the land
use rights and $544,000 for the deposit of purchasing an acquisition target in
China.
NOTE
6 – LOANS PAYABLE
Loans
payable consisted of the following at September 30, 2010 and December 31,
2009:
|
September
30,
2010
|
December 31,
2009
|
||||||
(Unaudited)
|
(Audited)
|
|||||||
Loans
from Shanghai Rural Commercial Bank, Dachang Branch due on June 16, 2010
with interest rate at 6.90% per annum, Guaranteed by Shanhai Group (RMB
2,600,000)
|
$
|
-
|
$
|
380,774
|
||||
Loans
from Shanghai Rural Commercial Bank, Dachang Branch due on January 4,
2011 with interest rate 5.31% per annum. Guaranteed by Shanhai Group
and Mr. Bian, Chairman of the Company (RMB 2,500,000)
|
|
373,073
|
-
|
|||||
Loans
from Shanghai Rural Commercial Bank, Dachang Branch due on March 15,
2011 with interest rate 5.31% per annum. Guaranteed by Shanhai Group
and Mr. Bian, Chairman of the Company (RMB 4,900,000)
|
731,223
|
-
|
||||||
Loans
from Shanghai Rural Commercial Bank, Dachang Branch due on July 13,
2011 with interest rate 5.31% per annum. Guaranteed by Shanhai Group
and Mr. Bian, Chairman of the Company (RMB 2,600,000)
|
387,996
|
-
|
||||||
$
|
1,492,292
|
$
|
380,774
|
19
NOTE
7 – RELATED PARTY TRANSACTIONS
Linkwell
Tech's wholly-owned subsidiary, LiKang Disinfectant, is engaged in business
activities with four related parties: Shanghai ZhongYou Pharmaceutical High-Tech
Co., Ltd., (“ZhongYou”), Shanghai LiKang Biological High-Tech Co., Ltd. (“Likang
Biological”), Shanghai Jiuqing Pharmaceuticals Company, Ltd. (“Shanghai
Jiuqing”) and Linkwell International Trading Co., Ltd. (“Linkwell Trading ”).
Shanghai LiKang Meirui Pharmaceuticals High-Tech Co., Ltd. (“Meirui”), a company
of which Shanhai is a majority shareholder, and had owned 68% of its Meirui
equity shares, used to be a related party, in that it formally owned
10% of Likang Disinfectant. However, Linkwell Tech acquired Shanhai’s 10% equity
interest in LiKang Disinfectant for total consideration of $684,057, which
included the cash payment of $399,057 and 1,500,000 common shares at $0.19 per
share. As a result of this transaction, Meirui was no longer a related
party. Likang Disinfectant completed its acquisition of Likang
Biological on March 31, 2009, thus, making Likang Biological no
longer a related party to the Company. Since then, all the sales and purchase
with Likang Biological were eliminated during the consolidation.
The
Company’s Chairman and Chief Executive Officer, Xuelian Bian, and Vice President
and Director, Wei Guan, own 90% and 10% respectively, of the capital stock of
ZhongYou. In March 2007, Wei Guan sold his 10% shares to Bing Chen, the
President of LiKang Disinfectant. In August 2007, Xuelian Bian sold his 90%
shares to his mother, Xiuyue Xing. In October 2007, the two new shareholders,
Bing Chen (10%) and Xiuyue Xing (90%) sold all of their shares in ZhongYou to
Shanghai Jiuqing, whose 100% owner is Shanghai Ajiao Shiye Co. Ltd. Mr. Bian is
currently a 60% shareholder of Shanghai Ajiao Shiye Co. Ltd.
For the
nine months ended September 30, 2010 and 2009, the Company recorded sales of
$4,657,289 and $2,978,680 to ZhongYou, respectively. For the three months ended
September 30, 2010 and 2009, the sales to Zhongyou were $1,835,257 and
$1,144,400, respectively. At September 30, 2010 and December 31, 2009, accounts
receivables from sales to ZhongYou were $5,316,553 and $3,322,044,
respectively.
Shanghai
Ajiao Shiye Co. Ltd. owns 100% of Shanghai Jiuqing Pharmaceuticals Company, Ltd
(“Shanghai Jiuqing”). Xuelian Bian is a 60% shareholder of Shanghai Ajiao Shiye
Co. Ltd. For the nine months ended September 30, 2010 and 2009, the Company
recorded sales of $1,801 and $4,805 to Shanghai Jiuqing, respectively. For the
three months ended September 30, 2010 and 2009, the Company recorded net revenue
of approximately $300 and $400, respectively. At September 30, 2010 and December
31, 2009, accounts receivable from sales to Shanghai Jiuqing were $87,927 and
$85,451, respectively. As of September 30, 2010 and December 31,
2009, due from other related parties were $1,689,991 and $2,362,088,
respectively.
As of
September 30, 2010, the Company $54,000 owed its management, and other related
parties of $181,243. As of December 31, 2009, the Company owed its
management $54,000, Zhongyou $175,520, and other related parties of
$289,111.
20
NOTE
8 – TAXES PAYABLE
Taxes
payable consisted of the following at September 30, 2010 and December 31, 2009,
respectively:
September
30,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Income
tax payable
|
$
|
133,868
|
$
|
136,823
|
||||
Value
added tax payable
|
146,078
|
114,720
|
||||||
Other
taxes payable
|
2,430
|
6,281
|
||||||
$
|
282,376
|
$
|
257,824
|
NOTE
9 –PUT OPTION LIABILITY
On
February 15, 2008, the Company entered into a stock purchase agreement with
Ecolab pursuant to which Ecolab agreed to purchase and Linkwell Tech agreed to
sell 888,889 of its shares, or 10% of the issued and outstanding capital stock
of Linkwell Tech for $2,000,000. On May 31, 2008, the Company, Linkwell Tech and
Ecolab entered into a Stockholders Agreement (“Stockholders Agreement”), whereby
both the Company and Ecolab are subject to, and the benefit of, certain
pre-emptive rights, transfer restrictions and take along rights relating to the
shares of Linkwell Tech, the Company and Ecolab each hold.
