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EX-5.1 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v210954_ex5-1.htm |
EX-23.1 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v210954_ex23-1.htm |
As filed
with the Securities and Exchange Commission on February 14, 2011
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDERTHE SECURITIES ACT OF 1933
WEIKANG
BIO-TECHNOLOGY GROUP COMPANY, INC.
(Exact
name of registrant as specified in its charter)
Nevada
(State or
other jurisdiction of
incorporation
or organization)
2833
(Primary
Standard Industrial Classification Code Number)
26-2816569
(I.R.S.
Employer Identification Number)
No.
365 Chengde Street, Daowai District, Harbin
Heilongjiang
Province, The People’s Republic of China 150020
+ (86)
0451-88355530
(Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices)
Yin
Wang
No.
365 Chengde Street, Daowai District, Harbin
Heilongjiang
Province, The People’s Republic of China 150020
+ (86)
0451-88355530
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Marc J.
Ross, Esq.
Sichenzia
Ross Friedman Ference LLP
61
Broadway, 32nd
Floor
New York,
NY 10006
(212)
930-9700
(212)
930-9725(fax)
Approximate
date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration
statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
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 definition of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
CALCULATION
OF REGISTRATION FEE
Proposed
|
Proposed
|
|||||||||||||||
Maximum
|
maximum
|
Amount of
|
||||||||||||||
Title of each class of securities to be
|
Amount to be
|
offering price
|
aggregate
|
registration
|
||||||||||||
Registered
|
Registered (1)
|
per unit
|
offering price
|
fee
|
||||||||||||
Common Stock, $0.00001 par value,
underlying Series C Warrants
|
520,831 | $ | 3.6 | (2) | $ | 1,874,991.6 | $ | 217.69 | ||||||||
Common
Stock, $0.00001 par value, underlying Series D Warrants
|
520,831 | 4.8 | (2) | 2,499,988.8 | 290.25 | |||||||||||
Common
Stock, $0.00001 par value, underlying warrants issued to the placement
agents
|
168,232 | 2.4 | (2) | 403,756.8 | 46.88 | |||||||||||
Common
Stock, $0.00001 par value
|
2,083,325 | 2.77 | (3) | 5,770,810.25 | 669.99 | |||||||||||
Total
|
3,293,219 | $ | 10,549,547.53 | $ | 1,224.81 |
(1)
|
Pursuant
to Rule 416 promulgated under the Securities Act of 1933, as amended,
there are also registered hereunder such indeterminate number of
additional shares as may be issued to the selling stockholders to prevent
dilution resulting from stock splits, stock dividends or similar
transactions.
|
(2)
|
Estimated
solely for purposes of calculating the registration fee in accordance with
Rule 457(g) under the Securities Act of 1933, as amended, based upon the
exercise price of the warrants.
|
(3)
|
Estimated
solely for purposes of calculating the registration fee in accordance with
Rule 457 (c) under the Securities Act of 1933, as amended, using the
average of the high price ($2.89) and the low price ($2.65) as reported on
the Over-The-Counter Bulletin Board on February 10, 2011 of $2.77 per
share.
|
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT IS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND BECOMES EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE SALE IS NOT
PERMITTED.
PRELIMINARY
PROSPECTUS
|
SUBJECT
TO COMPLETION, DATED ___,
2011
|
WEIKANG
BIO-TECHNOLOGY GROUP COMPANY, INC.
3,293,219
SHARES OF COMMON STOCK
This
prospectus relates to the resale by the selling stockholders identified in this
prospectus of up to 3,293,219 shares of common stock of Weikang Bio-Technology
Group Company, Inc., par value $0.00001 per share (“Common Stock”), including
2,083,325 shares of Common Stock, 520,831 shares of Common Stock issuable upon
the exercise of Series C Warrants, 520,831 shares of Common Stock issuable upon
the exercise of Series D Warrants and 168,232 shares of
Common Stock issuable upon the exercise of warrants issued to the
placement agents (the “PA Warrants”) (collectively, the
“Warrants”).
The
Common Stock and Warrants were issued to the selling stockholders in a
series of private placement transactions, in which the Company sold a total of
520,831 Units, each Unit comprising (i) four shares of Common
Stock, (ii) a three-year warrant to purchase one share of Common
Stock at $3.60 per share (the “Series C Warrant”), and (iii) a three-year
warrant to purchase one share of Common Stock at $4.80 per share (the “Series D
Warrant”), for an aggregated purchase price of
$4,999,973.60. Additionally, the Company issued certain warrants to its
placement agents (the “PA Warrants”) to purchase a total of 168,332
of the Company’s Common Stock at $2.40 per share as part of
consideration for their services.
The
resale of the shares of Common Stock is not being underwritten. The selling
stockholders may sell or distribute the shares, from time to time, depending on
market conditions and other factors, through underwriters, dealers, brokers or
other agents, or directly to one or more purchasers. Each selling stockholder
will determine the prices at which he sells his shares. Although we
will incur expenses in connection with the registration of the Common Stock
(estimated to be approximately $35,224.81), we will not receive any proceeds
from the sale of the shares of Common Stock by the selling stockholders. To the
extent the Warrants are exercised for cash, if at all, we will receive the
exercise price for those Warrants. Under the terms of the Warrants, cashless
exercise may be permitted if the resale of the warrant shares by the holder is
not covered by an effective registration statement. We cannot assure you that
the Warrants will be exercised for cash or at all.
Our
Common Stock is listed on the Over-the-Counter Bulletin Board under the symbol
“WKBT.” On February 10, 2011, the last reported sales price per share of our
Common Stock as reported by the Over-the-Counter Bulletin Board, was
$2.70.
Investing
in our Common Stock involves a high degree of risk. You may lose your entire
investment. See “Risk Factors” beginning on page 3
for a discussion of certain risk factors that you should consider.
You
should read the entire prospectus before making an investment
decision.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date
of this prospectus is ___________, 2011.
TABLE
OF CONTENTS
PAGE
NO.
|
||
ABOUT
THIS PROSPECTUS
|
1
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PROSPECTUS
SUMMARY
|
1
|
|
RISK
FACTORS
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3
|
|
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
|
12
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USE
OF PROCEEDS
|
12
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|
DILUTION
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12
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|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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13
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DESCRIPTION
OF BUSINESS
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21
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PROPERTIES
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29
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MARKET
PRICE OF AND DIVIDENDS OF OUR COMMON EQUITY AND RELATED STOCHOLDER
MATTERS
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29
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DIRECTORS
AND EXECUTIVE OFFICERS
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30
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EXECUTIVE
COMPENSATION
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32
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CERTAIN
RELATIONSIHIPS AND RELATED TRANSACTIONS
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34
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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35
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DESCRIPTION
OF SECURITIES TO BE REGISTERED
|
36
|
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SELLING
STOCKHOLDERS
|
40
|
|
PLAN
OF DISTRIBUTION
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46
|
|
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
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47
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|
LEGAL
MATTERS
|
48
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|
EXPERTS
|
48
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|
WHERE
YOU CAN FIND MORE INFORMATION
|
48
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|
FINANCIAL
STATEMENTS
|
|
F-1
|
ABOUT
THIS PROSPECTUS
You should rely only on the information
contained in this prospectus. We have not authorized anyone to provide you with
any information or to make any representations about us, the selling
stockholders, the securities or any matter discussed in this prospectus, other
than the information and representations contained in this prospectus. If any
other information or representation is given or made, such information or
representation may not be relied upon as having been authorized by us or any
selling stockholder.
The selling stockholders are offering
to sell and seeking offers to buy shares of our Common Stock, including shares
they acquire on exercise of their Warrants, only in jurisdictions where offers
and sales are permitted. This prospectus does not constitute an offer to sell or
a solicitation of an offer to buy the securities in any circumstances under
which the offer or solicitation is unlawful.
The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of our Common Stock. Neither
the delivery of this prospectus nor any distribution of securities in accordance
with this prospectus shall, under any circumstances, imply that there has been
no change in our affairs since the date of this prospectus. The prospectus will
be updated and updated prospectuses made available for delivery to the extent
required by the federal securities laws.
PROSPECTUS
SUMMARY
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus carefully, including the "risk factors" section, the
financial statements and the notes to the financial statements. As used
throughout this prospectus, the terms “Weikang,” “WKBT,” the “Company,” “we,”
“us,” and “our” refer to Weikang Bio-Technology Group Company, Inc., and its
subsidiaries and predecessors, unless indicated otherwise.
OUR
COMPANY
Overview
We are principally engaged in
developing, manufacturing and distributing health and nutritional supplements in
the People’s Republic of China (“PRC”). The Company has also expanded its
business scope to develop, manufacture and distribute Chinese herbal extract
products and GMP certified western prescriptive medicine.
The
Company was incorporated on May 12, 2004 in Florida as Expedition Leasing, Inc.
On July 12, 2008, the Company redomiciled from Florida to Nevada and changed its
name to Weikang Bio-Technology Group Co., Inc. pursuant to an acquisition of
Sinary Bio-Technology Holdings Group, Inc. (“Sinary”), a Nevada corporation
and, Sinary’s wholly owned subsidiary, Heilongjiang Weikang Biotechnology Group
Co., Ltd. (“Heilongjiang Weikang”), a limited liability company organized and
existing under PRC law. Upon completion of the transaction on December 7, 2007,
Sinary and Heilongjiang Weikang became our wholly-owned subsidiaries. The
transaction was treated for accounting purposes as a capital transaction and
recapitalization by the accounting acquirer and as a re-organization by the
accounting acquiree.
On July
22, 2008, Heilongjiang Weikang acquired 100% of the equity interest of
Tianfang (Guizhou) Pharmaceutical Co., Ltd. (“Tianfang”), a PRC limited
liability company, for $15,000,000, pursuant to a Stock Transfer Agreement dated
and entered into on June 30, 2008 by and among Heilongjiang Weikang, Tianfang,
and Tianfang’s two shareholders, Beijing Shiji Qisheng Trading Co., Ltd. and
Tri-H Trade (U.S.A.) Co., Ltd. As a result, Tianfang became our indirectly
wholly-owned subsidiary (“Heilongjiang Weikang” and “Tianfang” hereinafter
collectively referred to “PRC Subsidiaries”).
1
Recent
Private Placements
In and
around December 2010 and January 2011, the Company sold in a series of private
placements 520,831 Units, each unit comprised of (i) four shares of Common
Stock, (ii) a three-year warrant to purchase one share of Common
Stock at $3.60 per share (“Series C Warrant”), and (iii) a three-year warrant to
purchase one share of Common Stock at $4.80 per share (“Series D
Warrant”), for an aggregate purchase price of
$4,999,973.60.
The
Company engaged Hunter Wise Securities, LLC (“Hunter Wise”) as exclusive
placement agent for the private placements, with National Securities Corporation
(“NSC”), Pacific Summit Securities (“Pacific Summit”) and Anderson &
Strudwick, Inc. (“Anderson”)as authorized participating agents (collectively,
“Placement Agents”). As part of consideration for their services, the
Company issued the Placement Agents three-year warrants (“PA Warrants”) to
purchase 168,232 shares of Common Stock at $2.40 per share.
The
Warrants issued to the investors and the Placement Agents, which comprise
the selling stockholders. are immediately exercisable and have a term of three
years. Such Warrants may be exercised cashlessly in the event that
there is no effective registration statement providing for the resale of the
Common Stock underlying the Warrants pursuant to the time frame described in
more detail below. The exercise prices of the Warrants are subject to
customary adjustments provisions for stock splits, stock dividends,
recapitalizations and the like. Additionally, for a period of three
years following the final closing of the private placements, anti-dilution
protection shall be afforded the investors, as described in more detail
below.
In connection with the private
placements and pursuant to the transaction agreements, the Company agreed to
file a registration statement covering the shares of Common Stock issued as part
of the Units and issuable upon exercise of the Warrants issued to the investors
and the placement agent. The Company is to file the registration
statement within 45 days following the final closing of the private placements
and have the registration statement declared effective within 120 days after
such closing, except that the effective date shall be extended by 30 days in the
event that the Securities and Exchange Commission (“SEC”) undertakes a
full review of the registration statement.
Our
Corporate Information
We
maintain our corporate offices at No. 365 Chengde Street, Daowai District,
Harbin, Heilongjiang Province, People’s Republic of China 150020. Our telephone
number is (86) 451-88355530 and our facsimile number is (86)451-88355520. We
also have a website at http://www.hljweikang.com.
THE
OFFERING
This
prospectus relates to the resale by the selling stockholders identified in this
prospectus of up to 3,293,219 shares of Common Stock, including shares of Common
Stock issuable upon the exercise of Warrants. All of the shares, when sold, will
be sold by these selling stockholders. The selling stockholders may sell their
shares of Common Stock from time to time at prevailing market prices. We will
not receive any proceeds from the sale of the shares of Common Stock by the
selling stockholders.
2
Common
Stock outstanding prior to the offering:
|
30,911,880
|
|
Common
Stock offered by Company
|
0
|
|
Total
shares of Common Stock offered by selling stockholders:
|
Up
to 3,293,219 shares of Common Stock, including 2,083,325 shares of Common
Stock, 1,209,894 shares of Common Stock issuable upon the exercise of
the Warrants, of which (i) the Series C Warrants are
exercisable for up to 520,831 shares at $3.60 per share,
(ii) the Series D Warrants are exercisable for up to 520,831
shares at $4.80 per share, and (iii) the PA Warrants are
exercisable for up to 168,232 shares at $2.40 per
share. All warrant exercise prices are subject to certain
adjustments.
|
|
Common
Stock outstanding after the offering (assuming all the Warrants are
exercised)
|
32,121,774
|
|
Use
of Proceeds:
|
We
will not receive any proceeds from the sale of the 3,293,219 shares of
Common Stock subject to sale by the selling stockholders under this
prospectus. However, we may receive the sale price of any Common Stock we
sell to the selling stockholders upon exercise of the outstanding
Warrants. Any net proceeds we receive from the selling stockholders
through the exercise of warrants will be used for working capital and
capital expenditures. We, however, cannot assure you that any of the
Warrants will be exercised.
|
|
OTC
Bulletin Board Symbol:
|
WKBT
|
|
Risk
Factors
|
See
“Risk Factors” beginning on page 3
and other information included in this prospectus for a discussion of
factors you should consider before deciding to invest in shares of our
Common Stock.
|
RISK
FACTORS
An investment in our Common Stock is
speculative and involves a high degree of risk and uncertainty. You should
carefully consider the risks described below, together with the other
information contained in this prospectus, including the consolidated financial
statements and notes thereto of our Company, before deciding to invest in our
Common Stock. The risks described below are not the only ones facing our
Company. Additional risks not presently known to us or that we presently
consider immaterial may also adversely affect our Company. If any of the
following risks occur, our business, financial condition and results of
operations and the value of our Common Stock could be materially and adversely
affected.
Risks
Relating to Our Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We have a
limited operating history. Although Heilongjiang Weikang commenced operations in
2005, the company was a developmental stage company until May 2006 when it began
selling its products. Accordingly, you should consider our future prospects in
light of the risks and uncertainties experienced by early stage companies such
as our company in China. Some of these risks and uncertainties relate to our
ability to:
|
·
|
maintain
our market position in the health supplements business in
China;
|
|
·
|
offer
new and innovative products to attract and retain a larger customer
base;
|
|
·
|
attract
additional customers and increase spending per
customer;
|
|
·
|
increase
awareness of our brand and continue to develop user and customer
loyalty;
|
|
·
|
respond
to competitive market conditions;
|
|
·
|
respond
to changes in our regulatory
environment;
|
|
·
|
manage
risks associated with intellectual property
rights;
|
|
·
|
maintain
effective control of our costs and
expenses;
|
|
·
|
raise
sufficient capital to sustain and expand our
business;
|
|
·
|
attract,
retain and motivate qualified personnel;
and
|
|
·
|
upgrade
our technology to support additional research and development of new
products.
|
3
If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We
may need additional financing to execute our business plan.
The
revenues from the production and sale of health supplements products and the
projected revenues from these products may not be adequate to support our
expansion and product development programs. We may need substantial additional
funds to build new production facilities, pursue further research and
development, obtain regulatory approvals, market our products, and file,
prosecute, defend and enforce our intellectual property rights. We may seek
additional funds through public or private equity or debt financing, strategic
transactions and/or from other sources. We could enter into collaborative
arrangements for the development of particular products that would lead to our
relinquishing some or all of our rights to the related technology or
products.
There are
no assurances that future funding will be available to us on favorable
terms or at all. If additional funding is not obtained, we will need to reduce,
defer or cancel development programs, planned initiatives or overhead
expenditures, to the extent necessary. The failure to fund our capital
requirements would have a material adverse effect on our business, financial
condition and results of operations.
Our
certificates, permits, and licenses are subject to governmental control and
renewal, and Heilongjiang Weikang and Tianfang will not be able to operate if
they are not maintained.
Heilongjiang
Weikang has the certificates, permits, and licenses required for the
manufacturing, processing and distribution of health supplement products in the
PRC and Tianfang has the certificates, permits, and licenses required for the
manufacturing, processing and distribution of western medicine and Chinese
herbal extracts. In the event that we are not able to renew the certificates,
permits and licenses, all or part of our operations may be terminated.
Furthermore, if escalating compliance costs associated with governmental
standards and regulations restrict or prohibit any part of our operations, it
may adversely affect our operation and profitability.
Our
profitability could be adversely affected from the loss of preferential tax
treatment.
Heilongjiang
Weikang was exempt from income tax for three years. The preferential tax
concession granted by the Shuangcheng Municipal Government expired in 2008, and
has not been renewed. Weikang’s tax liabilities will increase as a result and
its profits will likely decline. The Company is now responsible for a
25% income tax.