Pursuant
to the terms of the Stockholders Agreement, Ecolab has an option (“Put Option”)
to sell the 888,889 shares (“Shares”) of common stock, par value $0.001, of
Linkwell Tech that Ecolab purchased under the Stock Purchase Agreement back to
Linkwell Tech in exchange for, as determined by Linkwell, cash in the amount of
$2,400,000 or the lesser of (a) 10,000,000 shares of Linkwell common stock, or
(b) such number of shares of Linkwell common stock as is determined by dividing
3,500,000 by the average daily closing price of Linkwell common stock for the
twenty days on which Linkwell shares of common stock were traded on the OTC
Bulletin Board prior to the date the Put Option is exercised (“Put Shares”). The
Put Option is exercisable during the period between the second and fourth
anniversaries of May 30, 2008, or upon the occurrence of certain events
including material breach by Linkwell Tech or its subsidiaries, of the
Consulting Agreement, Distributor Agreements or Sales Representative Agreement
entered into in connection with the Stock Purchase Agreement.
Under the
Stockholders Agreement, Ecolab also has a call option (“Call Option”),
exercisable if Linkwell is subject to a change of control transaction, to
require the Company to sell to Ecolab all of the equity interests in Linkwell
Tech, or any of Linkwell Tech’s subsidiaries, then owned by the Company. The
Company recognized the maximum expenses of the Put Option and the Call Option
described above as $2,400,000 put option liability.
NOTE
10 - INCOME TAXES
The
Company is subject to income taxes by entity on income arising in or derived
from the tax jurisdiction in which each entity is domiciled.
Linkwell
Corp and Linkwell Tech were incorporated in the U.S. and have net operating
losses (NOL) for income tax purposes. Linkwell Corp and Linkwell Tech
had net operating loss carry forwards for income taxes of approximately
$2,134,000 at September 30, 2010 which may be available to reduce future
years’ taxable income as NOL’s can be carried forward up to 20 years from the
year the loss is incurred. Under IRC section 382, certain of these loss
carry-forward amounts may be limited due to the more than 50% change in
ownership which took place during 2004. The Company’s management believes that
the realization of benefits from these losses are uncertain due to the Company’s
limited operating history and continuing losses. Accordingly, a
100% valuation allowance has been provided on the deferred tax asset of
approximately $814,000.
Likang
Disinfectant and Likang Biological are governed by the Income Tax Law of the PRC
concerning privately-run enterprises, which are generally subject to tax at a
statutory rate of 25% on income reported in the statutory financial statements
after appropriated tax adjustments. Likang Disinfectant is subject to
preferential income tax rate of 12.5% for 2010 and 2009; Likang Biological is
subject preferential income tax rate of 25% for 2010 and 20% for
2009.
21
NOTE
11 - STATUTORY RESERVES
Pursuant
to the PRC’s corporate law effective as of January 1, 2006, the Company is now
only required to maintain one statutory reserve by appropriating from its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
Surplus
Reserve Fund
The
Company is now only required to transfer 10% of its net income, as determined
under PRC accounting rules and regulations, to a statutory surplus reserve fund
until such reserve balance reaches 50% of the Company’s registered
capital.
The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Common
Welfare Fund
The
common welfare fund is a voluntary fund that provides that the Company can elect
to transfer 5% to 10% of its net income to this fund. This fund can only be
utilized on capital items for the collective benefit of the Company’s employees,
such as construction of dormitories, cafeteria facilities, and other staff
welfare facilities. This fund is non-distributable other than upon
liquidation. The Company did not make any reserve to this fund during
the nine months ended September 30, 2010 and 2009.
NOTE
12 – STOCKHOLDERS’ EQUITY
Common
Stock
In
September 2006, the Company entered into a three-year agreement with a
consultant to provide business development and management services. In
connection with this agreement, the Company issued 500,000 shares of the
Company’s common stock. The Company valued these services using the fair value
of common shares on the grant date at $0.185 per share and recorded deferred
consulting expense of $92,500 to be amortized over the service period. The
deferred consulting expense has been fully expensed in 2009.
22
On
November 20, 2007, the Company entered into a one year agreement with Segue
Ventures LLC to provide various informal advisory and consulting services,
including U.S. business methods and compliance with SEC disclosure requirements.
In connection with this agreement, Segue Ventures LLC received $4,000 in cash
and 16,000 shares of common stock per month. From November 20, 2007 to June 30,
2008, the Company recorded a total of 116,800 common shares issuable valued at
$24,064 as stock-based consulting expense. On February 27, 2008, 70,000 shares
of the Company’s common stock were issued to Segue Ventures LLC. The Company
valued these 70,000 shares using the fair value of common shares on the contract
date at $0.19 per share and recorded consulting expense of $13,300, of
which, $3,938 was allocated to the year ended December 31, 2007, and
$9,362 was allocated to the six months ended June 30, 2008. On August 13, 2008,
68,800 shares of the Company’s common stock were issued to Segue Ventures LLC.
The Company valued these 68,800 shares using the fair value of common shares on
the grant date at $0.19 per share and recorded consulting expense of $13,072 in
2008. The Company terminated its services agreement with Segue Ventures LLC on
September 11, 2008, and no shares were unissued.
In March
2008, the Company entered into a two month agreement with SmallCapVoice.Com,
Inc. to provide the Company with financial public relations services. In
connection with this agreement, the Company pays $3,500 per month and issues a
total of 35,000 shares of the Company’s common stock. On March 11, 2008, the
Company issued 35,000 shares to SmallCapVoice.Com, Inc. The Company valued these
services using the fair value of common shares on the grant date at $0.19 per
share.
On May 1,
2008, the Company entered into a two year agreement with China Health Capital
Group, Inc. (“CHC”) to provide the Company with financial and investment
services. In connection with this agreement, on June 24, 2008, the Company
issued 2,000,000 shares of Common Stock valued at $0.21 per share to CHC and
recorded $420,000 as deferred compensation. This compensation has been fully
expensed in 2009.
On June
27, 2008, Monarch Capital Fund, Ltd. exercised a warrant to purchase 100,000
shares of Common Stock with price of $0.20 per share. The Company received
proceeds from this warrant exercise of $20,000 on June 24, 2008.
On July
1, 2009, the Company entered into a two year agreement with FirsTrust Group,
Inc. In connection with this agreement, the Company issued 1,800,000 shares of
Common Stock valued at $0.09 per share to FirsTrust Group, Inc. and recorded
$162,000 as deferred compensation. The Company had accumulated amortization of
$101,250 for stock-based compensation as of September 30, 2010. This agreement
has a penalty to the stock recipient for non-compliance to its
terms.
On August
1, 2009, the Company entered into a two year agreement with Shanghai Hai Mai Law
Firm. In connection with this agreement, the Company issued 2,350,000 shares of
Common Stock valued at $0.10 per share to Shanghai Hai Mai Law Firm and
recorded $235,000 as deferred compensation. The Company had accumulated
amortization of $137,083 for stock-based compensation as of September 30, 2010.
This agreement has a penalty to the stock recipient for non-compliance to its
terms.
On
December 30, 2009, the Company issued 4,000,000 shares of common stock for
acquiring an acquisition target in China for $544,000 accounted for as a deposit
as of December 31, 2009. The Company is in the process of closing the
acquisition, which is contingent upon receiving governmental approval of the
acquisition.
On
December 30, 2009, the Company issued 500,000 shares of common stock for paying
the stock consideration portion of the acquisition price for Likang
Biological.
23
Common
Stock Warrants
During
the nine and three months ended September 30, 2010 and 2009, there were no
warrants granted or exercised.
The
following table summarizes the Company's warrants outstanding at September 30,
2010:
Warrants Outstanding and Exercisable
|
|||||||||||
Range of
|
Number
|
Weighted Average
|
Weighted Average
|
||||||||
Exercise
|
of
|
Remaining
|
Exercise
|
||||||||
Price
|
Warrants
|
Exercise Life
|
Price
|
||||||||
$
|
0.20
|
15,766,665
|
0.25
|
$
|
0.20
|
||||||
$
|
0.30
|
15,000,000
|
0.25
|
$
|
0.30
|
||||||
30,766,665
|
NOTE
13 – ACQUISITION OF LIKANG BIOLOGICAL
On March
5, 2009, the Company closed the acquisition of all the outstanding capital stock
of Likang Biological. The purchase price for Likang Biological was RMB2,000,000
(approximately $292,500) and 500,000 shares of common stock equivalent to
approximately US$25,000, which was determined by multiplying the 500,000
shares by the average stock price of Linkwell Corp. two days before and two days
after the closing date . This acquisition was a related party transaction. Mr.
Xuelian Bian, the Company’s Chief Executive Officer, owned 90% of LiKang
Pharmaceutical. Mr. Bian and LiKang Pharmaceutical owned 60% and 40% of LiKang
Biological, respectively.
For
convenience of reporting the acquisition for accounting purposes, March 1, 2009
was designated as the acquisition date.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition.
Cash
|
$
|
145,749
|
||
Other
receivables
|
121,573
|
|||
Inventory
|
986,043
|
|||
Property
and equipment
|
340,542
|
|||
Construction
in progress
|
834,401
|
|||
Intangible
assets
|
469,084
|
|||
Accounts
payable
|
(970,235
|
)
|
||
Other
current liabilities
|
(1,609,657
|
)
|
||
Purchase
price
|
$
|
317,500
|
24
The
following represents the unaudited pro forma consolidated results of operations
of the Company for the nine months ended September 30, 2009, presenting the
operations of the Company and Likang Biological as if the acquisition of Likang
Biological occurred on January 1, 2009. The pro forma results are not
necessarily indicative of the actual results that would have occurred had the
acquisitions been completed as of the beginning of the periods presented, nor
are they necessarily indicative of future consolidated results.
|
For the
Nine
Months
Ended
September
30,
|
|||
2009
|
||||
Net
revenue
|
$
|
10,451,465
|
||
Cost
of revenue
|
4,475,389
|
|||
Gross
profit
|
5,976,076
|
|||
Selling
expense
|
977,365
|
|||
General
& administrative expense
|
2,222,829
|
|||
Total
operating expenses
|
3,200,194
|
|||
Income from
operations
|
2,775,882
|
|||
Non-operating
income, net
|
265,700
|
|||
Income
before income tax
|
3,041,582
|
|||
Income
tax expense
|
459,953
|
|||
Net
income including noncontrolling interest
|
2,581,629
|
|||
Less:
noncontrolling interest
|
286,422
|
|||
Net
income attributable to Linkwell Corp
|
$
|
2,295,207
|
NOTE
14 – CONTINGENCY
The
Company is a defendant in a lawsuit filed in November 2009 in the
Supreme Court of the State of New York, County of New York, by
two warrant holders of the Company, seeking damages of at least
$800,000. As of August 11, 2010, the Company is vigorously
defending its position in this litigation matter and has not
made a provision with regards to this lawsuit in the event of an
unfavorable outcome. The Company has filed a motion to dismiss the complaint and
proceedings relating to the motion to dismiss are still ongoing.
NOTE
15 – OPERATING RISK
(a)
|
Country
risk
|
Currently,
the Company’s revenues are primarily derived from the sale of a line of
disinfectant product to customers in the PRC. The Company hopes to
expand its operations to countries outside the PRC, however, such expansion has
not been commenced and there are no assurances that the Company will be able to
achieve such an expansion successfully. Therefore, a downturn or stagnation
in the economic environment of the PRC could have a material adverse effect
on the Company’s financial condition.
(b)
|
Products
risk
|
In
addition to competing with other domestic manufacturers of disinfectant product
offerings, the Company competes with larger U.S. companies who have greater
funds available for expansion, marketing, research and development and the
ability to attract more qualified personnel. These U.S. companies may be able to
offer products at a lower price. There can be no assurance that the Company will
remain competitive should this occur.
25
(c)
|
Exchange
risk
|
The
Company cannot guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods. This is because a fluctuating exchange rate
may post a higher or lower profit depending on exchange rate of Renminbi
converted to US dollars on that day. The exchange rate could fluctuate depending
on changes in the political and economic environments without
notice.
(d)
|
Political
risk
|
Currently,
the PRC is in a period of growth and is openly promoting business development in
order to bring more business into the country. Additionally, the PRC currently
allows a Chinese corporation to be owned by a United States corporation. If the
PRC government changes laws or regulations relating to the ownership of a
Chinese corporation, then the Company's ability to operate the PRC subsidiaries
could be affected.