We
cannot guarantee the protection of our intellectual property
rights.
To
protect the reputation of our products, we applied for registration of our
trademarks in the PRC where our operating business is located.
Presently,
all of our products are sold under the brand name “Rongrun” and “Tianfang”.
Since we launched our products in May 2006, we are not aware of any infringement
of such trademarks. However, there is no assurance that there will not be any
infringement of our brand name or other trademarks or counterfeiting of our
products in the future. Should any such infringement or counterfeiting occur,
our reputation and business may be adversely affected. We may also incur
significant expenses and substantial amount of time and effort to enforce our
intellectual property rights in the future. Such diversion of our resources may
adversely affect our existing business and future expansion plan.
We
rely on a few suppliers and any disruption with our suppliers could have an
adverse effect on our business.
We have
good working relationships with a limited number of suppliers for our raw
materials that are otherwise generally available. Although we believe
alternative suppliers are available to supply materials, should any of these
suppliers terminate its business arrangements with us or increase the prices of
materials supplied by these suppliers, it could delay product shipments and
adversely affect our business operations and profitability.
4
We
are subject to the environmental protection laws of the PRC, which may result in
restrictions on our operations or liabilities for pollution.
Our
manufacturing process may produce by-products such as effluent, gases and noise,
which are harmful to the environment. We are subject to multiple laws governing
environmental protection, such as “The Law on Environmental Protection in the
PRC” and “The Law on Prevention of Effluent Pollution in the PRC”, as well as
standards set by the relevant governmental bodies determining the classification
of different wastes and proper disposal. The PRC has substantial problems
with environmental pollution. Accordingly, it is likely that the national,
provincial and local governmental agencies will adopt stricter pollution
controls. There can be no assurance that future changes in environmental laws
and regulations will not impose costly compliance requirements on us or
otherwise subject us to future liabilities. Our business’s profitability may be
adversely affected if additional or modified environmental control regulations
are imposed upon us.
We
may suffer as a result of product liability or defective products.
We may
produce products which, despite proper testing, inadvertently have an adverse
pharmaceutical effect on the health of individuals. Existing PRC laws and
regulations do not require us to maintain third party liability insurance to
cover product liability claims. However, if a product liability claim is brought
against us, it may, regardless of merit or eventual outcome, result in damage to
our reputation, breach of contract with our customers, decreased demand for our
products, costly litigation, product recalls, loss of revenue, and the inability
to commercialize our products. We currently are not aware of any existing or
anticipated product liability claims with respect to our products.
There
are no conclusive studies regarding the medical benefits of nutritional
supplements.
We
manufacture, market and distribute nutritional supplement products. Some
ingredients in our current products (and we anticipate in our future products)
are vitamins, minerals, herbs and other substances for which there is not a long
history of human consumption. Although we believe all of our products to be safe
when taken as directed by us, there is little experience with human consumption
of certain of these product ingredients in concentrated form. In addition, we
are highly dependent upon consumers' perception of the safety and quality of our
products as well as similar products distributed by other companies. We could be
adversely affected in the event any of our products or any similar products
distributed by other companies should prove or be asserted to be harmful to
consumers. In addition, because of our dependence upon consumer perceptions,
adverse publicity associated with illness or other adverse effects resulting
from consumers' failure to consume our products as we suggest or other misuse or
abuse of our products or any similar products distributed by other companies
could have a material adverse effect on the results of our operations and
financial condition and could expose us to legal liability.
The
manufacture and distribution of nutritional supplements and could result in
product liability claims.
We, like
any other retailer, distributor and manufacturer of products that are designed
to be ingested, face an inherent risk of exposure to product liability claims in
the event the use of our products results in injury. Such claims may include,
among others, that our products contain contaminants or include inadequate
instructions as to use or inadequate warnings concerning side effects and
interactions with other substances. While we may obtain product liability
insurance in the future, we may not be able to obtain such insurance at a
reasonable cost, or, if available, cannot assure it will be adequate to
cover liabilities. We do not anticipate obtaining contractual indemnification
from parties supplying raw materials or marketing our products. In any event,
any such indemnification if obtained will be limited by our terms and, as a
practical matter, to the creditworthiness of the indemnifying party. In the
event we do not have adequate insurance or contractual indemnification, product
liabilities relating to defective products could have a material adverse effect
on our operations and financial conditions.
Adverse
publicity due to unfavorable research findings in connection with our products
could adversely affect our sales and financial condition.
We
believe the growth experienced by the nutritional supplement market is based in
part on national media attention regarding scientific research suggesting
potential health benefits from regular consumption of certain vitamins and other
nutritional products. Such research has been described in major medical
journals, magazines, newspapers and television programs. The scientific research
to date is preliminary.
5
In the
future, scientific research and/or publicity may not be favorable to the
nutritional supplement market or any particular product, or may be inconsistent
with earlier favorable research or publicity. Future reports of research that
are perceived as less favorable or that question earlier research could
have a material adverse effect on our operations and financial condition.
Because of our dependence upon consumer perceptions, adverse publicity
associated with illness or other adverse effects resulting from the consumption
of our products or any similar products distributed by other companies could
have a material adverse effect on our operations. Such adverse publicity could
arise even if the adverse effects associated with such products resulted from
consumers' failure to consume such products as directed. In addition, we may not
be able to counter the effects of negative publicity concerning the efficacy of
our products. Any such occurrence could have a negative effect on our
operations.
Risks
Related to Our Corporate Structure
PRC
laws and regulations governing our business are uncertain. If we are found to be
in violation, we could be subject to sanctions. In addition, changes in such PRC
laws and regulations may materially and adversely affect our
business.
There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business. We are considered a foreign person or foreign invested
enterprise under PRC law. As a result, we are subject to PRC law limitations on
foreign ownership of Chinese companies. These laws and regulations are
relatively new and may be subject to change, and their official interpretation
and enforcement may involve substantial uncertainty. The effectiveness of newly
enacted laws, regulations or amendments may be delayed, resulting in detrimental
reliance by foreign investors. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively.
The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you that our current ownership and operating structure would not
be found in violation of any current or future PRC laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
Risks
Related to Doing Business in the PRC
Adverse
changes in economic and political policies of the PRC government could have a
material adverse effect on the overall economic growth of the PRC, which could
adversely affect our business.
Substantially all of our business
operations are conducted in the PRC. Accordingly, our results of operations,
financial condition and prospects are subject to a significant degree to
economic, political and legal developments in the PRC. The PRC economy differs
from the economies of most developed countries in many respects, including with
respect to the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources. While the PRC
economy has experienced significant growth in the past 20 years, growth has been
uneven across different regions and among various economic sectors of the PRC.
The PRC government has implemented various measures to encourage economic
development and guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may also have a negative effect on us. For
example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax
regulations that are applicable to us. Since early 2004, the PRC government has
implemented certain measures to control the pace of economic growth. Such
measures may cause a decrease in the level of economic activity in the PRC,
which in turn could adversely affect our results of operations and financial
condition.
6
Uncertainties
with respect to the PRC legal system could adversely affect us.
We
conduct our business primarily through our PRC Subsidiaries, Heilongjiang
Weikang and Tianfang. Our operations in the PRC are governed by PRC laws
and regulations. We are generally subject to laws and regulations applicable to
foreign investments in the PRC and, in particular, laws applicable to wholly
foreign-owned enterprises. The PRC legal system is based on written statutes.
Prior court decisions may be cited for reference but have limited precedential
value.
Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in the PRC.
However, the PRC has not developed a fully integrated legal system and recently
enacted laws and regulations may not sufficiently cover all aspects of economic
activities in the PRC. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result, we
may not be aware of our violation of these policies and rules until some time
after the violation. In addition, any litigation in the PRC may be protracted
and result in substantial costs and diversion of resources and management
attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in the PRC based on United States
or other foreign laws against us, our management or the experts named in this
current report.
We
conduct substantially all of our operations in the PRC and substantially all of
our assets are located in the PRC. In addition, most of our senior executive
officers reside within the PRC. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside of the PRC upon
our senior executive officers, including with respect to matters arising under
US federal securities laws or applicable state securities laws. Moreover, our
PRC counsel has advised us that the PRC does not have treaties with the US or
many other countries providing for the reciprocal recognition and enforcement of
judgment of courts.
Governmental
control of currency conversion may affect the value of your
investment.
The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the PRC. We receive
substantially all of our revenues in RMB. Under our current structure, our
income is primarily derived from our PRC Subsidiaries. Shortages in the
availability of foreign currency may restrict the ability of our PRC
Subsidiaries and our affiliated entity to remit sufficient foreign currency to
pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be made
in foreign currencies without prior approval from the PRC State Administration
of Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of the PRC to pay capital
expenses such as the repayment of bank loans denominated in foreign currencies.
The PRC government may also, at its discretion, restrict access in the future to
foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders.
Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
The value
of RMB against the US dollar and other currencies may fluctuate and is affected
by, among other things, changes in political and economic conditions. Our
revenues and costs are mostly denominated in RMB, while a significant portion of
our financial assets are denominated in US dollars. Our revenue is based
entirely on that generated by our PRC Subsidiaries. Any significant fluctuation
in value of RMB may materially and adversely affect our cash flows, revenues,
earnings and financial position, and the value of, and any dividends payable on,
our stock in US dollars. For example, an appreciation of RMB against the US
dollar would make any new RMB denominated investments or expenditures more
costly to us, to the extent that we need to convert US dollars into RMB for such
purposes. An appreciation of RMB against the US dollar would also result in
foreign currency translation losses for financial reporting purposes when we
translate our US dollar denominated financial assets into RMB, as RMB is our
reporting currency.
7
We
face risks related to health epidemics and other outbreaks.
Our
business could be adversely affected by the effects of Severe Acute Respiratory
Syndrome (“SARS”)
or another epidemic or outbreak. The PRC reported a number of cases of SARS in
April 2004. Any prolonged recurrence of SARS or other adverse public health
developments in the PRC may have a material adverse effect on our business
operations. For instance, health or other government regulations adopted in
response may require temporary closure of our production facilities or of our
offices. Such closures would severely disrupt our business operations and
adversely affect our results of operations. We have not adopted any written
preventive measures or contingency plans to combat any future outbreak of SARS
or any other epidemic.
Risks
Related to Investment in Our Securities
To
date, we have not paid any cash dividends and no cash dividends will be paid in
the foreseeable future.
We do not
anticipate paying cash dividends on our Common Stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even if
the funds are legally available for distribution, we may nevertheless decide not
to pay any dividends. We intend to retain all earnings from our
operations.
We
recently entered into a series of financing transactions that could
significantly dilute your investment in the Company and cause your shares to
become worthless.
In and
around January 2011 and December 2010, the Company entered into agreements with
accredited investors to raise $4,999,973.60 in gross proceeds and received net
proceeds of $3,975,263.56, after placement agent fees and other offering
expenses. Pursuant to the agreements, the Company sold a total of 520,831 Units,
each Unit comprised (i) four shares of Common Stock, (ii) a
three-year warrant to purchase one share of Common Stock of $3.60 per share, and
(iii) a three-year warrant to purchase one share of Common Stock of $4.80 per
share, for an aggregate price of $4,999,973.60 and issued certain
warrants to its placement agents to purchase a total of 168,232 shares of Common
Stock of $2.40 per share. The Warrants provide for anti-dilution
adjustments if the exercise price for certain convertible securities issued with
conversion prices lower than the Warrants’ exercise price. If the Company issues
these types of convertible securities and the anti-dilution provisions of the
Warrants are triggered, your investment in the Company will be diluted and your
shares will likely become worthless. The Company has also agreed to provide
these investors with registration rights for their securities. In the event that
the Company cannot meet certain deadlines for registering these securities the
Company will have to pay cash liquidated damages to each investor of 0.5%
of the amount subscribed for by such investor, to be paid each month from the
required effectiveness date until the registration statement is filed or
declared effective, as applicable.
The
application of the "penny stock" rules could adversely affect the market price
of our Common Stock and increase your transaction costs to sell those
shares.
As long
as price of our Common Stock is below $5 per share, the open-market
trading of our Common Stock will be subject to the "penny stock" rules. The
"penny stock" rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the SEC relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information on the
limited market in penny stocks. These additional burdens imposed on
broker-dealers may restrict the ability or decrease the willingness of
broker-dealers to sell our Common Stock, and may result in decreased liquidity
for our Common Stock and increased transaction costs for sales and purchases of
our Common Stock as compared to other securities.
8
Our
Common Stock is thinly traded and, you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
We cannot
predict the extent to which an active public market for our Common Stock will
develop or be sustained. However, we do not rule out the possibility of applying
for listing on the Nasdaq National Market or other exchanges.
Our
Common Stock has historically been sporadically or "thinly-traded" on the
“Over-the-Counter Bulletin Board”, meaning the number of persons interested in
purchasing our Common Stock at or near bid prices at any given time may be
relatively small or non-existent. This situation is attributable to a number of
factors, including the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others in
the investment community that generate or influence sales volume, and that even
if we came to the attention of such persons, they tend to be risk-averse and
would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned
and viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our Common Stock will develop or be sustained, or that
current trading levels will be sustained.
The
market price for our Common Stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you purchase our Common Stock may not be indicative of the price
that will prevail in the trading market. You may be unable to sell your Common
Stock at or above your purchase price if at all, which may result in substantial
losses to you.
The
market for our Common Stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our Common Stock is sporadically and/or thinly
traded. As a consequence of this lack of liquidity, the trading of relatively
small quantities of shares by our shareholders may disproportionately influence
the price of those shares in either direction. The price for our shares could,
for example, decline precipitously in the event that a large number of our
Common Stock are sold on the market without commensurate demand, as compared to
a seasoned issuer which could better absorb those sales without adverse impact
on its share price. Secondly, we are a speculative or "risky" investment due to
our lack of revenues or profits to date and uncertainty of future market
acceptance for our current and potential products. As a consequence of this
enhanced risk, more risk-adverse investors may, under the fear of losing all or
most of their investment in the event of negative news or lack of progress, be
more inclined to sell their shares on the market more quickly and at greater
discounts than would be the case with the stock of a seasoned issuer. The
following factors may add to the volatility in the price of our Common Stock:
actual or anticipated variations in our quarterly or annual operating results;
adverse outcomes, additions or departures of our key personnel, as well as other
items discussed under this "Risk Factors" section. Many of these factors are
beyond our control and may decrease the market price of our Common Stock,
regardless of our operating performance. We cannot make any predictions or
projections as to what the prevailing market price for our Common Stock will be
at any time, including as to whether our Common Stock will sustain their current
market prices, or as to what effect that the sale of shares or the availability
of Common Stock for sale at any time will have on the prevailing market
price.
9
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
Volatility
in our Common Stock price may subject us to securities litigation.
The
market for our Common Stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
In the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
Our
corporate actions are substantially controlled by a single
stockholder.
On
January 6, 2010, Weili Wang, the holder of 24,725,200 shares of our Common Stock
(approximately 88% of our then issued and outstanding Common Stock), formed
Lucky Wheel Limited (“LWL”), a British Virgin Islands corporation and issued to
herself 10,000 ordinary shares which represents 100% of the issued and
outstanding share capital of LWL. In June 2010, Weili Wang
transferred 22,925,200 of her shares of our Common Stock (approximately 82% of
our then issued and outstanding Common Stock) to LWL. As a result, LWL
(“Controlling Shareholder”) currently holds 74.16% of our outstanding Common
Stock, 74.16% of our voting power. On May 5, 2010, Ms. Weili Wang and Yin Wang,
our Chief Executive Officer and Chairman of the Board entered into a Call Option
Agreement (the “Option Agreement”), pursuant to which Weili Wang granted Yin
Wang an irrevocable and unconditional option to purchase all of her ordinary
shares of LWL. Additionally, Mr.Wang serves as the Chief Executive Officer and a
director of LWL and has the power to block any change in the structure of LWL
and the issuance of any new shares of LWL, among other powers. Yin Wang may be
deemed the ultimate beneficial owner of the 22,925,200 shares of our Common
Stock by virtue of his blocking power and his right to exercise options held in
LWL. Therefore, Yin Wang, through the Controlling Shareholder could exert
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. In addition, because of the
percentage of ownership and voting concentration in the Controlling Stockholder,
elections of our board of directors (“BOD”) will generally be within the control
of this shareholder. While all of our shareholders are entitled to vote on
matters submitted to our shareholders for approval, the concentration of shares
and voting control presently lies with this Controlling Shareholder. As such, it
would be extremely difficult for shareholders to propose and have approved
proposals not supported by the Controlling Shareholder. There can be no
assurances that matters voted upon by the Controlling Shareholder will be viewed
favorably by all shareholders of our company.
The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by us and may
discourage lawsuits against our directors, officers and employees.
Our
articles of incorporation contain specific provisions that eliminate the
liability of our directors for monetary damages to our company and shareholders,
and we are prepared to give such indemnification to our directors and officers
to the extent provided by Nevada law. We may also have contractual
indemnification obligations under our employment agreements with our officers.
The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards
against directors and officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage our company from bringing a
lawsuit against directors and officers for breaches of their fiduciary duties,
and may similarly discourage the filing of derivative litigation by our
shareholders against our directors and officers even though such actions, if
successful, might otherwise benefit our company and shareholders.
10
Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002 (“SOX”), and there may
potentially be new accounting pronouncements or additional regulatory rulings
that will have an impact on our future financial position and results of
operations. The SOX and other rule changes as well as proposed legislative
initiatives following the Enron bankruptcy are likely to increase general and
administrative costs and expenses. In addition, insurers are likely to increase
premiums as a result of high claims rates over the past several years, which we
expect will increase our premiums for insurance policies. Further, there could
be changes in certain accounting rules. These and other potential changes could
materially increase the expenses we report under generally accepted accounting
principles, and adversely affect our operating results.