NOTE 16 – SUBSEQUENT
EVENTS
In
accordance with ASC 855, “Subsequent Events,” the Company has evaluated
subsequent events after the balance sheet date of September 30, 2010. The
Company has reported all required subsequent events.
26
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). We have based these forward-looking statements on
our current expectations and projections about future events. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions about us that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“continue,” or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those listed under the heading
“Risk Factors” and those listed in our other Securities and Exchange Commission
filings. The following discussion should be read in conjunction with
our Financial Statements and related Notes thereto included elsewhere in this
report. Throughout this Quarterly Report, we will refer to Linkwell Corporation.
as "Linkwell," the "Company," "we," "us," and "our."
The
Management’s Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements and related Notes in Item 1.
OVERVIEW
We
operate under a holding company structure and currently have one direct 90%
owned operating subsidiary, Linkwell Tech Group Inc. (“Linkwell Tech”), a
Florida corporation. Linkwell Tech owns 100% of Shanghai LiKang
Disinfectant High-Tech Company, Limited (“LiKang Disinfectant”). On February 15,
2008, Linkwell Tech sold 10% of its issued and outstanding capital stock to
Ecolab Inc., a Delaware corporation (“Ecolab”). On March 5, 2009,
LiKang Disinfectant purchased 100% of LiKang Biological Company for
approximately $292,500 (RMB 2,000,000) and 500,000 shares of our common
stock.
Linkwell
Corporation, through Linkwell Tech’s wholly-owned subsidiaries, LiKang
Disinfectant and Likang Biological, is engaged in the development, manufacture,
sale and distribution of disinfectant health care products primarily to the
medical industry in China.
Since
1988, we have developed, manufactured and distributed disinfectant health care
products primarily to the medical industry in China. In the last few years,
China has witnessed a variety of public health crises, such as the outbreak of
SARS, which demonstrated the need for increased health standards in China. In
response, since the beginning in 2002, the Chinese government has undertaken
various initiatives to improve public health and living standards, including
continuing efforts to educate the public about the need for proper sanitation
procedures and the establishment of production standards for the disinfectant
industry in China. As a result of this heightened license and permit system, all
disinfectant manufacturers must comply with “qualified disinfection product
manufacturing enterprise requirements” established by the Ministry of Public
Health. The requirements include standards for hardware, such as facilities and
machinery, and software, including the technology to monitor the facilities, as
well as the heightened knowledge and capability of the production staff
regarding quality control procedures. Following the adoption of the industry
standards in 2002, we were granted thirty-one hygiene licenses by the
Ministry of Public Health.
27
We
believe that government standards adopted in July 2002 have increased the
barriers for competitors to enter into the disinfectant industry in China. The
implementation of these improved production standards and license requirements
has effectively decreased the competitive landscape as it pertains to small to
medium size manufacturers, since the new standards are especially difficult
for companies with limited product offerings and inferior technical content. In
addition, prior to the adoption of industry standards, disinfectant products
were generally marketed and sold based on price as opposed to quality. We
believe that as a result of the adoption of industry standards, the marketplace
is evolving with a more stringent focus on product quality, which we believe
will enable us to increase our base of commercial customers thereby increasing
our revenues.
Historically,
our focus has been on the commercial distribution of our products. Our customers
include hospitals, medical suppliers and distribution companies throughout
China. We have made efforts to expand our distribution reach to the retail
market. We have repackaged certain of our commercial disinfectant products for
sale to the consumer market and have commenced upon expanding our customer base
to include hotels, schools, supermarkets and pharmacies. By virtue of the
Chinese government's continuing focus on educating the Chinese population about
the benefits of proper sanitation procedures, we believe that another key to
increasing our revenue is the continued expansion of the retail distribution of
our products.
The
disinfectant industry in China is an emerging industry that is populated with
small, regional companies. We estimate that there are in excess of 1,000
manufacturers and distributors of disinfectant products in China; however, most
domestic competitors offer a limited line of products and there are only a few
domestic companies with a nationwide presence. We believe that our national
marketing and sales presence throughout all 22 provinces, as well as four
autonomous regions and four municipalities in China, give us a competitive
advantage over many other disinfectant companies in China and will enable us to
leverage the brand awareness for our products with commercial customers to the
retail marketplace.
Our
present manufacturing facilities and production capacities are sufficient for
the foreseeable future, and we believe that we have the assets and capital
available to us necessary to enable the increase of our revenue in future periods as
the market for disinfectant products in China continues to
increase. We will continue to focus our efforts on the retail market
for our products, as well as expanding our traditional base of commercial
customers. In addition, we may also consider the possible acquisition of
independent sales networks, which could be used to increase our product
distribution capacity and align our company with small, regional companies in
the industry.
28
RESULTS
OF OPERATIONS
Comparison
of the Nine Months Ended September 30, 2010 and 2009
The table
below sets forth the results of operations for the nine months ended September
30, 2010 as compared to the nine months ended September 30, 2009 accompanied by
the percentage of changes.
|
September
30, 2010
|
September
30, 2009
|
||||||||||||||
|
$
|
% of Sales
|
$
|
% of Sales
|
||||||||||||
Net
Revenue
|
||||||||||||||||
Non-related
companies
|
$
|
4,776,102
|
50.6
|
%
|
$
|
7,125,602
|
68.2
|
%
|
||||||||
Related
companies
|
4,659,090
|
49.4
|
%
|
3,325,863
|
31.8
|
%
|
||||||||||
Total
Net Revenue
|
9,435,192
|
100
|
%
|
10,451,465
|
100
|
%
|
||||||||||
Cost
of Sales
|
4,861,480
|
51.5
|
%
|
4,475,389
|
42.8
|
%
|
||||||||||
Gross
Profit
|
4,573,712
|
48.5
|
%
|
5,976,076
|
57.2
|
%
|
||||||||||
Selling
Expense
|
977,336
|
10.4
|
%
|
977,365
|
9.4
|
%
|
||||||||||
General
and Administrative
|
2,306,356
|
24.4
|
%
|
2,203,113
|
21.1
|
%
|
||||||||||
Total
Operating Expenses
|
3,283,692
|
34.8
|
%
|
3,180,478
|
30.4
|
%
|
||||||||||
Income
from Operations
|
1,290,020
|
13.7
|
%
|
2,795,598
|
26.7
|
%
|
||||||||||
Other
Income (Expenses), net
|
(14,062
|
)
|
(0.1
|
)%
|
265,627
|
2.5
|
%
|
|||||||||
Income
tax expense
|
(241,376
|
)
|
(2.6
|
)%
|
(459,953
|
)
|
(4.4
|
)%
|
||||||||
Net
Income including non-controlling interest
|
1,034,582
|
11.0
|
%
|
2,601,272
|
24.9
|
%
|
||||||||||
Less:
net income attributable non-controlling interest
|
(119,596
|
)
|
(1.3
|
)%
|
(288,386
|
)
|
(2.8
|
)%
|
||||||||
Net
Income attributable to Linkwell Corp
|
914,986
|
9.7
|
%
|
2,312,886
|
22.1
|
%
|
NET
REVENUE
Net
revenue for the nine months ended September 30, 2010 was $9,435,192 as compared
to net revenue of $10,451,465 for the same period in 2009, a decrease of
$1,016,273 or approximately 9.7%. This decrease in revenue was due to decreased
sales on certain low-end and old products and temporary limitations on the sales
due to inspection and replacement of product certificates with the authorities.
In addition, we reduced credit sales to customers whose payment history is not
satisfactory. Of our total net revenue for the nine months ended September 30,
2010, $4,659,090 or approximately 49.4% were attributable to related parties as
compared to net revenue of $3,325,863, or approximately 31.8% in the same period
of 2009.
COST
OF SALES
Cost of
sales includes raw materials and manufacturing costs, which includes labor, rent
and an allocated portion of overhead expenses, such as utilities, directly
related to product production. For the nine months ended September 30, 2010,
cost of revenue amounted to $4,861,480, or approximately 51.5% of net revenue,
as compared to cost of revenue of $4,475,389, or approximately 42.8% of net
revenue in the same period of 2009. The increase in cost of
revenue as a percentage of revenue was mainly due to increased price of raw
material and labor costs resulting from an overall price inflation in China
compared to the same period of 2009.
GROSS
PROFIT
Gross
profit for the nine months ended September 30, 2010 was $4,573,712, or
approximately 48.5% of net revenue, as compared to $5,976,076, or approximately
57.2% of revenue for the same period in 2009. The decrease in gross profit
margin was mainly due to the increase of cost of revenue as a percentage of
revenue.
29
OPERATING
EXPENSES
Total
operating expenses consisted of selling, general and administrative expenses;
for the nine months ended September 30, 2010, total operating expenses were
$3,283,692, an increase of $103,214, or approximately 3.2%, from total operating
expenses of $3,180,478 for the same period in 2009. The increase in operating
expenses was mainly due to increased payroll, consulting fee, and research and
development expenses for new products and technology.
NONCONTROLLING
INTEREST
On
February 15, 2008, we entered into a stock purchase agreement with Ecolab,
pursuant to which Ecolab purchased and Linkwell Tech sold 888,889 of its shares,
or 10% of the issued and outstanding capital stock of Linkwell Tech, for a total
of $2,000,000. On March 28, 2008 and June 4, 2008, Linkwell Tech received
$200,000 and $1,388,559, respectively, from Ecolab. Linkwell Tech received a
total of $2,000,000 from Ecolab, inclusive of a $400,000 loan that Ecolab
released to Linkwell Tech and accrued interest of $11,441. On May 31, 2008, we,
Linkwell Tech and Ecolab entered into a Linkwell Tech Group Inc. Stockholders
Agreement, whereby both the Company and Ecolab are subject to, and are the
beneficiaries of, certain pre-emptive rights, transfer restrictions and take
along rights relating to the shares of Linkwell Tech that we and Ecolab each
hold. As of May 31, 2008, the principal and accrued interest of $11,441 on the
short-term $400,000 loan became part of Ecolab’s investment and no longer needed
to be repaid. After this transaction, Ecolab became a 10% minority interest
holder of Linkwell Tech. For the nine months ended September 30, 2010, we had a
minority interest expense of $119,596 as compared to $288,386 for the same
period in 2009.
NET
INCOME
Our net
income for the nine months ended September 30, 2010 was $914,986 compared to
$2,312,886 for the same period in 2009, a decrease of $1,397,900 or
60.4%. Net income as a percentage of revenue was 9.7% for the nine
months ended September 30, 2010, while it was 22.1% for the same period in 2009.
This decrease in net income was attributable to decreased sales and increased
cost of sales, and increased general and administrative expenses for the period
ended September 30, 2010.
Comparison of the Three Months Ended
September 30, 2010 and 2009
The table
below sets forth the results of operations for the three months ended September
30, 2010 as compared to the three months ended September 30, 2009 accompanied by
the percentage of changes.
|
September
30, 2010
|
September
30, 2009
|
||||||||||||||
|
$
|
% of Sales
|
$
|
% of Sales
|
||||||||||||
Net
Revenue
|
||||||||||||||||
Non-related
companies
|
$
|
1,734,770
|
48.6
|
%
|
$
|
2,930,306
|
71.9
|
%
|
||||||||
Related
companies
|
1,835,574
|
51.4
|
%
|
1,146,139
|
28.1
|
%
|
||||||||||
Total
Net Revenue
|
3,570,344
|
100
|
%
|
4,076,445
|
100
|
%
|
||||||||||
Cost
of Sales
|
1,867,584
|
52.3
|
%
|
1,900,775
|
46.6
|
%
|
||||||||||
Gross
Profit
|
1,702,760
|
47.7
|
%
|
2,175,670
|
53.4
|
%
|
||||||||||
Selling
Expense
|
286,453
|
8.0
|
%
|
53,799
|
1.3
|
%
|
||||||||||
General
and Administrative
|
724,230
|
20.3
|
%
|
1,131,216
|
27.8
|
%
|
||||||||||
Total
Operating Expenses
|
1,010,683
|
28.3
|
%
|
1,185,015
|
29.1
|
%
|
||||||||||
Income
from Operations
|
692,077
|
19.4
|
%
|
990,655
|
24.3
|
%
|
||||||||||
Other
Income (Expenses), net
|
(3,948)
|
(0.1
|
)%
|
100,054
|
2.5
|
%
|
||||||||||
Income
tax expense
|
(98,491
|
)
|
(2.8
|
)%
|
(160,788
|
)
|
(4.0
|
)%
|
||||||||
Net
Income including non-controlling interest
|
589,638
|
16.5
|
%
|
929,921
|
22.8
|
%
|
||||||||||
Less:
net income attributable non-controlling interest
|
(59,418
|
)
|
(1.6
|
)%
|
(111,548
|
)
|
(2.7
|
)%
|
||||||||
Net
Income attributable to Linkwell Corp
|
530,220
|
14.9
|
%
|
818,373
|
20.1
|
%
|
NET
REVENUE
Net
revenue for the three months ended September 30, 2010 was $3,570,344 as compared
to net revenue of $4,076,445 for the same period in 2009, a decrease of $506,101
or approximately 12.4%. This decrease in revenue was due to decreased sales on
certain low-end and old products, temporary limitations on the sales due to
inspection and replacement of product certificates with the authority, and
decreased credit sales to customers with dissatisfied payment
history. Of our total net revenue for the three months ended
September 30, 2010, $1,835,574 or approximately 51.4% were attributable to
related parties as compared to net revenue of $1,146,139, or approximately 28.1%
in the same period of 2009.