The
market price for our stock may be volatile.
The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:
|
·
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actual
or anticipated fluctuations in our quarterly operating
results;
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changes
in financial estimates by securities research
analysts;
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conditions
in pharmaceutical and agricultural
markets;
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changes
in the economic performance or market valuations of other pharmaceutical
companies;
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announcements
by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
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addition
or departure of key personnel;
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fluctuations
of exchange rates between RMB and the US
dollar;
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intellectual
property litigation;
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general
economic or political conditions in the
PRC.
|
In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.
We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.
We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from the private offering of 3,293,219 shares of
the Company’s Common Stock in January 2011 and December 2010 will be sufficient
to meet our anticipated cash needs for the near future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may seek
to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity securities could result in additional dilution to our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
11
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
We are
subject to reporting obligations under the US securities laws. The SEC, as
required by Section 404 of the SOX, adopted rules requiring every public company
to include a management report on such company's internal controls over
financial reporting in its annual report, which contains management's assessment
of the effectiveness of our internal controls over financial reporting. In
addition, an independent registered public accounting firm must attest to and
report on management's assessment of the effectiveness of our internal controls
over financial reporting. Our management may conclude that our internal controls
over our financial reporting are not effective. Moreover, even if our management
concludes that our internal controls over financial reporting are effective, our
independent registered public accounting firm may still decline to attest to our
management's assessment or may issue a report that is qualified if it is not
satisfied with our controls or the level at which our controls are documented,
designed, operated or reviewed, or if it interprets the relevant requirements
differently from us. Our reporting obligations as a public company will place a
significant strain on our management, operational and financial resources and
systems for the foreseeable future. Effective internal controls, particularly
those related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to help prevent fraud. As a result, our
failure to achieve and maintain effective internal controls over financial
reporting could result in the loss of investor confidence in the reliability of
our financial statements, which in turn could harm our business and negatively
impact the trading price of our stock. Furthermore, we anticipate that we will
incur considerable costs and use significant management time and other resources
in an effort to comply with Section 404 and other requirements of the
SOX.
Declining
economic conditions could negatively impact our business
Our
operations are affected by local, national and worldwide economic conditions.
Markets in the US and elsewhere have been experiencing extreme volatility and
disruption for more than 12 months, due in part to the financial stresses
affecting the liquidity of the banking system and the financial markets
generally. The consequences of a potential or prolonged recession may include a
lower level of economic activity and uncertainty regarding energy prices and the
capital and commodity markets. Instability in the financial markets, as a result
of recession or otherwise, also may affect the cost of capital and our ability
to raise capital.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of
the statements under “Prospectus Summary,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
“Business,” and elsewhere in this prospectus constitute forward-looking
statements. These statements involve risks known to us, significant
uncertainties, and other factors which 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 those forward-looking statements.
You can
identify forward-looking statements by the use of the words “may,” “will,”
“should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “intends,” “potential,” “proposed,” or “continue” or the negative of
those terms. These statements are only predictions. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined above. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although
we believe the exceptions reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
USE
OF PROCEEDS
We will
not receive any proceeds from the sale by the selling stockholders of their
Common Stock. If the selling stockholders exercise any Warrants, we will receive
the amount of the exercise price. The maximum total exercise price is
$4,778,737.2, which we would receive only if all of the Warrants for which the
underlying shares of Common Stock are being registered were exercised at their
present exercise price. Any proceeds which we receive from the exercise of the
Warrants would be used for working capital, capital expenditure and other
corporate purposes. We cannot assure you that any of the Warrants will be
exercised.
DILUTION
The
Common Stock to be sold by the selling shareholders is Common Stock that is
currently issued or will be issued to our shareholders upon conversion or
exercise of certain Warrants. Accordingly, there will be no dilution to our
existing shareholders.
12
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and
analysis is based on, and should be read in conjunction with our audited
historical consolidated financial statements, which are included elsewhere in
this Prospectus. This Prospectus, including this discussion entitled
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contains or may contain forward-looking statements and information
that are based upon beliefs of and information currently available to, Company's
management as well as estimates and assumptions made by Company's management.
Readers are urged not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date
hereof. When used in the filings, the words "anticipate", "believe", "estimate",
"expect", "future", "intend", "plan", or the negative of these terms and similar
expressions as they relate to Company or Company's management identify
forward-looking statements. Such statements reflect the current view of Company
with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors (including the risk contained in the section of
operations and results of operations, and any businesses that Company may
acquire.) Should one or more of these risks or uncertainties materialize, or
should the underlying assumptions prove incorrect, actual results may differ
significantly from those anticipated, believed, estimated, expected, intended,
or planned.
Although
Company believes that expectations reflected in the forward-looking statements
are reasonable, the Company cannot guarantee future results, levels of activity,
performance, or achievements. Except as required by applicable law, including
the securities laws of the US, the Company does not intend to update any of the
forward-looking statements to conform to these statements to actual results.
Readers are urged to carefully review and consider the various disclosures made
throughout the entirety of this annual report, which attempt to advise
interested parties of the risks and factors that may affect our business,
financial condition, results of operations, and prospects.
Our
financial statements are prepared in US Dollars and in accordance with
accounting principles generally accepted in the US. See "Foreign Currency
Translation and Comprehensive Income (Loss)" and "Foreign Exchange Rates" below
for information concerning the exchange rates at the Renminbi ("RMB") were
translated into US Dollars ("USD") at various pertinent dates and for pertinent
periods.
Overview
Weikang
Bio-Technology Company, Inc. (“we”, “us”, the “Company”) was incorporated in
Florida on May 12, 2004 as Expedition Leasing, Inc. On December 7, 2007, we
acquired Sinary Bio-Technology Holdings Group, Inc. (“Sinary”), a Nevada
corporation and, as a result, Sinary’s wholly-owned subsidiary Heilongjiang
Weikang Bio-Technology Group Co., Ltd. (“Heilongjiang Weikang”), a limited
liability company in the PRC, by exchanging 24,725,200 shares of our Common
Stock for 100% of the issued and outstanding common stock of
Sinary.
Having no
substantive operation of its own, Sinary, through Heilongjiang Weikang, engages
in the research, development, manufacturing, marketing, and sales
of Traditional Chinese Medicine (“TCM”) in the PRC. Heilongjiang
Weikang is located in Heilongjiang Province in Northeastern PRC, with our
principal office and manufacturing facility located in the Economic and
Technology Development Zone in the city of Shuangcheng, approximately 42
kilometers south of the provincial capital Harbin. Heilongjiang Weikang’s
products are primarily Chinese herbal-based health and nutritional supplements.
Heilongjiang Weikang seeks to maintain and improve the quality of its products,
and as of April 2006, implemented the “GB/T19001-2000 idt ISO9001:2000” quality
assurance management system to all of its manufacturing processes. Heilongjiang
Weikang was issued a Certificate of Good Manufacturing Practices for Health Food
by the Health Department of Heilongjiang Province on November 24,
2008.
Through
our subsidiary Heilongjiang Weikang, we manufacture and distribute throughout
the PRC a series of internally developed TCM products under our trademark
“Rongrun”. The “Rongrun” line presently includes seven products. We developed
two new products during 2007, which were approved by the Heilongjiang Department
of Health.
13
On July
22, 2008, Heilongjiang Weikang acquired 100% of the equity interest of
Tianfang (Guizhou) Pharmaceutical Co., Ltd. (“Tianfang”), a PRC limited
liability company, for $15,000,000, pursuant to a Stock Transfer Agreement dated
and entered into on June 30, 2008 by and among Heilongjiang Weikang, Tianfang,
and Tianfang’s two shareholders, Beijing Shiji Qisheng Trading Co., Ltd. and
Tri-H Trade (U.S.A.) Co., Ltd.
Tianfang
was incorporated in Guizhou Province, PRC in 1998. Tianfang is
engaged in the development, manufacture and distribution of over-the-counter
pharmaceuticals. Tianfang was issued a Certificate of Good Manufacturing
Practices for Pharmaceutical Products by Food and Drug Administration of Guizhou
Province on August 20, 2010.
Critical
Accounting Policies and Estimates
Our
management's discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which were
prepared in accordance with accounting principles generally accepted in the
United States (US GAAP). The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
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 aid you in fully understanding and evaluating this
management discussion and analysis.
Basis
of presentation
These
accompanying consolidated financial statements have been prepared in accordance
with US GAAP and pursuant to the rules and regulations of the SEC for annual or
quarterly financial statements.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Sinary, and the results of operations
of Heilongjiang Weikang, Sinary’s wholly-owned subsidiary; and Tianfang,
Heilongjiang Weikang’s wholly-owned subsidiary. All significant
inter-company accounts and transactions were eliminated in
consolidation.
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves.
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods comprises
direct material, direct production cost and an allocated portion of production
overheads.
14
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for all assets with estimated lives ranging from 3 to 20 years as
follows:
Building
|
20
|
Vehicle
|
5
|
Office
Equipment
|
3-7
|
Production
Equipment
|
3-10
|
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104, codified in FASB ASC Topic 480. Revenue is
recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is
reasonably assured. Payments received before all of the relevant criteria for
revenue recognition are recorded as unearned revenue.
Revenue
represents the invoiced value of goods, net of value-added tax (or VAT). All of
the Company’s products sold in the PRC are subject to Chinese value-added tax of
17% of the gross sales price. This VAT may be offset by VAT paid by the Company
on raw materials and other materials included in the cost of producing their
finished product. The Company recorded VAT payable and VAT receivable net of
payments in the financial statements. The VAT tax return is filed offsetting the
payables against the receivables.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (or RMB). For financial reporting
purposes, RMB were translated into US dollars (or USD) as the reporting
currency. Assets and liabilities are translated at the exchange rate in effect
at the balance sheet date. Revenues 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 stockholders' 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.
The
Company uses SFAS No 130, “Reporting Comprehensive Income”, codified in FASB ASC
Topic 220. Comprehensive income is comprised of net income and all changes to
the statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to
stockholders.
NEW
ACCOUNTING PRONOUNCEMENTS
In
October 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding
accounting for own-share lending arrangements in contemplation of convertible
debt issuance or other financing. This ASU requires that at the date
of issuance of the shares in a share-lending arrangement entered into in
contemplation of a convertible debt offering or other financing, the shares
issued shall be measured at fair value and be recognized as an issuance cost,
with an offset to additional paid-in capital. Further, loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs, at which time the loaned shares would be
included in the basic and diluted earnings-per-share
calculation. This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years.
The
adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
In August
2009, the FASB issued an ASU regarding measuring liabilities at fair value. This
ASU provides additional guidance clarifying the measurement of liabilities at
fair value in circumstances in which a quoted price in an active market for the
identical liability is not available; under those circumstances, a reporting
entity is required to measure fair value using one or more of valuation
techniques, as defined. This ASU is effective for the first reporting period,
including interim periods, beginning after the issuance of this ASU. The
adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
15
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.
In June 2009, the FASB issued SFAS No.
167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), codified as
FASB ASC Topic 810-10, which modifies how a company determines when an entity
that is insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. SFAS 167 clarifies that the
determination of whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance. SFAS 167 requires an ongoing reassessment of
whether a company is the primary beneficiary of a variable interest entity. SFAS
167 also requires additional disclosures about a company’s involvement in
variable interest entities and any significant changes in risk exposure due to
that involvement. SFAS 167 is effective for fiscal years beginning after
November 15, 2009. The
adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
In June 2009, the FASB issued SFAS No.
166, “Accounting for Transfers of Financial Assets — an amendment of FASB
Statement No. 140” (“SFAS 166”), codified as FASB Topic ASC 860, which requires
entities to provide more information regarding sales of securitized financial
assets and similar transactions, particularly if the entity has continuing
exposure to the risks related to transferred financial assets. SFAS 166
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets and requires additional
disclosures. SFAS 166 is effective for fiscal years beginning after November 15,
2009. The
adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
In May 2009, the FASB issued SFAS No.
165, “Subsequent Events” (“SFAS 165”) codified in FASB ASC Topic 855-10-05,
which provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS 165 also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. SFAS 165 is
effective for interim and annual periods ending after June 15, 2009, and
accordingly, the Company adopted this pronouncement during the second quarter of
2009. SFAS 165 requires that public entities evaluate subsequent events through
the date that the financial statements are issued.
In April
2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim Disclosures
about Fair Value of Financial Instruments,” which is codified in FASB ASC Topic
825-10-50. This FSP essentially expands the disclosure about fair value of
financial instruments that were previously required only annually to also be
required for interim period reporting. In addition, the FSP requires certain
additional disclosures regarding the methods and significant assumptions used to
estimate the fair value of financial instruments. These additional disclosures
are required beginning with the quarter ending June 30, 2009. This FSP had no
material impact on the Company’s financial position, results of operations or
cash flows.
16
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments,” which is codified in FASB
ASC Topic 320-10. This FSP modifies the requirements for recognizing
other-than-temporarily impaired debt securities and changes the existing
impairment model for such securities. The FSP also requires additional
disclosures for both annual and interim periods with respect to both debt and
equity securities. Under the FSP, impairment of debt securities will be
considered other-than-temporary if an entity (1) intends to sell the security,
(2) more likely than not will be required to sell the security before recovering
its cost, or (3) does not expect to recover the security’s entire amortized cost
basis (even if the entity does not intend to sell). The FSP further indicates
that, depending on which of the above factor(s) causes the impairment to be
considered other-than-temporary, (1) the entire shortfall of the security’s fair
value versus its amortized cost basis or (2) only the credit loss portion would
be recognized in earnings while the remaining shortfall (if any) would be
recorded in other comprehensive income. FSP 115-2 requires entities to initially
apply the provisions of the standard to previously other-than-temporarily
impaired debt securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulate other comprehensive income. The Company adopted FSP No. SFAS 115-2
and SFAS 124-2 beginning April 1, 2009. This FSP had no material impact on the
Company’s financial position, results of operations or cash flows.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP
No. SFAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP
No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and
820-10-50-2, provides additional guidance for estimating fair value and
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
The Company adopted FSP No. SFAS 157-4 beginning April 1, 2009.
This FSP had no material impact on the Company’s financial position, results of
operations or cash flows.
Results
of Operations
Comparison
of the Nine Months Ended September 30, 2010 and 2009
The following table summarizes our
results of operations. The table and the discussion below should be read in
conjunction with the unaudited financial statements and the notes thereto
appearing elsewhere in this report.
2010
|
2009
|
|||||||||||||||
Net
sales
|
$ | 41,878,410 | $ | 34,534,249 | ||||||||||||
Cost
of goods sold
|
16,976,845 | 41 | % | 15,803,400 | 46 | % | ||||||||||
Gross
profit
|
24,901,565 | 59 | % | 18,730,849 | 54 | % | ||||||||||
Operating
expense
|
7,550,292 | 18 | % | 4,446,576 | 13 | % | ||||||||||
Income
from operations
|
17,351,273 | 41 | % | 14,284,273 | 41 | % | ||||||||||
Other
income, net
|
297,883 | 1 | % | 735,200 | 2 | % | ||||||||||
Income
taxes
|
5,124,858 | 12 | % | 3,853,312 | 11 | % | ||||||||||
Net
income
|
$ | 12,524,298 | 30 | % | $ | 11,166,161 | 32 | % |
Net sales. During the nine
months ended September 30, 2010, sales were $41.88 million, compared to $34.53
million for the comparable period in 2009, an increase of $7.34 million or
21%. The increase in sales was primarily a result of new product
sales in third quarter and the expansion of sales channels by our sales
department as a result of increased demand of our products from end users as
well as an overall increase of our product market share. The sales
for the new products during the quarter were $2.23 million, or 5.3% of the total
sales. We believe our sales will continue to grow as we develop new products to
satisfy our consumers and continue to improve the quality of our existing
products.
Cost of goods sold. Cost
of goods sold increased $1.17 million or 7%, from $15.80 million in the nine
months ended September 30, 2009 to $16.98 million for the nine months ended
September 30, 2010. The cost of goods sold as a percentage of sales for the nine
months ended September 30, 2010, was 41% compared to 46% for the comparable
period of 2009, which was attributable to decreased cost of goods sold by
Tianfang, from 51% to 47% of sales; the cost of goods sold was 31% of the sales
made by Heilongjiang Weikang, a decrease of 2% when compared with the comparable
period of 2009. Such decrease was mainly due to our continuous
efforts at cost control, including the implementation of strict cost control
procedures for purchasing, manufacturing, storage and
transportation. In addition, due to increased economy of
scale, we increased our production volume significantly while keeping
our fixed costs relatively constant.
17
Gross profit. Gross profit
was $24.90 million for the nine months ended September 30, 2010, compared to
$18.73 million for the comparable period of 2009, representing gross margin of
59% and 54% of sales, respectively. The increase in our gross profit margin in
the nine months ended September 30, 2010 was mainly due to decreased cost of
goods sold as a percentage of sales for the reasons described
above.
Operating expenses. Total
operating expenses of $7.55 million for the nine months ended September 30, 2010
compared to $4.45 million for the nine months ended September 30, 2009, an
increase of $3.10 million or 70%. Operating expenses as a percentage of sales
was 18% for the nine months ended September 30, 2010 compared to 13% for the
comparable period in 2009. This increase was mainly attributable to the
increased promotion and marketing expenses for launching and promoting new
products, and stock compensation expenses of $2.28 million with respect to stock
issued to financial and IR consultants which were non-cash
expenses.