COST
OF SALES
Cost of
sales includes raw materials and manufacturing costs, which includes labor, rent
and an allocated portion of overhead expenses, such as utilities, directly
related to product production. For the three months ended September 30, 2010,
cost of revenue amounted to $1,867,584, or approximately 52.3% of net revenue,
as compared to cost of revenue of $1,900,775, or approximately 46.6% of net
revenue in the same period of 2009. The increase in cost of revenue
as a percentage of revenue was mainly due to the increased price of raw
material and labor costs resulting from an overall price inflation in China as
compared to the same period of 2009.
30
GROSS
PROFIT
Gross
profit for the three months ended September 30, 2010 was $1,702,760, or
approximately 47.7% of net revenue, as compared to $2,175,670, or approximately
53.4% of revenue for the same period in 2009. The decrease in gross profit
margin was mainly due to the increase of cost of revenue as a percentage of
revenue.
OPERATING
EXPENSES
Total
operating expenses consisted of selling, general and administrative expenses.
For the three months ended September 30, 2010, total operating expenses were
$1,010,683, a decrease of $174,332, or approximately 14.7%, from total operating
expenses of $1,185,015 for the same period in 2009.
NONCONTROLLING
INTEREST
On
February 15, 2008, we entered into a stock purchase agreement with Ecolab,
pursuant to which Ecolab purchased and Linkwell Tech sold 888,889 of its shares,
or 10% of the issued and outstanding capital stock of Linkwell Tech, for a total
of $2,000,000. On March 28, 2008 and June 4, 2008, Linkwell Tech received
$200,000 and $1,388,559, respectively, from Ecolab. Including a $400,000 loan
that Ecolab released to Linkwell Tech and accrued interest of $11,441, Linkwell
Tech received a total of $2,000,000 from Ecolab. On May 31, 2008, we, Linkwell
Tech and Ecolab entered into a Linkwell Tech Group Inc. Stockholders Agreement,
whereby both we and Ecolab are subject to, and are the beneficiaries of, certain
pre-emptive rights, transfer restrictions and take along rights relating to the
shares of Linkwell Tech that the Company and Ecolab each hold. As of May 31,
2008, the principal and accrued interest of $11,441 on the short-term $400,000
loan became part of Ecolab’s investment and no longer needed to be repaid. After
this transaction, Ecolab became the 10% minority interest holder of Linkwell
Tech. For the three months ended September 30, 2010, we had a minority interest
expense of $59,418 as compared to $111,548 for the same period in
2009.
NET
INCOME
Our net
income for the three months ended September 30, 2010 was $530,220 compared to
$818,373 for the same period in 2009, a decrease of $288,153 or
35.2%. Net income as a percentage of revenue was 19.8% for the three
months ended September 30, 2010, while it was 20.1% for the same period in 2009.
This decrease in net income was attributable to increased cost of sales,
decreased sales for the three months ended September 30, 2010 compared to the
same period of 2009.
LIQUIDITY
AND CAPITAL RESOURCES
As shown
in the accompanying financial statements, our working capital increased
$1,1442,980, or approximately 11.9%, from $12,106,651 on December 31, 2009
to $13,549,631 on September 30, 2010. With the expansion of our businesses, we
anticipate the need to utilize our capital resources in the near future. In
addition to our working capital, we intend to obtain required capital through a
combination of bank loans and the sale of our equity securities. Although we are
not party to any commitments or agreements at this time to provide us with
additional bank financing or to sell our securities, we are optimistic that we
will be able to obtain additional capital resources to fund our business
expansions.
We
currently have no material commitments for capital expenditures. At September
30, 2010, we had a total of $1,492,292 in outstanding short term loans, which
will mature in 2011. Other than our working capital and loans, we presently have
no other alternative capital resources available to us. We plan to build
additional product lines and upgrade our manufacturing facilities in order to
expand our production capacity and improve the quality of our products. Based on
our preliminary estimates, upgrades and expansion will require additional
capital of approximately $1 million.
31
We need
to raise additional capital to meet the demands described above. We may raise
additional capital through the sale of equity securities. There can be no
assurances that any additional debt or equity financing will be available to us
on acceptable terms, if at all. The inability to obtain debt or equity financing
could have a material adverse effect on our operating results, and as a
result, we could be required to cease or significantly reduce our operations,
seek a merger partner or sell additional securities on terms that may be
disadvantageous to shareholders.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the six months ended September 30, 2010 and
2009:
2010
|
2009
|
|||||||
Cash
provided by (used in):
|
||||||||
Operating
Activities
|
$
|
(862,526
|
) |
$
|
281,312
|
|||
Investing
Activities
|
(1,101,252
|
) |
(731,997
|
) | ||||
Financing
Activities
|
1,567,742
|
530,047
|
NET
CASH FROM OPERATING ACTIVITES
Net cash
used by operating activities for the nine months ended September 30, 2010 was
$862,526, as compared to net cash provided by operating activities $281,312
for the same period of 2009, a decrease of cash inflow of $1,143,838. The
increase in cash outflow in the nine months ended September 30, 2010 was mainly
a result of increased account receivable-related parties outstanding and,
other receivables as well as decreased net income as
compared to same period of 2009.