Net other income. Other
income was $0.30 million in the nine months ended September 30, 2010 compared to
$0.74 million in the nine months ended September 30, 2009. Other
income in the nine months of 2009 mainly consisted of lease income of $778,000
from leasing a workshop and the right to use our technology for manufacturing
royal jelly; while in the nine months of 2010, other income mainly consisted of
lease income of $260,000 from leasing a different product manufacturing
technology and workshop starting from June 30, 2010 for a period of one
year.
Net income. Net income for
the nine months ended September 30, 2010 was $12.52 million compared to $11.17
million for the nine months ended September 30, 2009, an increase of $1.36
million or 12%. The increase was mainly attributed to increased net
sales and decreased cost of goods sold. Our management believes net income will
increase as we continue to offer better quality and variety of products and
continue to improve our manufacturing efficiency.
Liquidity
and Capital Resources
At
September 30, 2010, the Company had cash and cash equivalents of $29.95 million,
other current assets of $1.51 million, and current liabilities of $4.24 million.
In addition, at September 30, 2010, working capital was $27.22 million and the
ratio of current assets to current liabilities was 7.42-to-1.
The following is a summary of cash
provided by or used in each of the indicated types of activities during the nine
months ended September 30, 2010 and 2009, respectively:
|
2010
|
2009
|
||||||
Cash
provided by (used in):
|
||||||||
Operating
Activities
|
$ | 16,327,845 | $ | 11,325,254 | ||||
Investing
Activities
|
$ | (482,831 | ) | $ | (27,751 | ) | ||
Financing
Activities
|
$ | 2,222,475 | $ | (2,614,430 | ) |
Net cash
provided by operating activities was $16.33 million for the nine months ended
September 30, 2010, compared to $11.33 million for the comparable period of
2009. The increase in net cash inflow from operating activities was mainly due
to an increase in our net income, payments received as unearned
revenue, less payments made for taxes and other payables during the
period.
Net cash used in investing activities
was $0.48 million for the nine months ended September 30, 2010, compared to
$27,751 for the comparable period of 2009. The cash outflow during
the nine months ended September 30, 2010 was mainly due to construction of a new
workshop and acquisition of equipment.
Net cash provided by financing
activities was $2.22 million for the nine months ended September 30, 2010
compared to $2.61 million cash outflow for the comparable period of 2009. The
cash inflow in financing activities for the nine months ended September 30, 2010
mainly consisted of proceeds of $2.2 million for stock issued.
18
We do not believe inflation had a
significant negative impact on our results of operations during the nine months
ended September 30, 2010.
Off-Balance
Sheet Arrangements
We have not made any other financial
guarantees or other commitments to guarantee the payment obligations of any
third party. We have not entered into any derivative contracts that are indexed
to our shares and classified as stockholder’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.
Comparison
of the Years Ended December 31, 2009 and 2008
The
following table summarizes our results of operations. The table and the
discussion below should be read in conjunction with the unaudited financial
statements and the notes thereto appearing elsewhere in this
Prospectus.
2009
|
2008
|
|||||||||||||||
Sales
|
$ | 47,484,188 | $ | 12,852,884 | ||||||||||||
Cost
of Sales
|
21,640,326 | 46 | % | 4,584,093 | 36 | % | ||||||||||
Gross
Profit
|
25,843,862 | 54 | % | 8,268,791 | 64 | % | ||||||||||
Operating
Expense
|
5,856,040 | 12 | % | 1,208,998 | 9 | % | ||||||||||
Income
from Operations
|
19,987,822 | 42 | % | 7,059,793 | 55 | % | ||||||||||
Other
Income (Expenses), net
|
984,738 | 2 | % | 959,735 | 7.5 | % | ||||||||||
Income
Tax Expense
|
5,355,758 | 11 | % | 748,919 | 6 | % | ||||||||||
Net
Income
|
$ | 15,616,802 | 33 | % | $ | 7,270,609 | 57 | % |
Sales. During the year ended
December 31, 2009, we had sales of $47.48 million, compared to $12.85 million
for 2008, an increase of $34.63 million or 269%. The increase in sales was
primarily a result of increased sales from Tianfang, which brought us $34.09
million sales or 72% of our total sales during 2009. Tianfang’s sales increased
$28.45 million or 493% during the year ended December 31, 2009; while in
2008, Tianfang had only 6 months operations due to the snow disaster in
China. In addition, there was increased demand from our dealers and
distributors as a result of increased acceptance and trust in our products from
end users despite our increased selling price in 2009. We believe our
sales will continue to grow as we develop new products and continue to improve
the quality of our existing products.
Cost of Sales. Cost of
sales increased $17.06 million or 372%, from $4.58 million for the year ended
December 31, 2008 to $21.64 million for the year ended December 31, 2009. The
increase was mainly due to increased production as a result of our acquisition
of Tianfang and increased demand from the end users. The cost of sales as a
percentage of sales for the year ended December 31, 2009, 46% compared to 36%
for 2008, which was attributable to relatively higher cost of sales of Tianfang,
51% of sales, while the cost of sales was 33% of the sales for Heilongjiang
Weikang. The relatively higher cost of Tianfang was mainly due to Tianfang’s
high cost product type which are popular and well-accepted products in order to
meet customers’ demand and which are being used for expanding its market share
in the new regions. When the market becomes stable and recognition of Tianfang
brand is established in these new regions, we will launch new product lines to
replace the low profit margin products.
Gross Profit. Gross profit
was $25.84 million for the year ended December 31, 2009, compared to $8.27
million for 2008, profit margins of 54% and 64% of sales, respectively. The
decrease in our profit margin was mainly due to increase in cost of sales as a
percentage of sales as a result of relatively high cost of sales from Tianfang’s
operations during 2009.
19
Operating Expenses. Total
operating expenses consisted of selling, general and administrative expenses of
$5.85 million for the year ended December 31, 2009 compared to $1.21 million for
the year ended December 31, 2008, an increase of $4.64 million or 383%.
Operating expenses as a percentage of sales was 12% for the year ended December
31, 2009 while it was 9% for 2008. This increase was attributable to the
combined expenses of Heilongjiang Weikang and Tianfang due to the acquisition of
Tianfang in July 2008. In addition, we had R&D expense of $1.95 million in
2009 for developing certain new medicine and health supplemental products with
the Botany medicine research center of Northeast Forestry
University.
Net Other Income. Other
income was $0.98 million in the year ended December 31, 2009 compared to $0.96
million in the year ended December 31, 2008, an increase of $25,000 or
3%. Other income in 2009 and 2008 mainly consisted of lease income
received from leasing a workshop and right to use our technology for
manufacturing royal jelly.
Net Income. Our net income
for the year ended December 31, 2009 was $15.62 million compared to $7.27
million for the year ended December 31, 2008, an increase of $8.35 million or
115%. The increase was mainly attributed to growth in revenue
and efficiency of operations. Our management believes net income will continue
to increase as we continue to offer better quality and variety of products and
improve our manufacturing efficiency.
Liquidity
and Capital Resources
As of
December 31, 2009, the Company had cash and equivalents of $11.38 million, other
current assets of $0.31 million, and current liabilities of $10.54 million.
Working capital was $1.15 million at December 31, 2009. The ratio of current
assets to current liabilities was 1.11-to-1 as of December
31, 2009.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the years ended December 31, 2009 and 2008,
respectively:
2009
|
2008
|
|||||||
Cash
provided by (used in):
|
||||||||
Operating
Activities
|
$ | 17,468,437 | $ | 10,178,609 | ||||
Investing
Activities
|
(3,563,305 | ) | (808,739 | ) | ||||
Financing
Activities
|
(2,550,714 | ) | (9,635,668 | ) |
Net cash
provided by operating activities was $17.47 million for 2009, compared to $10.18
million for 2008. The increase in net cash inflow from operating activities was
mainly due to an increase in our net income with faster collection on
accounts receivable.
Net cash
used in investing activities was $3.56 million for 2009, compared to $0.81
million for 2008. The cash outflow during the year ended December 31,
2009 was mainly due to the acquisition of additional office equipment at
$29,491 and purchase of a new land use right for $3.53 million.
Net cash
used in financing activities was $2.55 million for the year ended December 31,
2009 compared to $9.64 million for 2008. The net cash outflow in financing
activities for the year ended December 31, 2009 mainly consisted of payment of
$3.81 million for the remaining portion of the acquisition price of Tianfang;
and repayment of sales receipts of $1.26 million from the management that was
previously deposited into a personal bank debit card owned by the Company’s
officer mainly for the purpose of convenience on payment collection.
We do not
believe inflation had a significant negative impact on our results of operations
during 2009.
20
Off-Balance
Sheet Arrangements
We have
not made any other financial guarantees or other commitments to guarantee the
payment obligations of any third party. We have not entered into any derivative
contracts that are indexed to our shares and classified as stockholder’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.
Quantitative
and Qualitative Disclosures about Market Risk
We do not use derivative financial
instruments in our investment portfolio and have no foreign exchange contracts.
Our financial instruments consist of cash and equivalents, trade accounts
receivable, accounts payable and long-term obligations. We consider investments
in highly liquid instruments purchased with a maturity of 90 days or less at the
date of purchase to be cash equivalents. However, in order to manage the foreign
exchange risks, we may engage in hedging activities to manage our financial
exposure related to currency exchange fluctuation. In these hedging activities,
we might use fixed-price, forward, futures, financial swaps and option contracts
traded in the over-the-counter markets or on exchanges, as well as long-term
structured transactions when feasible.
DESCRIPTION
OF BUSINESS
Overview
We are
principally engaged in developing, manufacturing and distributing health and
nutritional supplements in China. The Company has also expanded its business
scope to develop, manufacture and distribute Chinese herbal extract products and
GMP (Good Manufacturing Practice) certified western prescriptive
medicine.
History
As used
herein the terms "We", the "Company", "WKBT", the "Registrant," or the "Issuer"
refers to Weikang Bio-Technology Group Co., Inc., its subsidiaries and
predecessors, unless indicated otherwise. The Company was originally
incorporated on May 12, 2004 in Florida as Expedition Leasing, Inc. On July 12,
2008, the Company redomiciled from Florida to Nevada and changed to its name to
Weikang Bio-Technology Group Co., Inc. pursuant to an acquisition of
Sinary Bio-Technology Holdings Group, Inc. (“Sinary”), a Nevada corporation
and, Sinary’s wholly owned subsidiary, Heilongjiang Weikang Biotechnology Group
Co., Ltd. (“Heilongjiang Weikang”), a limited liability company organized and
existing under the laws of the People’s Republic of China (“PRC”). Upon
completion of the transaction on December 7, 2007, Sinary and Heilongjiang
Weikang became our wholly-owned subsidiaries. The transaction was treated for
accounting purposes as a capital transaction and recapitalization by the
accounting acquirer and as a re-organization by the accounting
acquiree.
Overview
of Sinary
Sinary
was incorporated under the laws of the State of Nevada on August 31, 2007. On
October 25, 2007, Sinary entered into an equity interest transfer agreement with
the owners of Heilongjiang Weikang to acquire 100% of the equity interest of
Heilongjiang Weikang for 57 million Renminbi ( “RMB” ), or approximately $ 7.6
million. In connection with this acquisition, on November 6, 2007, Heilongjiang
Weikang was approved by the Heilongjiang Provincial Government as a foreign
invested enterprise (“FIE” ), and the acquisition of Heilongjiang Weikang was
deemed completed on November 9, 2007, the date when the Heilongjiang Office of
the State Administration for Industry and Commerce ( or Heilongjiang SAIC )
issued a FIE business license to Heilongjiang Weikang, and registered Sinary as
the 100% owner of Heilongjiang Weikang’s registered capital. Pursuant
to the terms of the equity interest transfer agreement and the requirements of
applicable PRC laws and regulations, Sinary had a grace period to remit the
acquisition price by June 30, 2010. On August 6, 2010, Sinary and the former
owners of Heilongjiang Weikang entered into a Settlement Agreement and Release
pursuant to which the former owners waived all of their rights that they have to
payment of both the acquisition price and contributed the acquisition price to
the Company’s capital. Other than the 100% equity interest in
Heilongjiang Weikang, Sinary has no other assets. Sinary conducts all of its
business operations through Heilongjiang Weikang.
21
Overview
of Heilongjiang Weikang
Heilongjiang
Weikang was incorporated in Heilongjiang Province, PRC on March 29, 2005,
formerly known as Heilongjiang Province Weikang Bio-Engineering Co., Ltd.
Heilongjiang Weikang had an initial registered capital of RMB 5 million. On
November 21, 2006, Heilongjiang Weikang changed its corporate name to
“Heilongjiang Weikang Bio-Technology Group Co., Ltd.” and increased its
registered capital to RMB 40 million. On October 25, 2007, the owners of
Heilongjiang Weikang sold and transferred 100% of
Heilongjiang Weikang ’ s equity interests to Sinary pursuant to an
equity interest transfer agreement. Upon completion of the transaction on
November 9, 2007, Sinary became the 100% owner of Heilongjiang Weikang’s
registered capital; and Heilongjiang Weikang was subsequently approved as
an FIE by HeilongjiangProvincial Government. Heilongjiang Weikang is
primarily engaged in the development, manufacture, marketing and distribution of
health and nutritional supplements in the PRC.
On June
30, 2008, Heilongjiang Weikang entered into a stock transfer agreement with
Tianfang (Guizhou) Pharmaceutical Co., Ltd. (“Tianfang”), a limited liability
company organized and existing under the laws of the PRC, and Tianfang’s two
shareholders: Beijing Shiji Qisheng Trading Co., Ltd., a limited liability
company organized and existing under the laws of China, and Tri-H Trade (U.S.A.)
Co., Ltd., a California corporation. Pursuant to the terms of the
Agreement, Heilongjiang Weikang acquired 100% of the equity interests of
Tianfang in exchange for $15,000,000. The transaction was completed on July 22,
2008. Heilongjiang Weikang paid $15,000,000 as of the end of 2009. We
believe the acquisition of Tianfang has strengthened our distribution channels
and improved our production capacity. As a result of the acquisition we now not
only sell Chinese herbal extract products, but also sell “western”
pharmaceuticals.
Overview
of Tianfang
Tianfang
was incorporated in Guizhou Province, China in 1998 with a registered capital of
RMB 5,900,000 ($891,000). Tianfang is located within the Zhazuo Medicine
Industry Area of Xiuwen country, Guiyang City, Guizhou Province, PRC where it
engages in the development, manufacture and distribution of Chinese herbal
extract products and GMP certified western prescription
pharmaceuticals. Tianfang operates on 71,907 square meters with
14,675 square meters of factory facilities. Tianfang has a well-established
business that benefits greatly from economies of scale and cost. Tianfang, as an
independent subsidiary, currently has 244 employees, including 68 full-time
administrators, 126 full-time production workers and 50 full-time sales
representatives. Tianfang has six production lines and all of its products have
received Good Manufacturing Practices (“GMP”) certification. For the fiscal year
2009 and nine months ended September 30, 2010, Tianfang had sales revenues of
$34 million and $27 million, and net income of $10 million and $9
million, respectively.
On January 6, 2010 Weili
Wang, the holder of 24,725,200 shares of our Common Stock
(approximately 88% of our then issued and outstanding Common Stock), formed LWL,
a British Virgin Islands corporation and issued to herself 10,000 ordinary
shares which represents 100% of the issued and outstanding share capital of
LWL. In June 2010, Ms. Weili Wang transferred 22,925,200 of her
shares of our Common Stock (82% of our then issued and outstanding Common Stock)
to LWL. On May 5, 2010, Ms. Weili Wang and Yin Wang, our Chief
Executive Officer and Chairman of the Board entered into a Call Option Agreement
(the “Option Agreement”), pursuant to which Weili Wang granted Yin Wang an
irrevocable and unconditional option to purchase all of her ordinary shares of
LWL (the “Option Shares”) at $0.10 per ordinary share for a total purchase price
of $1,000. Mr. Wang has the right to purchase thirty-four percent
(34%) of the Option Shares on December 31, 2010 and thirty-three percent (33%)
of the Option Shares on December 31, 2011 and December 31, 2012,
respectively. The Option Agreement expires on June 29,
2015. If and when the option is fully exercised, Yin Wang will become
the sole shareholder of LWL whose sole asset is 22,925,200 shares of our Common
Stock.
Business
Description of the Company
Since the
reverse merger with Sinary and Heilongjiang Weikang was consummated, we have
continued operations of Heilongjiang Weikang, which is principally engaged in
developing, manufacturing and distributing health and nutritional supplements in
China, in compliance with requisite Chinese licenses and approvals. We are also
expanding our business scope to develop, manufacture and distribute Chinese
herbal extract products and GMP certified western prescription pharmaceuticals
through the acquisition of Tianfang.
22
Principal Products or
Services
Heilongjiang
Weikang is located in Heilongjiang Province in northeastern PRC, with its
principal office and manufacturing facility located in the Economic and
Technology Development Zone in the city of Shuangcheng, approximately 42
kilometers south of the provincial capital Harbin. Heilongjiang Weikang’s
primary products are Chinese herbal-based health and nutritional supplements.
Heilongjiang Weikang actively seeks to maintain and improve the quality of its
products, and since April 2006, Heilongjiang Weikang has implemented the “GB/T
1900-2000 idt ISO 9001:2000” quality assurance management system into all of its
manufacturing processes.
Heilongjiang
Weikang currently manufactures and distributes a series of internally developed
health supplements under the trademark “Rongrun”. The “Rongrun” line of products
presently includes:
Rongrun
Youth Keeping Capsules
Rongrun
Youth Keeping Capsules contain kudzu vine root, soybean isoflavone, oil extract
from Chinese forest frog, jequirity fruit, and Vitamin E. These capsules may
promote the restoration of the natural balance of female hormones reduce
symptoms of irritability, depression, headache, vomiting, high blood pressure,
and other conditions related to menopause. Balancing female hormones may lower
the risk of arteriosclerosis by utilizing the body’s natural protection against
heart diseases before menopause. These capsules are also intended to increase
the absorption of calcium, which may deter the onset of osteoporosis, and to
enhance the body’s immune system in order to counter negative health conditions
associated with aging beyond menopause. This
product accounted for approximately 3.78% of our total sales in
2009.
Rongrun
Energy Keeping Capsules
The key component of the Rongrun Energy
Keeping Capsules is grape seed extract, which is harvested for its high content
of oligomeric proacnthocyanidins (or OPC). OPC is being studied for its
antioxidant properties in reducing free radicals and oxidative stress, which may
be effective in reducing the risk of cardiovascular disease by promoting blood
vessel elasticity and countering inflammation, and promote a slower and
healthier aging process by increasing skin elasticity and smoothness, joint
flexibility and heightening immunity. Other ingredients of the Energy Keeping
Capsules include Barbary wolfberry fruit, which may improve eyesight and promote
liver function by reducing lipid accumulation in the liver, Vitamin E and oil
extracted from corn endosperm, which is the albumin tissue produced in the seeds
during fertilization and is rich in nutrients. This product accounted for
approximately 3.75% of our total sales in 2009.
Rongrun
Vitamin Sugar Capsules
The Rongrun Vitamin Sugar Capsules
contain bitter melon, hawthorne fruit, propolis, cactus, Vitamin E, and oil
extract from corn endosperm, and aims to reduce the onset of cardiovascular
disease and fatigue, and promote healthy aging. Propolis, which is a resinous
substance that bees collect from tree buds or other botanical sources and used
as a sealant in the hive, has long been used in Chinese traditional medicine for
the relief of inflammations, viral diseases, ulcers, and superficial burns or
scalding. This product accounted for approximately 4.11% of our total sales in
2009.
Rongrun
Intestine Cleansing Capsules
The Rongrun Intestine Cleansing
Capsules contain shisonin, black currant, Vitamin E, and oil extract from corn
endosperm. Shisonin ( perilla
frutescens ), or wild red basil, has long been harvested in China for its
medicinal properties. These capsules are intended to lower blood lipid levels in
order to reduce the likelihood of brain and heart vessel related diseases, to
provide nutrition for the brain and the optic nerve, to strengthen the immune
system, and to promote a healthy aging process. This product accounted for
approximately 3.84% of our total sales in 2009.
23
Rongrun
Artery Cleansing Capsules
The constituent ingredients of the
Rongrun Artery Cleansing Capsules are gingko, hawthorn fruit, Vitamin E, and oil
extract from corn endosperm. Ginkgo extract may have three effects on the human
body: it may improve blood flow (including microcirculation in small
capillaries) to most tissues and organs; it may protect against oxidative cell
damage from free radicals; and it may block many of the effects of
platelet-activating factor (platelet aggregation, blood clotting) that have been
related to the development of a number of cardiovascular, renal, respiratory and
central nervous system diseases are intended to reduce the level of
cholesterol built-up in the arteries in order promote healthier heart and brain
functions and to decrease the likelihood of heart attacks and strokes. This
product accounted for approximately 3.95% of our total sales in
2009.
Rongrun
Royal Jelly Extract
Royal Jelly is a honey bee secretion
that is used in the nutrition of the bee larvae, and has been used as part of
traditional Chinese medicine since the early first century. Royal Jelly is a
rich source of complete protein, containing all the essential amino acids, as
well as essential fatty acids, minerals and vitamins, particularly pantothenic
acid (B-5) and pyridoxine (B-6). Royal Jelly also contains collagen; lecithin;
and vitamins A, C, D and E. Additionally, Royal Jelly contains several other
compounds that have been shown to help lower cholesterol. Another component in
Royal Jelly, 10-Hydroxy-2-Decenoic Acid (10-HDA), is being studied for its
immuno-regulatory and anti-cancer properties. While Royal Jelly is widely
available commercially, Weikang’s Rongrun Royal Jelly Extract is distinguished
from the competition by its enhanced concentration of 10-HDA. Weikang introduced
its Royal Jelly product in 2007. This product accounted for approximately 4.63%
of our total sales in 2009.
Rongrun
Kidney Boost Tonic
Rongrun Kidney Boost Tonic contains
various traditional Chinese herbs including ginseng, dioscorea and cistanche
salsa. All of the components in our tonic have been used for centuries in China
to strengthen and promote healthy kidney functions. A tenet of traditional
Chinese medicine is that a strong kidney attributes to strong “ qi ”, which translates into
strong bones, sharp vision, clarity of hearing, and healthy organs, while
unhealthy kidneys are responsible for weak “ qi ” as manifested by
physical weakness, low energy level, mental deficiency, high blood pressure and
reduced sex drive. This product accounted for approximately 4.06% of our total
sales in 2009.
Tianfang’s
products are sold under trademark “Tianfang”, which presently
include:
Ferrous
Fumarate Granule
Ferrous Fumarate Granule contains
Ferrous Fumarate. It is used for iron deficiency anemia caused by various
reasons, such as, chronic blood loss, malnutrition, pregnancy, or child
development period. This product accounted for approximately 24.24%
of our total sales in 2009.
Eucommia
Ulmoides Oliv Granule
The key components of Eucommia Ulmoides
Oliv Granule are Eucommiae ulmoides Oliv, Eucommiae ulmoides Oliv leaves, which
is nourishing liver and kidney, strengthening muscles and bones. This product
accounted for approximately 23.26% of our total sales in 2009.
Bushen
Qiangshen Tablet
Bushen Qiangshen Tablet contains
Epimedium, dodder, Rosa laevigata, glossy privet fruit and cibot rhizome, which
may be effective in nourishing the liver and kidney, enriching yin,
strengthening yang, and enhancing health and brain function. This product
accounted for approximately 7.85% of our total sales in 2009.
24
Tinidazole
Vaginal Effervescent Tablet
The key component of Tinidazole Vaginal
Effervescent Tablet is Tinidazole. It is intended to fight infections
caused by anaerobe, especially for anaerobic infection of female reproductive
systems. This product accounted for approximately 14.87% of our total
sales in 2009.
Ranitidine
Hydrochloride Capsule
Ranitidine Hydrochloride Capsule, a
prescription-strength generic formulation of Zantac, is formulated to treat
duodenal ulcers, gastric ulcers, gastroesophageal reflux disease and other
gastric conditions.
Product
Development
Our products currently under
development as of September 30, 2010 include: 10-hydroxy-2-decylenic acid,
commonly known as 10-HDA, in gel capsule and in powder form. 10-HDA has been
promoted as having anti-cancer properties and used in the treatment of radiation
sickness and angiocardiopathy. Our products have been approved by the
Heilongjiang Department of Health, although we have not yet begun production, as
of February 9, 2011 we expect production to begin in
2012.
In cooperation with the Forest Ecology
Department of Northeast Forestry University, in 2008 we began developing new
product lines involving the planting of “ShuangBaoGu”( a variety of mushroom) on
“Saline-alkali Soil”. By combining the saline-alkali soil
cultivated “ShuangBaoGu” mushroom, sweet corn, and beet we can produce
sweet corn bamboo juice, sweet corn straw juice, and beet
juice. These juices are thought to have several positive health
benefits including the prevention and treatment of cardiovascular
disease. Through the development of these products we hope to help
customers reduce the level of cholesterol built-up in arteries, and promote
healthier heart and brain functions. We have not yet begun production on this
project as of the date of this registration statement, but we anticipate that
production should commence in 2012.
As a
result of the recent acquisition of Tianfang, we are developing a new product
known as Dofetilide. Dofetilide is a medicine given to patients with
atrial fibrillation (irregular heartbeats). Atrial fibrillation occurs when
certain parts of the heart (the chambers known as atria) beat too fast or
irregularly, causing an uncomfortable chest pain and “fluttering” or
“palpitations.” Dofetilide may help the heart to beat more regularly and stay
beating regularly for a longer period of time. This medicine is currently
undergoing the second-phase clinical test.
Our
Distribution Methods
Since
Heilongjiang Weikang launched its products from its home base of Heilongjiang
Province in May 2006, we have extended our sales and distribution network to the
national capital of Beijing as well as to four provinces, namely: Anhui, Hebei,
Henan and Jiangsu. Currently, we only sell to wholesale dealers, who then
distribute our products to their customers such as local retail stores and
pharmacies. Heilongjiang Weikang will continue to identify and establish
business relationships with more wholesale vendors across China in order to
strengthen our distribution network.
The
acquisition of Tianfang helped to expand our distribution network and increase
our sales channels. Tianfang has more than 60 retail sales locations
throughout China in many of the major cities. Tianfang was acquired by
Heilongjiang Weikang in July 2008, and since then both companies have operated
together on only a trial basis while adjusting to the acquisition. We
hope to expand Heilongjiang Weikang’s distribution network through the channels
that Tianfang provides. We see this strategy as an excellent
opportunity for corporate growth of both organizations.
We
recognize the importance of branding as well as packaging. All of our products
bear a uniform brand but have specialized designs to differentiate the
different categories. We conducts promotional marketing activities to publicize
and enhance our image as well as to reinforce the recognition of our brand
names, which includes: (1) organizing cooperative promotional activities with
distributors; (2) conducting product informational meetings with distributors;
and (3) creating sales incentive programs such as rebates for
distributors.
25
Major
Customers
Five
customers who are dealers of the Company accounted for 47% of the Company’s net
revenues for 2008. Each customer accounted for 14%, 12%, 11% and 10%
of sales, of which, one was the related party owned by the shareholder
of Weikang accounting for about 1% of total sales. There were no
customers which accounted for over 10% of the Company’s sales for the years
ended December 31, 2009 and 2008.
The loss
of any and/or all of these customers could have a material adverse effect on our
business.
Competition
Although
we presently do not have any direct competitors in the PRC due to the uniqueness
of most of our products, competitive products are available on the marketplace
that offer features similar to those of our products. For example, Jinwanxia
Technology Development Co., Ltd.(or Jinwanxia), a subsidiary of the state-owned
pharmaceutical conglomerate Heilongjiang Pharmaceutical Group Holding Co., Ltd.,
distributes a line of bee-derived products which potentially compete with
our Royal Jelly Extract. China’s health supplements industry is
highly fragmented and competitive, and companies such as Jinwanxia have greater
financial, marketing and technical resources than us. Additionally, there can be
no assurance that one or more of these companies will not develop products that
compete directly with, and are equal or superior to, our products. Nevertheless,
we believe that we can maintain and increase our market position through our
strong R&D capability, unique products, growing sales network and
competitive prices.
Principal
Suppliers
Three and
two suppliers provided 38% and 26% of the Company’s purchases of raw material
for the years ended December 31, 2009 and 2008, respectively. For 2009, each
vendor accounted for 16%, 11%, 11%. For 2008, each vendor accounted for 16% and
10%. For the year ended December 31, 2010, the top two suppliers provided 21.38%
and 12.91% of our raw materials, respectively.
The
prices for these raw materials are subject to market forces largely beyond our
control, including energy costs, market demand, and freight costs. We have no
long term agreements with our suppliers, and purchase raw materials on a
purchase order basis. Our management recognizes that this strategy also carries
with it the potential disadvantages and risks of shortages and supply
interruptions. Our suppliers are meeting our supply requirements, and we believe
our relationships with our suppliers are stable.
Intellectual
Property
We rely
on a combination of trademark, copyright and trade secret protection laws in PRC
and other jurisdictions, as well as confidentiality procedures and contractual
provisions to protect our intellectual property and brand. As a part of their
employment, each of our employees agrees to abide by the confidentiality
provisions set forth in our employee procedure guide.
Health
and nutritional supplements manufacturers may at times be involved in litigation
based on allegations of infringement or other violations of intellectual
property rights. Furthermore, the application of laws governing intellectual
property rights in the PRC is uncertain and evolving and could involve
substantial risks to us.
Set forth
below is a detailed description of our trademarks.
26
Mark
|
Registration
No.
|
Class
|
Effective
Date
|
Expiration
Date
|
Owner
|
|||||
5219378 |
Class
30. Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee;
flour and preparations made from cereals, bread, pastry and confectionery,
ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces
(condiments); spices; ice.
|
March
28, 2009
|
March
27, 2019
|
Heilongjiang
Weikang
|
||||||
1367751 |
Class
5.
Pharmaceutical
and veterinary preparations; sanitary preparations for medical purposes;
dietetic substances adapted for medical use, food for babies; plasters,
materials for dressings; material for stopping teeth, dental wax;
disinfectants; preparations for destroying vermin; fungicides,
herbicides.
|
February
28, 2010
|
February
27, 2020
|
Tianfang
|
Government
Approval and Regulation of Our Principal Products
General
PRC Government Approval
Heilongjiang
Weikang currently has the requisite approval and licenses from the Heilongjiang
Provincial Government and the Heilongjiang Office of the State Administration
for Industry and Commerce to manufacture, process and distribute health
supplements in pill and tonic forms.
Tianfang
currently has the requisite approval and licenses from the Guizhou Provincial
Government and the Guizhou Office of the State Administration for Industry and
Commerce to manufacture and sell pharmaceuticals in tablet, capsule,
and granule forms (including traditional Chinese medicine extract).
Compliance
with Circular 106 and the 2006 M&A Regulations
On May
31, 2007, China’s State Administration of Foreign Exchange (or SAFE) issued an
official notice known as “Circular 106”, which requires the owners of Chinese
companies to obtain SAFE’s approval before establishing any offshore holding
company structure in so-called “round-trip” investment transactions for foreign
financing as well as subsequent acquisition matters in China. Likewise, the
“Provisions on Acquisition of Domestic Enterprises by Foreign Investors” (known
as the 2006 M&A Regulations), issued jointly by Ministry of Commerce (or
MOFCOM), State-owned Assets Supervision and Administration Commission, State
Taxation Bureau, State Administration for Industry and Commerce, China
Securities Regulatory Commission and SAFE in September 2006, impose approval
requirements from MOFCOM for “round-trip” investment transactions, including
acquisitions in which equity is used as consideration.
27
Because
Sinary was not established by the owners of Heilongjiang Weikang and because
Sinary and Heilongjiang Weikang are owned by unrelated parties, the two
companies did not have any direct or indirect connection until Sinary’s
acquisition of Heilongjiang Weikang. Sinary acquired Heilongjiang Weikang for
cash, rather than equity consideration. Sinary’s sole stockholder (immediately
prior to the share exchange transaction with Expedition Leasing) is not a
“domestic person” as defined under Circular 106. Accordingly, Sinary is not a
“special purpose company” as defined in Circular 106 and Sinary’s acquisition of
Heilongjiang Weikang is not a “round trip” investment transaction. As such,
Circular 106 and the provisions of the 2006 M&A Regulations relating to
special purpose companies are not implicated. Sinary’s acquisition of
Heilongjiang Weikang is a pure cross-border merger and acquisition transaction
governed by and permitted under the 2006 M&A Regulations, and Heilongjiang
Weikang was accordingly approved and issued a business license as a FIE by the
Heilongjiang Provincial Government and the Heilongjiang Office of the State
Administration for Industry and Commerce, respectively.
Costs
and Effects of Compliance with Environmental Laws
We are
subject to certain requirements and potential liabilities under national,
regional and municipal environmental laws, ordinances and regulations in the
PRC. We may generate certain wastes that may be deemed hazardous or toxic under
applicable environmental laws, and we from time to time have incurred, and in
the future may incur, costs relating to compliance with the environmental laws.
Although we may incur remediation and other environmental-related costs
during the ordinary course of operations, management anticipates that such costs
will not have a material adverse effect on our operations or financial
condition.
Research
and Development
We are
committed to quality research and development (or R&D). We focus on the
development of new products and the improvement of existing products. Our
R&D team is led by Dr. Zhengbin Xu, M.D., who has over 40 years of clinical
and research experience with traditional Chinese herbs and in
nutrition. Dr. Xu has published 56 scientific articles in
international and domestic journals and has prior professional affiliations with
the Chinese Medicine Research Bureau (as Vice Director of Research and
Development), Heilongjiang Province Chinese Medicine Co., Ltd. (as General
Manager), and the Chinese Medical Association (as Vice President).
Other
members of our R&D team include: (i) Mr. Hongbin Cui, who is an Executive of
Harbin Medical School’s Public Health Institute with over 20 years of research
experience in dermatology and nutrition; (ii) Mr. Zuo Zhang, Vice President and
Chief Pharmacist of Harbin Medical School Hospital, and an executive of
Heilongjiang Province Medical Association; (iii) Mr. Hua Shi, Vice Administrator
of Heilongjiang Province Health Quality Control Bureau and a health supplements
expert; (iv) Mr. Bingchun Wu , who is a former Executive of
Heilongjiang Province Chinese Medicine Research Association; and (v) Mr.
Huisheng Qin, M.D., Ph.D., who has over 20 years
experience as a surgeon, professor and scientist and knowledge in neurobiology,
molecular cell biology, pathology, pharmacology and nutritional
science.
For 2008,
2009 and 2010, we had $0, $1,951,000 and $ 2,570,000 in R&D
expenses.
Our
Employees
As of
February 9, 2011, the Company had 425 full-time employees. Of our 425
employees 124 are involved in our administration, 246 are involved in production
and 55 are part-time sales representatives. We have not experienced
any significant work stoppage or production shutdown since inception and we do
not anticipate any in the near future. Our management believes we
have a strong relationship with our workers.
Our
Principal Executive Offices
Our
principal executive office is located in the “Economic & Technology
Development Zone” of Chengxu Village, Shuangcheng Town, Shuangcheng City,
Heilongjiang Province, PRC. Our telephone number is (86)
451-88355530.