NET
CASH FROM INVESTING ACTIVITIES
Net cash
used in investing activities for the nine months ended September 30, 2010 was
$1,101,252 as compared to net cash used in investing activities of $731,997 for
the same period in 2009, an increase of $369,225. Cash used in investing
activities during the nine months ended September 30, 2010 mainly consisted of
$881,484 for short-term investment, $171,874 for purchase of equipment, and
$47,894 for construction in progress.
NET
CASH FROM FINANCING ACTIVITIES
Net cash
provided by financing activities was $1,567,742 for the nine months ended
September 30, 2010 as compared to net cash provided by financing activities of
$530,047 in the same period of 2009. This was primarily a result of $480,578
decrease in cash due from related parties, a decrease in cash due to related
parties, and $1,087,164 proceeds from short-term loans. In comparison to the
same period in 2009, we had $288,218 in cash inflow from quick advance from
related parties and a $241,829 decrease in cash due from related
parties.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and
liabilities.
32
We base
our estimates and judgments on historical experience and on various other
assumptions we believe to be reasonable under the circumstances. Future events,
however, may differ markedly from our current expectations and assumptions.
While there are a number of significant accounting policies affecting our
consolidated financial statements, we believe the following critical accounting
policies involve the most complex, difficult and subjective estimates and
judgments: allowance for doubtful accounts; income taxes; stock-based
compensation; asset impairment and option value.
While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements, we believe the following accounting
policies are the most critical to help develop a full understanding
and evaluation this management discussion and analysis.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
We
maintain an allowance for doubtful accounts to reduce amounts to their estimated
realizable value. A considerable amount of judgment is required when we
assess the realization of accounts receivables, including assessing the
probability of collection and the current credit-worthiness of each customer. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, an additional provision for
doubtful accounts could be required. We initially record a provision for
doubtful accounts based on our historical experiences, and we then adjust this
provision at the end of each reporting period based on a detailed
assessment of our accounts receivables and allowance for doubtful accounts. In
estimating the provision for doubtful accounts, we consider, among other factor:
(i) the aging of the accounts receivable; (ii) trends within and ratios
involving the age of the accounts receivable; (iii) the customer mix in
each of the aging categories and the nature of the receivable; (iv) our
historical provision for doubtful accounts; (v) the credit worthiness of the
customer; and (vi) the economic conditions of the customer's industry as well as
general economic conditions.
REVENUE
RECOGNITION
Our
revenue recognition policies are in compliance with SEC Staff Accounting
Bulletin (“SAB”) 104 (codified in FASB ASC Topic 480). We record revenue when
persuasive evidence of an arrangement exists, services have been rendered or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectibility is reasonably assured. The following policies
reflect specific criteria for our various revenue streams.
Our
revenue from the sale of products to related parties are recorded when the goods
are shipped to the customers from our related parties. Upon shipment, title
passes, and collectibility is reasonably assured. We receive purchase orders
from our related parties on an as need basis from the related party customers.
Generally, the related party does not hold our inventory. If the related party
has inventory on hand at the end of a reporting period, the sale is reversed and
the inventory is included in our balance sheet.
33
INCOME
TAXES
We
account for income taxes in accordance with Accounting for Income Taxes,
which prescribes the use of the liability method. Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred
tax assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. We then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we establish a valuation
allowance. To the extent we establish a valuation allowance, or increase or
decrease this allowance in a period, we increase or decrease our income tax
provision in our statement of operations. If any of our estimates of our
prior period taxable income or loss prove to be incorrect, material differences
could impact the amount and timing of income tax benefits or payments for any
period. In addition, as a result of the significant change in our
ownership, our future use of its existing net operating losses may be
limited.
We
currently operate in the PRC, however, our operations could change in the near
future and we could be subject to tax liability involving a consideration of
uncertainties in the application and interpretation of complex tax regulations
in a multitude of jurisdictions across operations in other
countries.
We
recognize potential liabilities and record tax liabilities for anticipated tax
audit issues in the U.S. and other tax jurisdictions based on our estimate of
whether, and the extent to which, additional taxes will be due. The tax
liabilities are a reflected net of realized tax loss carry forwards. We
adjust these reserves upon specific events; however, due to the complexity of
some of these uncertainties, the ultimate resolution may result in a payment
that is different from our current estimate of the tax liabilities. If our
estimate of tax liabilities proves to be less than the ultimate assessment, an
additional charge to expense would result. If payment of these amounts
ultimately proves to be less than the recorded amounts, the reversal of the
liabilities would result in tax benefits being recognized in the period when the
contingency has been resolved and the liabilities are no longer
necessary.
Changes
in tax laws, regulations, agreements and treaties, foreign currency exchange
restrictions or our level of operations or profitability in each taxing
jurisdiction could have an impact upon the amount of income taxes that we
provide during any given year.
STOCK-
BASED COMPENSATION
We
account for our stock-based compensation in accordance with SFAS No. 123R,
“Share-Based Payment, an Amendment of FASB Statement No. 123” (codified in
FASB ASC Topics 718 & 505). Under the fair value recognition provisions of
this statement, share-based compensation cost is measured on the grant date
based on the value of the award and is recognized as expense over the vesting
period. Determining the fair value of share-based awards on the grant date
requires judgment, including estimating expected volatility. In addition,
judgment is also required in estimating the amount of share-based awards that
are expected to be forfeited. If actual results differ significantly from these
estimates, stock-based compensation expense and our results of operations could
be materially impacted.
IMPAIRMENT
OF LONG-LIVED ASSETS
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily
determinable.