28
Reports
to Security Holders
We file
reports including our annual report, information statements as well as other
reports required of publicly held companies with the SEC. You can read and copy
any materials we file with the Commission at its Public Reference Room at 100 F
Street, N.E, Washington, DC 20549. You can obtain additional information about
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
In addition, the SEC maintains an Internet site (www.sec.gov) that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, including us.
PROPERTIES
Heilongjiang
Weikang’s principal executive offices and manufacturing facility are located
approximately 42 kilometers south of the provincial capital Harbin, in the
“Economic and Technology Development Zone” in the City of Shuangcheng. We
acquired the land use rights for 50 years for this property in 2005 and the land
underlying the facility is approximately 9.63 acres in size. The facility
includes two workshops, an administrative office building, a warehouse and
cafeteria building, all of which are owned by us. We acquired the land use
rights and the buildings of the facility from the Shuangcheng Municipal
Government pursuant to a lease, under which we agreed to renovate and utilize
the site and existing buildings and structures for our health supplements
business. In return, we were exempted from certain municipal fees during our
renovation efforts, and we were also exempted from income tax from 2005 to
2008.
In
November 2009, the Company signed a new lease for the right to use an additional
143,688 square meters of property located in the “Shuangcheng Economic
Development Zone” in the City of Shuangcheng. We paid $3,530,000 for
the use of this additional land from November 2009 until November 2059. There is
no tax exemption or other arrangements for this lease.
Tianfang
leases property located within the Zhazuo Medicine Industry Area of Xiuwen
county, Guiyang City, Guizhou Province, China where it engages in the
development, manufacture and distribution of Chinese herbal extract products and
GMP certified western prescription pharmaceuticals. Tianfang’s
operations comprise 71,907 square meters with 14,675 square meters of factory
facilities. Tianfang has four workshops, one administration building,
four warehouses, and one staff building, all of which are owned by Tianfang
including the land use rights for 50 years, starting from 2001.
LEGAL
PROCEEDINGS
We know of no material, active, pending
or threatened proceeding against us or our subsidiaries, nor are we, or any
subsidiary, involved as a plaintiff or defendant in any material proceeding or
pending litigation.
MARKET
PRICE OF AND DIVIDENDS OF OUR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market
Information
Our
Common Stock is quoted on the Over-the-Counter Bulletin Board under the symbol
“WKBT.OB”. Presented below is the high and low bid information of our Common
Stock for the periods indicated. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
Year
Ended December 31, 2009, by quarters:
|
High
|
Low
|
||||||
3/31
|
$ | 1.04 | $ | 1.04 | ||||
6/30
|
$ | 2.00 | $ | 0.51 | ||||
9/30
|
$ | 3.00 | $ | 0 | ||||
12/31
|
$ | 3.05 | $ | 1.65 |
29
Year
Ended December 31, 2010, by quarters:
|
High
|
Low
|
||||||
3/31
|
$ | 3.75 | $ | 2.35 | ||||
6/30
|
$ | 6.99 | $ | 2.70 | ||||
9/30
|
$ | 3.30 | $ | 1.90 | ||||
12/31
|
$ | 3.65 | $ | 2.37 |
Securities
Authorized for Issuance under Equity Compensation Plans
On June
24, 2008, our Board of Directors approved a 2008 Stock Incentive Plan for our
employees, officers, and directors, and our consultants and advisors. We also
filed a related Form S-8 with the SEC. As of February 9, 2011, we had 297,000
shares issued pursuant to 2008 Stock Incentive Plan.
Holders
As of February 9, 2011, there were
approximately 402
holders of record of our Common Stock, including the shares held in street name
by brokerage firms. The holders of Common Stock are entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
Holders of the Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or sinking
fund provisions applicable to the Common Stock.
Dividends
We have
not paid dividends on our Common Stock and do not anticipate paying such
dividends in the foreseeable future. We will rely on dividends from our PRC
Subsidiaries for our funds and PRC regulations may limit the amount of funds
distributed to us from our PRC Subsidiaries, which will affect our ability to
declare any dividends.
DIRECTORS
AND EXECUTIVE OFFICERS
Current
Executive Officers and Directors
The
following tables set forth information regarding the Company’s current executive
officers and directors of the Company. The BOD is comprised of only one class.
Except as otherwise described below, all of the directors will serve until the
next annual meeting of stockholders or until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
Also provided herein are brief descriptions of the business experience of each
director and executive officer during the past five years and an indication of
directorships held by each director in other companies subject to the reporting
requirements under the federal securities laws.
Name
|
Age
|
Positions
|
||
Yin
Wang
|
55
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
||
Baolin
Sun
|
55
|
Chief
Financial Officer
|
||
Yvonne
Zhang
|
36
|
Director
|
||
Yilun
Jin
|
36
|
Director
|
||
Allen
Zhang
|
57
|
Director
|
||
Yan
Huang
|
46
|
Director
|
Yin Wang
is the founder and Chairman of Weikang. Mr. Yin Wang has extensive clinical
training and bio-medical research experience, having been a physician in China
for over 30 years. From 1980 to 1982, Mr. Yin Wang served as the Director of the
Surgical Department at the Harbin Geriatric Hospital. Thereafter, from 1982
until 2001, Mr. Yin Wang served as the Director of Harbin No. 2 Chinese Medical
Hospital. Shortly thereafter, in 2002, he founded Weikang. Mr. Yin Wang is a
graduate of Harbin Medical University, a prestigious and nationally recognized
medical school in China.
30
Baolin Sun
was appointed our Chief Financial Officer on July 23, 2010. He has more than
twenty years’ experience in finance and accounting. Prior to joining
the Company, Mr. Sun was the Finance Manager and Chief Finance Officer of
Guangdong Chaozhou Foreign Business Activity Center from June 2005 to January
2010. Mr. Sun also served as the Head of Finance Department and
Manager of Securities Department at Jilin Wuhua Group Co., Ltd. from May 1993 to
April 2005. In addition, from December 1980 to April 1993, Mr. Sun
served as the Head of Accounting and Finance Department in Harbin Department
Store Company. Mr. Sun graduated and received his Bachelor degree in
Finance and Economics from Dongbei University of Finance and
Economics.
Yvonne
Zhang is a U.S. Certified Public Accountant. From November
2001 to June 2005, Ms. Zhang was the Accounting Manager of Koo Chow &
Company, LLP, an accounting firm in Los Angeles, CA. Ms. Zhang also
served as the Audit in Charge in Kabani & Company in Los Angeles, CA, from
June 2005 to June 2006. In addition, in July 2006, Ms. Zhang
established her own business, V-Trust Accounting and Tax Services, in Alhambra,
CA, providing consulting services to Chinese based companies going public in the
U.S. regarding Chinese GAAP and U.S. GAAP reconciliation, preparation of
financial statements in compliance with U.S. GAAP and PCAOB standards and review
of financial sections of SEC filings. Since August 2007, Ms. Zhang
has been serving as the Chief Financial Officer of Songzai International Holding
Group Inc., a coal production and mining company. Ms. Zhang received
her Bachelor degree in accounting in 1999 and her Master degree from California
State University, Northridge.
Yilun Jin
is a certified Chartered Financial Analyst. From August 2002 to
December 2003, Mr. Jin was the Management Associate of Citigroup in New York,
NY. Mr. Jin then served as the Vice President of Markets and Banking
of Citigroup in New York, NY, from January 2004 to September 2008. Since
September 2008, Mr. Jin has been serving as the Chief Financial Officer of
American Lorain Corporation, an integrated food manufacturing company, listed on
NYSE Amex. Mr. Jin received his Bachelor of Arts degree in Economics
from Fudan University, Shanghai, China in 1997 and his MBA in International
Management with Specialization of Finance from Thunderbird School of Global
Management in 2002.
Allen
Zhang has been serving as the International Business Consultant of
Oriental Connections/China Railway Construction 18 th Bureau
Corporation/Shanghai Power Transmission Engineering Company since 2002. Since
2008, Mr. Zhang also has been serving as the Interim Chief Financial Officer of
Pansoft Company Limited, an enterprise resource planning (ERP) software
solutions and services provider for the oil and gas industry in
China. Mr. Zhang received his Bachelor of Science degree in Economics
from People’s University of China, Beijing, China in 1982 and his Master of
Science in Agricultural and Applied Economics from University of Minnesota in
1988.
Yan Huang
is a PRC qualified lawyer. From 1988 to 1992, Ms. Huang
participated in the professional business trainings of the copyright law, real
estate law, mergers and acquisitions and reorganization. She studied
the Russian trade regulations in Moscow in 1993. In 2003, Ms. Huang
was awarded the qualification of independent director of listed companies by
Chinese Securities Regulatory Commission. Ms. Huang is the founder and the
attorney of Heilongjiang Long Yang Law Firm, China, since 2007. Ms.
Huang received her Bachelor of Law degree and Master of Civil and Commercial Law
degree from Heilongjiang University in 1987.
Audit,
Nominating and Compensation Committees
Due to
our lack of operations and size, we have not designated an audit committee.
Furthermore, we are currently quoted on the OTC Bulletin Board, which is
sponsored by the NASD, under the symbol “WKBT.OB” and the OTCBB does not have
any listing requirements mandating the establishment of any particular
committees. Our board of directors acts as our audit committee and performs
equivalent functions, such as: recommending a firm of independent certified
public accountants to audit the annual financial statements; reviewing the
independent auditors’ independence, the financial statements and their audit
report; and reviewing management's administration of the system of internal
accounting controls. For these same reasons, we do not have any other
committees.
Our board
believes that, considering our size and the members of our board, decisions
relating to director nominations can be made on a case-by-case basis by all
members of the board without the formality of a nominating committee or a
nominating committee charter. To date, we have not engaged third parties to
identify or evaluate or assist in identifying potential nominees, although we
reserve the right in the future to retain a third party search firm, if
necessary.
31
The BOD
does not have an express policy with regard to the consideration of any director
candidates recommended by shareholders since the board believes that it can
adequately evaluate any such nominees on a case-by-case basis. The BOD will
evaluate shareholder-recommended candidates under the same criteria as
internally generated candidates. Although the board does not currently have any
formal minimum criteria for nominees, substantial relevant business and industry
experience would generally be considered important, as would the ability to
attend and prepare for board, committee and shareholder meetings. Any candidate
must state in advance his or her willingness and interest in serving on the
BOD.
We have
not received any recommendations for a director nominee from any
shareholder.
Family
Relationships
There are no family relationships
between or among any of the current directors, executive officers or persons
nominated or charged by the Company to become directors or executive
officers.
Involvement
in Certain Legal Proceedings
There are no orders, judgments, or
decrees of any governmental agency or administrator, or of any court of
competent jurisdiction, revoking or suspending for cause any license, permit or
other authority to engage in the securities business or in the sale of a
particular security or temporarily or permanently restraining any of our
officers or directors from engaging in or continuing any conduct, practice or
employment in connection with the purchase or sale of securities, or convicting
such person of any felony or misdemeanor involving a security, or any aspect of
the securities business or of theft or of any felony. Nor are any of the
officers or directors of any corporation or entity affiliated with us so
enjoined.
Code
of Ethics
We have adopted a Code of Ethics that
applies to our principal chief executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. The Code of Ethics is being designed with the intent to deter
wrongdoing, and to promote the following:
•
|
Honest
and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional
relationships
|
•
|
Full,
fair, accurate, timely and understandable disclosure in reports and
documents that we file with, or submits to, the SEC and in other public
communications made by us
|
• Compliance
with applicable governmental laws, rules and regulations. The prompt internal
reporting of violations of the code to an appropriate person or persons
identified in the code; and
•
|
Accountability
for adherence to the code
|
EXECUTIVE
COMPENSATION
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to (i) all individuals serving as the
Company’s principal executive officer or acting in a similar capacity during the
last two completed fiscal years, regardless of compensation level, and (ii) the
Company’s two most highly compensated executive officers other than the
principal executive officers serving at the end of the last two completed fiscal
years.
32
Summary
Compensation Table
The
following table sets forth certain information regarding the annual and
long-term compensation for services in all capacities to us for the fiscal years
ended December 31, 2010, 2009, and 2008, of those persons who were either
the chief executive officer during the last completed fiscal year or any other
compensated executive officers as of the end of the last completed fiscal year,
and whose compensation exceeded $100,000 for those fiscal periods.
SUMMARY COMPENSATION TABLE
|
||||||||||||||||||||||||||||||||||
Name and
principal position
(a)
|
Year
(b)
|
Salary
($)
(c)
|
Bonus ($)
(d)
|
Stock
Awards
($)
(e)
|
Option
Awards
($)
(f)
|
Non-Equity
Incentive Plan
Compensation
($)
(g)
|
Nonqualified
Deferred
Compensation
Earnings ($)
(h)
|
All Other
Compensation
($)
(i)
|
Total ($)
(j)
|
|||||||||||||||||||||||||
Yin
Wang, Chief Executive
|
2010
|
4,000 | 0 | 0 | 0 | 0 | 0 | 0 | 4,000 | |||||||||||||||||||||||||
Officer
and Chairman
|
2009
|
4,000 | 0 | 0 | 0 | 0 | 0 | 0 | 4,000 | |||||||||||||||||||||||||
2008
|
4,000 | 0 | 0 | 0 | 0 | 0 | 0 | 4,000 | ||||||||||||||||||||||||||
Yanhua
Liu, Chief Financial
|
2010
|
1,668.49 | 0 | 0 | 0 | 0 | 0 | 0 | 1,668.49 | |||||||||||||||||||||||||
Officer
and Director (1)
|
2009
|
3,000 | 0 | 0 | 0 | 0 | 0 | 0 | 3,000 | |||||||||||||||||||||||||
2008
|
3,000 | 0 | 0 | 0 | 0 | 0 | 0 | 3,000 | ||||||||||||||||||||||||||
Baolin
Sun Chief Financial
|
2010
|
2,425.89 | 0 | 0 | 0 | 0 | 0 | 0 | 2,425.89 | |||||||||||||||||||||||||
Officer
(2)
|
2009
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
2008
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
(1)
|
On
July 23, 2010, Ms. Yanhua Liu resigned as the Chief Financial Officer and
director of the Company.
|
(2)
|
Mr.
Baolin Sun was appointed our Chief Financial Officer on July 23,
2010. Mr. Sun will receive a monthly cash compensation of RMB
3,000 and no equity compensation.
|
Outstanding
Equity Awards at Fiscal Year-End
There are no unexercised options,
unvested stock awards or equity incentive plan awards for any of the above-named
executive officers outstanding as of February 9, 2011.
Compensation
of Directors
We did
not pay any compensation to our directors for any services provided as a
director during the years ended December 31, 2009 and 2008. On April 7,
2010, the BOD of the Company appointed Yvonne Zhang, Yilun Jin, Allen Zhang and
Yan Huang as directors of the Company, effective immediately. The
Board has determined that Yvonne Zhang, Yilun Jin, Allen Zhang and Yan Huang are
independent directors within the meaning set forth in the applicable rules, as
currently in effect. In connection with the appointments of the new
directors to the BOD, the Company agreed to pay (i) Yvonne Zhang an annual
compensation of 10,000 shares of the Company’s restricted Common Stock, (ii)
Yilun Jin an annual compensation of 10,000 shares of the Company’s restricted
Common Stock, (iii) Allen Zhang an annual compensation of 10,000 shares of the
Company’s restricted Common Stock and (iv) Yan Huang an annual compensation of
10,000 shares of the Company’s restricted Common Stock. There are no
other formal or informal understandings or arrangements relating to
compensation.
Employment
Agreements, Termination of Employment, and Change-in-Control
Arrangements
We currently have no employment
agreements with any of our executive officers, nor any compensatory plans or
arrangements resulting from the resignation, retirement or any other termination
of any of our executive officers, from a change-in-control, or from a change in
any executive officer’s responsibilities following a
change-in-control.
33
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years, we
have not entered into any material transactions or series of transactions that
would be considered material in which any officer, director or beneficial owner
of 5% or more of any class of our capital stock, or any immediate family member
of any of the preceding persons, had a direct or indirect material interest.
There are no transactions presently proposed, except as follows:
1. Due
from Weikang’s Management
At
December 31, 2008, due from management mainly represented lease payments
received by Weikang’s CEO on behalf of Weikang for leasing the royal jelly
manufacturing workshop and the right to use Weikang’s technology for
manufacturing royal jelly from January 1, 2008 through June 30,
2010. During 2008, Weikang’s CEO received lease income of $1,008,000
(RMB 7,000,000) and prepaid lease payment of $219,000 (RMB 1,500,000) on behalf
of the Company.
At December 31, 2009, due from
management was advance payment of $1,745 to one of the Company’s officers
for his paying certain expenses relating to the Company’s daily
operations.
At September 30, 2010, due to related
party represented Company’s expenses of $25,369 paid by a related party company
owned by one of the Company’s officers. This advance bears no interest and is
payable upon demand.
2. Sales
to Related Party
One of
our customers, Weikang Pharmaceutical Group Co., Ltd., is owned by Mr. Yin Wang,
our current chief executive officer and chairman of the board of directors. Mr.
Wang was also a shareholder of Heilongjiang Weikang Bio-Technology Group Co.,
Ltd., our Chinese operating company, before the company was acquired by
Sinary.
During
2008 and the four months ended December 31, 2007, the Company sold $1,081,000
and $213,000, respectively, to another related company owned by the Company’s
chief executive officer. The receivables from this related party was $0 as of
December 31, 2008 and 2007.
3. Advance
from Officer and Other Expense
Advance
from officer and other expense represented the payment of $650,000 made by an
officer of Heilongjiang Weikang on behalf of Sinary to certain former
shareholders of the Company in connection with the reverse
acquisition between the Company and Sinary on December 7, 2007. The
advance from officer bears no interest and is payable on demand. On August 6,
2010, the officer waived the payment of the advance and contributed the advance
to the Company’s capital.