34
FOREIGN
CURRENTY TRANSLATION AND COMPREHENSIVE INCOME (LOSS)
Our
functional currency is the Chinese Yuan - Renminbi (“RMB”). For financial
reporting purposes, RMB was translated into United States dollars ("USD") as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenue and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of shareholders' equity as "Accumulated other
comprehensive income." Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
RECENT
ACCOUNTING PRONOUNCEMENTS
On July
1, 2009, we adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic
105 - Generally Accepted Accounting Principles - amendments based on Statement
of Financial Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles”
(“ASU No. 2009-01”). ASU No. 2009-01 re-defines authoritative GAAP
for nongovernmental entities to be only comprised of the FASB Accounting
Standards Codification (“Codification”) and, for SEC registrants, guidance
issued by the SEC. The Codification is a reorganization and
compilation of all then-existing authoritative GAAP for nongovernmental
entities, except for guidance issued by the SEC. The Codification is
amended to effect non-SEC changes to authoritative
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of GAAP in Notes to the Consolidated Financial
Statements.
On
February 25, 2010, the FASB issued ASU No. 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of US GAAP. The FASB believes these amendments remove
potential conflicts with the SEC’s literature. The adoption of this ASU did not
have a material impact on our consolidated financial statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is also permitted. The adoption of this ASU did not
have a material impact on our consolidated financial statements.
In April
2010, the FASB codified the consensus reached in Emerging Issues Task Force
Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU
No. 2010-17 provides guidance on defining a milestone and determining when
it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. FASB ASU No. 2010-17 is
effective for fiscal years beginning on or after June 15, 2010, and is
effective on a prospective basis for milestones achieved after the adoption
date. We do not expect this ASU will have a material impact on its
financial position or results of operations when it adopts this update on
January 1, 2011.
35
In April
2010, the FASB issued an authoritative pronouncement on the effect of
denominating the exercise price of a share-based payment award in the currency
of the market in which the underlying equity securities trades and that currency
is different from (1) entity's functional currency, (2) functional currency of
the foreign operation for which the employee provides services, and (3) payroll
currency of the employee. The pronouncement clarifies that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity's equity securities trades
should not be considered to contain a condition that is not a market,
performance, or service condition, and therefore should be considered an equity
award assuming all other criteria for equity classification are met. The
pronouncement is for interim and annual periods beginning on or after December
15, 2010, and will be applied prospectively. Affected companies will be required
to record a cumulative catch-up adjustment for all awards outstanding as of the
beginning of the annual period in which the guidance is adopted. This amendment
is not expected to have a material impact on our financial
statements.
OFF-BALANCE
SHEET ARRANGEMENTS
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our stocks and
classified as shareholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We
do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.
ITEM
4. CONTROLS AND PROCEDURES.
As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
September 30, 2010, the end of the period covered by this quarterly report, our
management concluded its evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures. Disclosure controls and
procedures are controls and procedures designed to reasonably assure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, such as this quarterly report, is recorded, processed,
summarized and reported within the time periods prescribed by SEC rules and
regulations, and to reasonably assure that such information is accumulated and
communicated to our management, including our Chief Executive Officer who
also serves as our principal financial and accounting officer, to allow timely
decisions regarding required disclosure.
Our
management, including our Chief Executive Officer, does not expect that our
disclosure controls and procedures will prevent all error and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions.
All of
our employees and accounting staff are located in the PRC and we do not
presently have a Chief Financial Officer, comptroller or similarly titled senior
financial officer who is bilingual and experienced in the application of U.S.
GAAP. Currently, we are searching for an appropriate candidate who can fill
such a position; however, we are unable to predict when such a person will be
hired. We have also begun providing additional training to our accounting staff
in the application of U.S. GAAP. As a result, our management believes that a
deficiency in our internal controls continues to exist. Based upon historical
accounting errors and lack of a Chief Financial Officer and sufficiently trained
accounting staff, our management has determined that there is a deficiency in
our internal controls over financial reporting and that our disclosure controls
and procedures were ineffective at September 30, 2010. Until we expand our staff
to include a bilingual senior financial officer who has the requisite experience
necessary, as well as supplement the accounting knowledge of our staff, it is
likely that we will continue to have material weaknesses in our disclosure
controls.
There
have been no changes in our internal control over financial reporting during our
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
36
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
Please
see the disclosure included in NOTE 14, “CONTINGENCY” in the notes to our
financial statements included in Part I, Item 1 to this Form 10-Q.
ITEM
6. EXHIBITS.
The following documents are filed as a
part of this report or are incorporated by reference to previous filings, if so
indicated:
Exhibit
No.
|
Description
|
|
3.1
|
Articles
of Incorporation (1)
|
|
3.2
|
Articles
of Amendment to Articles of Incorporation (2)
|
|
3.3
|
Articles
of Amendment to Articles of Incorporation (3)
|
|
3.4
|
Articles
of Amendment to Articles of Incorporation (4)
|
|
3.5
|
Articles
of Amendment to the Articles of Incorporation (5)
|
|
3.6
|
Bylaws
(1)
|
|
3.7
|
Articles
of Amendment to the Articles of Incorporation (6)
|
|
4.1
|
Form
of common stock purchase warrant (7)
|
|
4.2
|
Form
of Class A and Class B Common Stock Purchase Warrants
(5)
|
31.1
|
Section
302 Certificate of Chief Executive Officer *
|
|
31.2
|
Section
302 Certificate of principal financial and accounting officer
*
|
|
32.1
|
Section
906 Certificate of Chief Executive Officer
*
|
*
|
filed
herewith
|
(1)
|
Incorporated
by reference to the Report on Form 8-K as filed on December 8,
1999.
|
(2)
|
Incorporated
by reference to the Report on Form 8-K as filed on December 27,
2001.
|
(3)
|
Incorporated
by reference to the annual report on Form 10-KSB for the fiscal year ended
December 31,
2002.
|
(4)
|
Incorporated
by reference to the Report on Form 8-K as filed on March 17,
2005.
|
(5)
|
Incorporated
by reference to the Report on Form 8-K as filed on August 22,
2006.
|
(6)
|
Incorporated
by reference to the Report on Form 8-K as filed on September 15,
2006.
|
(7)
|
Incorporated
by reference to the Report on Form 8-K as filed on April 15,
2005.
|
37
LINKWELL
CORPORATION
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Linkwell
Corporation
|
|||
Date:
November 15, 2010
|
By:
|
/s/
Xuelian Bian
|
|
Xuelian
Bian,
|
|||
Chief
Executive Officer,
|
|||
President,
Principal
|
|||
Executive
Officer and
|
|||
Principal Financial | |||
Officer |
38