Indemnification
Agreements
None.
Director
Independence
None of
the members of the BOD is “independent” as defined under the rules of the
NASDAQ Stock Market.
34
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following tables set forth information as of February 9, 2011 regarding the
beneficial ownership of stock by (a) each stockholder who is known by the
Company to own beneficially in excess of 5% of the Company’s outstanding stock;
(b) each director; (c) the Company’s chief executive officer; and (d) the
executive officers and directors as a group. Except as otherwise indicated, all
persons listed below have (i) sole voting power and investment power with
respect to their shares of Common Stock (the only class of outstanding stock),
except to the extent that authority is shared by spouses under applicable law,
and (ii) record and beneficial ownership with respect to their shares of stock.
The percentage of beneficial ownership is based upon 30,911,880
shares of Common Stock outstanding, as of February 9, 2011. Except as
otherwise indicated in the footnotes to the table, the persons and entities
named in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws, where
applicable.
OFFICERS,
DIRECTORS AND BENEFICIAL OWNERS, AS OF FEBRUARY 9, 2011
Name & Address of Beneficial Owner (1)
|
Title of Class
|
Amount &
Nature of
Beneficial
Owner (2)
|
% of Class (2)
|
|||||||
Owner
of More Than 5%
|
||||||||||
Lucky
Wheel Limited
|
Common
Stock,
|
22,925,200 | 74.16 | % | ||||||
P.O.
Box 957
|
$.00001
par value
|
|||||||||
Offshore
Incorporations Centre
Tortola,
British Virgin Islands
|
||||||||||
Weili
Wang
|
Common Stock,
$.00001
par value
|
22,925,200 |
(3)
|
74.16 | % | |||||
Directors
and Executive Officers
|
|
|||||||||
Yin Wang (3)
|
Common
Stock,
$.00001
par value
|
22,925,200 |
(3)
|
74.16 | % | |||||
Baolin
Sun
|
Common
Stock,
$.00001
par value
|
0 | * | |||||||
Yilun Jin (4)
|
Common
Stock,
$.00001
par value
|
10,000 |
(4)
|
* | ||||||
Allen Zhang (5)
|
Common
Stock,
$.00001
par value
|
10,000 |
(5)
|
* | ||||||
Yvonne
Zhang
|
Common
Stock,
$.00001
par value
|
0 | * | |||||||
Yan Huang (6)
|
Common
Stock,
$.00001
par value
|
10,000 |
(6)
|
* | ||||||
All
directors and executive officers as a
|
Common
Stock,
|
22,955,200 | 74.16 | % | ||||||
group
(six persons)
|
$.00001
par value
|
(1) Unless
stated otherwise, the business address for each person named is c/o Weikang
Bio-Technology Group Co., Inc.
(2) Calculated
pursuant to Rule 13d-3(d) (1) of the Securities Exchange Act of 1934. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants, rights
or conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by a person, but not
deemed outstanding for the purpose of calculating the percentage owned by each
other person listed. We believe that each individual or entity named has sole
investment and voting power with respect to the shares of Common Stock indicated
as beneficially owned by them (subject to community property laws where
applicable) and except where otherwise noted.
(3)
On May 5, 2010, Ms. Weili Wang, the sole owner of Lucky Wheel Limited (“Lucky
Wheel”), and Yin Wang, our Chief Executive Officer and Chairman of the Board
entered into a Call Option Agreement (the “Option Agreement”), pursuant to which
Weili Wang granted Yin Wang an irrevocable and unconditional option to purchase
all of her ordinary shares of Lucky Wheel (the “Option Shares”) at a price of
$0.10 per ordinary share for a total purchase price of $1,000. Mr.
Wang has the right to purchase thirty-four percent (34%) of the Option Shares on
December 31, 2010 and thirty-three percent (33%) of the Option Shares on
December 31, 2011 and December 31, 2012, respectively. The Option
Agreement expires on June 29, 2015. As of February 9, 2011, Mr. Wang
has acquired the right to purchase 34% of the Option Shares. Since the sole
asset of Lucky Wheel is 22,925,200 shares of our Common Stock, Mr. Wang thus
indirectly owned 7,794,568 shares of our Common Stock. In addition, Mr.Wang
serves as the Chief Executive Officer and a director of Lucky Wheel. Mr.Wang has
the power to block any change in the structure of Lucky Wheel and the issuance
of any new shares of Lucky Wheel, among other powers. Yin Wang may be deemed the
ultimate beneficial owner of the 22,925,200 shares of our Common Stock by virtue
of his blocking power and his right to exercise options held in Lucky Wheel
Limited.
35
(4) On
April 7, 2010, our BOD appointed Yilun Jin as our director effective
immediately. In connection with the appointment, Yilun Jin received
an annual compensation of 10,000 shares of our Common Stock on June 21,
2010.
(5) On
April 7, 2010, our BOD appointed Allen Zhang as our director effective
immediately. In connection with the appointment, Allen Zhang received
an annual compensation of 10,000 shares of our Common Stock on June 21,
2010.
(6) On
April 7, 2010, our BOD appointed Yan Huang as our director effective
immediately. In connection with the appointment, Yan Huang received
an annual compensation of 10,000 shares of our Common Stock on June 21,
2010.
DESCRIPTION
OF SECURITIES TO BE REGISTERED
Description
of Capital Stock
Common
Stock
We are
authorized to issue 100,000,000 shares of Common Stock, $0.00001 par value. As
of February 9, 2011, 30,911,880
shares of our Common Stock were outstanding.
Each
outstanding share of Common Stock entitles the holder thereof to one vote per
share on all matters. Stockholders do not have preemptive rights to purchase
shares in any future issuance of our Common Stock. Upon our liquidation,
dissolution or winding up, and after payment to our creditors, if any, our
assets will be divided pro-rata on a share-for-share basis among the holders of
the shares of Common Stock.
The
holders of shares of our Common Stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. We have never
declared or paid cash dividends. Our board of directors does not anticipate
declaring a dividend in the foreseeable future. Should we decide in the future
to pay dividends, as a holding company, our ability to do so and meet other
obligations depends upon the receipt of dividends or other payments from our
operating subsidiaries and other holdings and investments.
Preferred
Stock
We are
authorized to issue 5,000,000 shares of preferred stock, $0.01 par value per
share, no shares of which were issued and outstanding as of February 9,
2011.
Our
Certificate of Incorporation authorizes our BOD to issue shares of
preferred stock in one or more classes or series within a class upon authority
of the BOD without further stockholder approval. Any preferred stock issued
in the future may rank senior to the Common Stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up of us, or both.
In addition, any such shares of preferred stock may have class or series voting
rights. Moreover, under certain circumstances, the issuance of preferred stock
or the existence of the un-issued preferred stock might tend to discourage or
render more difficult a merger or other change in control. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging
a third party from acquiring, a majority of our outstanding voting
stock.
36
Registration
Rights
On
January 20, 2010, the Company entered into a Subscription Agreement with three
“accredited” investors. Pursuant to the Subscription Agreement,
the investors purchased 1,470,588 shares of the Company’s Common Stock at $1.70
per share. Pursuant to the Subscription Agreement, the Company had agreed to
file a resale Registration Statement on Form S-1 by April 9, 2010 registering
the investor shares of Common Stock and the shares of Common Stock issuable
under warrants issued to the investors with the Securities and Exchange
Commission. In the event the Company did not file the
Registration Statement by the required filing date, or the Registration
Statement is not declared effective by the SEC by 120 days after the required
filing date, the Company had agreed to pay liquidated damages to each investor,
at a rate per month equal to 0.50% of the total purchase price of the shares
purchased by such investor pursuant to the Subscription Agreement. In
no event, however, may the penalties exceed 9% in the aggregate of such total
purchase price. The Company filed the Registration Statement on Form S-1 on
March 25, 2010 and it was declared effective on April 21, 2010.
In
December 2010 and January 2011, we sold in a series of private placements
520,831 Units, each unit comprised of (i) four shares of Common Stock,
(ii) a three-year warrant to purchase one share of Common Stock at
$3.60 per share, and (iii) a three-year warrant to purchase one share of Common
Stock at $4.80 per share for an aggregate purchase price of $4,999,973.60 and
issued certain warrants to the placement agents to purchase a total of 168,232
shares of our Common Stock at $2.40 per share. In connection with the
private placements, we agreed to file a registration statement covering the
shares of Common Stock issued as part of the Units and issuable upon exercise of
the Warrants issued to the investors and the placement agent. We are to file the
registration statement within 45 days following the final closing of the private
placements and have the registration statement declared effective within 120
days after such closing, except that the effective date shall be extended by 30
days in the event that the SEC undertakes a full review of the registration
statement. If the registration statement is not filed or declared
effective within the above-mentioned periods, we shall pay cash liquidated
damages to each investor in the amount equal to 0.5% of the amount subscribed
for by such investor, to be paid each month from the required effectiveness date
until the registration statement is filed or declared effective, as
applicable.
Warrants
At February 9, 2011, the following
warrants were outstanding:
Investor
Warrants
|
·
|
Warrants
to purchase 312,500 shares of Common Stock at $3.00 per share. Pursuant to
the terms of such warrants, the exercise price of such warrants is subject
to adjustment in the event of stock splits, combinations or the like of
our Common Stock.
|
|
·
|
Warrants
to purchase 312,500 shares of Common Stock at $5.00 per share. Pursuant to
the terms of such warrants, the exercise price of such warrants is subject
to adjustment in the event of stock splits, combinations or the like of
our Common Stock.
|
Other
Warrants
|
·
|
Warrants
to purchase 73,528 shares of Common Stock at $3.00 per share. Pursuant to
the terms of such warrants, the exercise price of such warrants is subject
to adjustment in the event of stock splits, combinations or the like of
our Common Stock.
|
|
·
|
Warrants
to purchase 73,528 shares of Common Stock at $5.00 per share. Pursuant to
the terms of such warrants, the exercise price of such warrants is subject
to adjustment in the event of stock splits, combinations or the like of
our Common Stock.
|
In our recent financing in December
2010 and January 2011, we issued to certain investors and our placement agents
warrants to purchase 1,209,894 shares of our Common Stock for a term of three
years from the date of issuance. As of February 9, 2011, the following warrants
were outstanding:
|
·
|
Series
C Warrants—warrants to purchase 520,831 shares of our Common Stock at
$3.60 per share.
|
37
|
·
|
Series
D Warrants—warrants to purchase 520, 381 shares of our Common Stock at
$4.80 per share.
|
|
·
|
Placement
Agent Warrants—warrants to purchase 168,232 shares of our Common Stock at
$2.40 per share.
|
Series C Warrants, Series D Warrants
and Placement Agent Warrants are immediately exercisable and have a term of
three years. Such Warrants may be exercised cashlessly in the event
that there is no effective registration statement providing for the resale of
the Common Stock underlying the Warrants. The exercise prices of the Warrants
are subject to customary adjustments provisions for stock splits, stock
dividends, recapitalizations and the like. Additionally, for a period
of three years following the final closing of the private placements,
anti-dilution protection shall be afforded the investors.
Resale
of Restricted Securities
Rule 144
provides an exemption from registration under the Securities Act of 1933 for
sales by holders of "restricted securities" (i.e., securities acquired directly
or indirectly from the issuer or an affiliate of the issuer in a transaction or
chain of transactions not involving a public offering) and for sales of "control
securities" (i.e., securities held by affiliates, regardless of how they
acquired them).
In
February 2008, amendments to Rule 144 under the Securities Act of 1933 that
substantially liberalized the rules governing the resale of securities issued in
private transactions or held by affiliates became effective. The amendments
shortened the holding periods for restricted securities of public companies,
significantly reduced the conditions applicable to sales of restricted
securities by non-affiliates, and modified other aspects of the
rules.
Under
amended Rule 144, holders of restricted securities of reporting companies (i.e.,
companies that have been subject to public reporting requirements for at least
90 days before the sale) are able to sell their securities after holding them
for only six months, subject to specified conditions. Sales under Rule 144 may
also limited by manner of sale provisions and notice requirements and to the
availability of current public information about the combined
company.
Sales
by Non-Affiliates under Rule 144
After six
months but prior to one year from the date of acquisition of securities from the
issuer or an affiliate of the issuer, non-affiliates of reporting companies may
resell those securities under Rule 144 subject only to the current public
information requirement described below. They will not have to file a Form 144,
follow manner-of-sale requirements, or stay within the volume limitations. After
holding securities for one year, non-affiliates of both reporting and
non-reporting companies may resell those securities freely without any
additional conditions under Rule 144.
Sales
by Affiliates
In
general, affiliates are subject to all of the requirements under Rule
144.
|
·
|
Current
public information. There must be adequate current public information
available about the issuer. Reporting companies must have been subject to
public reporting requirements for at least 90 days immediately before the
Rule 144 sale and must have filed all required reports (other than Forms
8-K) during the 12 months (or shorter period that the company was subject
to public reporting) before the sale. For non-reporting companies
(including companies that have been subject to the public reporting
requirements for less than 90 days), certain other specified public
information must be available.
|
|
·
|
Holding
period. Restricted securities must be held for at least six months before
they may be sold (securities issued in registered transactions are not
subject to a holding period). The holding period for restricted securities
of non-reporting companies is one
year.
|
|
·
|
Volume
limitations. For equity securities, in any three-month period, resales may
not exceed a sales volume limitation equal to the greater of (i) the
average weekly trading volume for the preceding four calendar weeks, or
(ii) one percent of the outstanding securities of the
class. The volume limitations for debt securities permits the
sale of up to 10% of a tranche or class of debt securities in any
three-month period.
|
38
|
·
|
Manner-of-sale
requirements. Resales of equity securities must be made in unsolicited
"brokers' transactions" or transactions directly with a "market maker" and
must comply with other specified requirements. Equity
securities may be sold in "riskless principal transactions" (in addition
to "brokers' transactions" and transactions directly with a "market
maker").
|
|
·
|
Filing
of Form 144. The seller must file a Form 144 if the amount of securities
being sold in any three-month period exceeds the lesser of 5,000 shares or
$50,000 in aggregate sales price.
|
Nevada
Law
Some
provisions of Nevada law and our Certificate of Incorporation and amended and
restated bylaws could make the following transactions more
difficult:
|
·
|
acquisition
of our company by means of a tender offer, a proxy contest or otherwise;
and
|
|
·
|
removal
of our incumbent officers and
directors.
|
These
provisions of our amended and restated certificate of incorporation and amended
and restated bylaws, summarized below, are expected to discourage and prevent
coercive takeover practices and inadequate takeover bids. These provisions are
designed to encourage persons seeking to acquire control of our company to
negotiate first with our board of directors. They are also intended to provide
our management with the flexibility to enhance the likelihood of continuity and
stability if our BOD determines that a takeover is not in the best
interests of our stockholders. These provisions, however, could have the effect
of discouraging attempts to acquire us, which could deprive our stockholders of
opportunities to sell their shares of Common Stock at prices higher than
prevailing market prices.
Under the
NRS, amendments of a company's articles of incorporation generally require the
approval of the holders of a majority of the outstanding stock entitled to vote
on the amendment, and if the amendment would increase or decrease the number of
authorized shares of any class or series or the par value of shares of that
class or series or would adversely affect the rights, powers or preferences of
that class or series, a majority of the outstanding stock of that class or
series also would be required to approve the amendment.
Under the
NRS, a special meeting of shareholders can be called by a company's board of
directors or by any person or persons as may be authorized by the corporation's
articles of incorporation or bylaws. The NRS permit corporate action without a
meeting of shareholders upon the written consent of the holders of that number
of shares necessary to authorize the proposed corporate action being taken,
unless the articles of incorporation or bylaws expressly provide otherwise.
Under the NRS, any director may be removed by the vote of shareholders
representing not less than two-thirds of the voting power entitled to
vote.
The NRS
provides that any merger, consolidation or share exchange of a Nevada
corporation, as well as the sale, lease, exchange or disposal of all or
substantially all of its assets not in the ordinary course of business,
generally must be recommended by the BOD and approved by a vote of a
majority of the outstanding shares of stock of the corporation entitled to vote
on such matters, unless the articles of incorporation provides otherwise. Under
the NRS, the vote of the shareholders of a corporation surviving a merger is not
required if: (a) the articles of incorporation of the surviving domestic
corporation will not differ from its articles before the merger; (b) each
stockholder of the surviving domestic corporation whose shares were outstanding
immediately before the effective date of the merger will hold the same number of
shares, with identical designations, preferences, limitations and relative
rights immediately after the merger; (c) the number of voting shares outstanding
immediately after the merger, plus the number of voting shares issued as a
result of the merger, either by the conversion of securities issued pursuant to
the merger or the exercise of rights and warrants issued pursuant to the merger,
will not exceed by more than 20 percent the total number of voting shares of the
surviving domestic corporation outstanding immediately before the merger; and
(d) the number of participating shares outstanding immediately after the merger,
plus the number of participating shares issuable as a result of the merger,
either by the conversion of securities issued pursuant to the merger or the
exercise of rights and warrants issued pursuant to the merger, will not exceed
by more than 20 percent the total number of participating shares outstanding
immediately before the merger.
39
The NRS
provides that any person who has been a shareholder of record for at least six
months preceding his demand, or any person holding, or thereunto authorized in
writing by the holders of, at least 5 percent of all of the Company’s
outstanding shares is entitled to inspect the corporation's stock ledger,
articles of incorporation, bylaws and any amendments to the articles of
incorporation and bylaws.
Anti-Takeover
Implications
Nevada,
like many other states, permits a corporation to adopt a number of measures
through amendment of the corporate articles of incorporation or bylaws or
otherwise, which measures are designed to reduce a corporation's vulnerability
to unsolicited takeover attempts. The reincorporation is not being proposed in
order to prevent such a change in control, nor is it in response to any present
attempt known to the board of directors to acquire control of the Company or to
obtain representation on the board of directors.
In the
discharge of its fiduciary obligations to its shareholders, the BOD has
evaluated the Company's vulnerability to potential unsolicited bidders. In the
course of such evaluation, the BOD of the Company may consider in the
future certain defensive strategies designed to enhance the Board's ability to
negotiate with an unsolicited bidder. These strategies include, but are not
limited to, the adoption of a shareholder rights plan and severance agreements
for its management and key employees that become effective upon the occurrence
of a change in control of the Company. None of these measures has been
implemented by the Company under Nevada law.
Undesignated
Preferred Stock. The authorization of undesignated preferred stock
makes it possible for our BOD to issue preferred stock with voting or other
rights or preferences that could impede the success of any attempt to change
control of our company.
These
provisions could have the effect of discouraging others from attempting hostile
takeovers and, as a consequence, they may also inhibit temporary fluctuations in
the market price of our Common Stock that often result from actual or rumored
hostile takeover attempts. These provisions may also have the effect of
preventing changes in our management. It is possible that these provisions could
make it more difficult to accomplish transactions that stockholders may
otherwise deem to be in their best interests.
Market
Information
Our Common Stock price is quoted on the
OTC Bulletin Board, or OTCBB, under the symbol “WKBT.”
SELLING
STOCKHOLDERS
The following table sets forth as
of February 9, 2011 information regarding the current beneficial
ownership of our Common Stock by the persons identified, based on information
provided to us by them, which we have not independently verified. Although we
have assumed for purposes of the table that the selling stockholders will sell
all of the shares offered by this prospectus, because they may from time to time
offer all or some of their shares under this prospectus or in another
manner, no assurance can be given as to the actual number of shares that will be
resold by the selling stockholder (or any of them), or that will be held after
completion of the resales. In addition, a selling stockholder may
have sold or otherwise disposed of shares in transactions exempt from the
registration requirements of the Securities Act or otherwise since the date he
or she provided information to us. The selling stockholders are not making any
representation that the shares covered by this prospectus will be offered
for sale. No selling stockholder has held any position nor had any material
relationship with us or our affiliates during the past three
years. None of the selling stockholders is a registered broker-dealer
or an affiliate of a registered broker-dealer except indicated in the
footnotes.
40
Name of
Stockholder
|
Total Number
of Shares of
Common Stock
Held Prior to
Offering
|
Number of
Shares of
Common
Stock
Underlying
Warrants
Held and
Offered
Pursuant to
this
Prospectus
|
Number of
Shares of
Common Stock
Held and
Offered
Pursuant to
this
Prospectus
Including Shares
of Common Stock
Issuable upon
Exercise of
Warrants
|
Shares
Beneficially
Owned
Before
Offering
(Percentage)
(1) (2)
|
Shares
Beneficially
Owned After
the Offering
(Number) (1)
|
Shares
Beneficially
Owned After
the Offering
(Percentage)
(1)(2)
|
||||||||||||||||||
The
Bosphorous Group, Inc. (3)
318
N, Carson St. #208
Carson
City, NV 89701
|
457,252 | 2,084 | 6,252 | 1.48 | % | 451,000 | 1.46 | % | ||||||||||||||||
Jon
Baldwin
18161
E Linvale Drive
Avrora,
CA 80013
|
60,000 | 20,000 | 60,000 | * | 0 | 0 | ||||||||||||||||||
Freestone
Advantage Partners, LP (4)
3100
Dundee Rd., Ste. 703
Northbrook,
IL 60062
|
6,240 | 2,080 | 6,240 | * | 0 | 0 | ||||||||||||||||||
Cranshire
Capital, L.P. (5)
3100
Dundee Rd., Ste. 703
Northbrook,
IL 60062
|
118,752 | 39,584 | 118,752 | * | 0 | 0 | ||||||||||||||||||
Whalehaven
Capital Fund Limited (6)
560
Sylvan Avenue, 3rd
Floor
Englewood
Cliffs, NJ 07632
|
150,000 | 50,000 | 150,000 | * | 0 | 0 | ||||||||||||||||||
Chestnut
Ridge Partners, LP (7)
10
Forest Ave. Ste. 220
Paramus,
NJ 07652
|
187,500 | 6,2500 | 187,500 | * | 0 | 0 | ||||||||||||||||||
Alpha
Capital Anstalt (8)
Pradafaut
7 Furstentums 1490
Vaduz,
Liechtenstein
|
240,000 | 80,000 | 240,000 | * | 0 | 0 | ||||||||||||||||||
Assameka
Capital Inc. (9)
150
Central Park South, 2nd
Floor
New
York, NY 10019
|
15,000 | 5,000 | 15,000 | * | 0 | 0 | ||||||||||||||||||
Octagon
Capital Partners (10)
155
West 68th
St., #27E
New
York, NY 100019
|
60,000 | 20,000 | 60,000 | * | 0 | 0 | ||||||||||||||||||
C.J.
McTavish
2027
West 35th
Ave
Vancouver,
BC, V6M/J/
Canada
|
30,000 | 10,000 | 30,000 | * | 0 | 0 | ||||||||||||||||||
Bristol
Investment Fund, Ltd. (11)
69
Dr. Roy’s Drive, P.O. Box 1043
George
Town, Grand Cayman,
Cayman
Islands KY1-1102
|
124,999 | 41,666 | 124,999 | * | 0 | 0 | ||||||||||||||||||
Lane
Ventures, Inc. (12)
120
Park Street
Woodmere,
NY 11598
|
15,000 | 5,000 | 15,000 | * | 0 | 0 | ||||||||||||||||||
Cape
One Financial Master Fund Ltd. (13)
410
Park Ave., Suite 1500
New
York, NY 10022
|
62,502 | 20,834 | 62,502 | * | 0 | 0 | ||||||||||||||||||
Midsouth
Investor Fund, L.P. (14)
201
4th
Ave. North, Suite 1950
Nashville,
TN 37219
|
156,252 | 52,084 | 156,252 | * | 0 | 0 | ||||||||||||||||||
DNST
Properties (15)
6612
N. LeMai
Lincolnwood,
IL 60712
|
124,998 | 41,666 | 124,998 | * | 0 | 0 | ||||||||||||||||||
NPV
LP (16)
54655
Heritage Dr.
Mishawaka,
IN 46545
|
30,000 | 10,000 | 30,000 | * | 0 | 0 | ||||||||||||||||||
Global
Speculation LP (16)
54655
Heritage Dr.
Mishawaka,
IN 46545
|
30,000 | 10,000 | 30,000 | * | 0 | 0 |
41
Global
Speculation III LP (16)
54655
Heritage Dr.
Mishawaka,
IN 46545
|
30,000 | 10,000 | 30,000 | * | 0 | 0 | ||||||||||||||||||
Global
Speculation V LP (16)
54655
Heritage Dr.
Mishawaka,
IN 46545
|
30,000 | 10,000 | 30,000 | * | 0 | 0 | ||||||||||||||||||
Global
Speculation VI LP (16)
54655
Heritage Dr.
Mishawaka,
IN 46545
|
30,000 | 10,000 | 30,000 | * | 0 | 0 | ||||||||||||||||||
DNL
LTD. (16)
54655
Heritage Dr.
Mishawaka,
IN 46545
|
90,000 | 30,000 | 90,000 | * | 0 | 0 | ||||||||||||||||||
Berdon
Ventures LLC (26)
37
WesterLeigh Road
Purchase,
NY 10577
|
60,000 | 20,000 | 40,000 | * | 0 | 0 | ||||||||||||||||||
Steven
Wallitt
12
Abby Drive
Lawerenceville,
NJ 08648
|
30,000 | 10,000 | 30,000 | * | 0 | 0 | ||||||||||||||||||
Gerald
A. Caterina
119
Fifteenth St.
Huntington
Beach, CA 92648-4408
|
30,000 | 10,000 | 30,000 | * | 0 | 0 | ||||||||||||||||||
Bradley
Rotter
850
Corbett Ave., Ste. 6
San
Francisco, CA 94131
|
49,998 | 16,666 | 49,998 | * | 0 | 0 | ||||||||||||||||||
John
E. Barsell and Sandra K. Barsell
RR2
Box 3933
Pahoa,
HI 96778
|
126,000 | 42,000 | 126,000 | * | 0 | 0 | ||||||||||||||||||
Nigel
Alexander
2460
W. 26th Ave., 380C
Denver,
CO 80211
|
12,000 | 4,000 | 12,000 | * | 0 | 0 | ||||||||||||||||||
Thomas
Scott Deal
P.O.
Box 463
Aurora,
NC 27806
|
15,624 | 5,208 | 15,624 | * | 0 | 0 | ||||||||||||||||||
David
A. Dent
6712
Arrowhead Pass
Edina,
MN 55439
|
30,000 | 10,000 | 30,000 | * | 0 | 0 | ||||||||||||||||||
John
Bremner
4058
Ripple Place
West
Van, BC, Canada
|
25,248 | 416 | 1,248 | * | 24,000 | * | ||||||||||||||||||
Jeffrey
Tisherman & Ingrid Tisherman
Ttees
U/A Dtd 6/28/06
Tisherman
Family Trust (17)
1718
Port Westbourne Pl.
Newport
Beach, CA 92660
|
96,000 | 32,000 | 96,000 | * | 0 | 0 | ||||||||||||||||||
Next
View Capital LP (18)
180
Crestview Dr.
Deerfield,
IL 60015
|
187,500 | 62,500 | 187,500 | * | 0 | 0 | ||||||||||||||||||
Silver
Rock II, Ltd. (19)
Sable
Trust, Roadtown, Tortola, BVI
|
150,000 | 50,000 | 150,000 | * | 0 | 0 | ||||||||||||||||||
Paragon
Capital LP (20)
110
E. 59th St., 22nd Fl
New
York, NY 10022
|
187,500 | 62,500 | 187,500 | * | 0 | 0 | ||||||||||||||||||
Richmond
Capital LP (21)
One
Hawthorne Lane
Westport,
CT 06880
|
124,998 | 41,666 | 124,998 | * | 0 | 0 | ||||||||||||||||||
Dash
Com Inc. (22)
1793
Country Lane
Quakertown,
PA 18951
|
218,748 | 72,916 | 218,748 | * | 0 | 0 | ||||||||||||||||||
Capital
Ventures International (23)
Attn: Heights
Capital Management
101
California St., Suite 3250
San
Francisco, CA 94111
|
126,000 | 42,000 | 126,000 | * | 0 | 0 | ||||||||||||||||||
Alpha
Capital Anstalt (24)
Pradafaut
7 Furstentums 1490
Vaduz
Liechtenstein
|
62,502 | 20,834 | 62,502 | * | 0 | 0 |
42
Momona
Capital Corp.(25)
C/O
LH Financial Services
150
Central PKS
New
York, NY 10019
|
19,374 | 6,458 | 19,374 | * | 0 | 0 | ||||||||||||||||||
Hunter
Wise Financial Group, LLC (27)
2361
Campus Drive, Suite 100
Irvine,
CA 92612
|
128,096 | 99,096 | 99,096 | * | 128,096 | * | ||||||||||||||||||
Pacific
Summit Capital (28)
6
Venture, Suite 100
Irvine,
CA 92618
|
26,296 | 26,296 | 26,296 | * | 0 | 0 | ||||||||||||||||||
Anderson
& Strudwick, Inc. (29)
707
E. Main Street, 20th
Floor
Richmond,
VA 23219
|
5,693 | 5,693 | 5,693 | * | 0 | 0 | ||||||||||||||||||
National
Securities Corporation (30)
330
Madison Avenue, 18th
Floor
New
York, NY 10017
|
22,061 | 22,061 | 22,061 | * | 0 | 0 | ||||||||||||||||||
Scott
Shames (30)
40 W
72 Street
New
York, NY 10023
|
6,347 | 6,347 | 6,347 | * | 0 | 0 | ||||||||||||||||||
Carmelo
E Troccoli (30)
136
E 55th
Street, Apt. 8K
New
York, NY 10022
|
405 | 405 | 405 | * | 0 | 0 | ||||||||||||||||||
David
Rich (29)
69
Osprey Dr.
Old
Bridge, NJ 08857
|
236 | 236 | 236 | * | 0 | 0 | ||||||||||||||||||
Jeff
Auerbach (30)
315
E 65th
Street
New
York, NY 10022
|
6,347 | 6,347 | 6, 347 | * | 0 | 0 | ||||||||||||||||||
Jonathan
C. Rich (30)
10
Fennimore Court
Flanders,
NJ 07836
|
1,621 | 1,621 | 1,621 | * | 0 | 0 | ||||||||||||||||||
Robert
Bookbinder (30)
425
E 63rd
Street
New
York, NY 10021
|
130 | 130 | 130 | * | 0 | 0 |
* Less
than one percent.
(1)
|
Under
applicable SEC rules, a person is deemed to beneficially own securities
which the person as the right to acquire within 60 days through the
exercise of any option or warrant or through the conversion of a
convertible security. Also under applicable SEC rules, a person is deemed
to be the “beneficial owner” of a security with regard to which the person
directly or indirectly, has or shares (a) voting power, which includes the
power to vote or direct the voting of the security, or (b) investment
power, which includes the power to dispose, or direct the disposition, of
the security, in each case, irrespective of the person’s economic interest
in the security. Each listed selling stockholder has the sole investment
and voting power with respect to all shares of Common Stock shown as
beneficially owned by such selling stockholder, except as otherwise
indicated in the footnotes to the
table.
|
(2)
|
As
of February 9, 2011, there were 30,911,880
shares of our Common Stock issued and outstanding. In determining the
percent of Common Stock beneficially owned by a selling stockholder on
February 9, 2011, (a) the numerator is the number of shares of Common
Stock beneficially owned by such selling stockholder (including shares
that he has the right to acquire within 60 days of February 9, 2011), and
(b) the denominator is the sum of (i) the 30,911,880
shares outstanding on February 9, 2011 and (ii) the number of shares of
Common Stock which such selling stockholders has the right to acquire
within 60 days of February 9, 2011.
|
(3)
|
Daniel
J. McClory is the president of this selling stockholder and has the sole
voting and dispositive power over the securities held for the account of
this selling stockholder.
|
43
(4)
|
Keith
Goodman is the manager of this selling stockholder and has the sole voting
and dispositive power over the securities held for the account of this
selling stockholder.
|
(5)
|
Keith
A. Goodman has the sole voting and dispositive power over the securities
held for the account of this selling
stockholder.
|
(6)
|
Michael
Finkelstein has the sole voting and dispositive power over the securities
held for the account of this selling
stockholder.
|
(7)
|
Kenneth
Pasternak has the sole voting and dispositive power over the securities
held for the account of this selling
stockholder.
|
(8)
|
Konred
Ackermann is the director of this selling stockholder and has the sole
voting and dispositive power over the securities held for the account of
this selling stockholder.
|
(9)
|
Asher
Brand is the president of this selling stockholder and has the sole voting
and dispositive power over the securities held for the account of this
selling stockholder.
|
(10)
|
Steven
Hat is the general manager of this selling stockholder and has the sole
voting and dispositive power over the securities held for the account of
this selling stockholder.
|
(11)
|
Bristol
Capital Advisors, LLC (“BCA”) is the investment advisor to Bristol
Investment Fund, Ltd. (“Bristol”). Paul Kessler is the manager of BCA and
as such has voting and investment control over the securities held by
Bristol. Mr. Kessler disclaims beneficial ownership of these
securities.
|
(12)
|
Joe
Hammer has the sole voting and dispositive power over the securities held
for the account of this selling
stockholder.
|
(13)
|
Reid
Drescher is the director of this selling stockholder and has the sole
voting and dispositive power over the securities held for the account of
this selling stockholder.
|
(14)
|
Lyman
O. Heidtke is the general partner of this selling stockholder and has the
sole voting and dispositive power over the securities held for the account
of this selling stockholder.
|
(15)
|
Michael
Aufrecht is the manager of this selling stockholder and has the sole
voting and dispositive power over the securities held for the account of
this selling stockholder.
|
(16)
|
Glen
Bradford is the general partner of this selling stockholder and has the
sole voting and dispositive power over the securities held for the account
of this selling stockholder.
|
(17)
|
Jeffrey
Tisherman and Ingrid Tisherman are the trustees of this selling
stockholder and have the sole voting and dispositive power over the
securities held for the account of this selling
stockholder.
|
(18)
|
Stewart
Flink is the manager of the selling stockholder and has the sole voting
and dispositive power over the securities held for the account for this
selling stockholder.
|
|
(19)
|
Ezzat
Jallad is the director of the selling stockholder and has the sole voting
and dispositive power over the securities held for the account for this
selling stockholder.
|
(20)
|
Alan
P. Donenfeld is the general partner of the selling stockholder and has the
sole voting and dispositive power of the securities held for the account
of this selling stockholder.
|
(21)
|
David
Kass has the sole voting and dispositive power over the securities held
for the account of this selling
stockholder.
|
44
(22)
|
Daniel
Kaufman is the CEO of this selling stockholder and has the sole voting and
dispositive power of the securities held for the account of this selling
stockholder.
|
(23)
|
Heights
Capital Management, Inc., the authorized agent of Capital Ventures
International ("CVI"), has discretionary authority to vote and dispose of
the shares held by CVI and may be deemed to be the beneficial owner of
these shares. Martin Kobinger, in his capacity as Investment Manager of
Heights Capital Management, Inc., may also be deemed to have investment
discretion and voting power over the shares held by CVI. Mr.
Kobinger disclaims any such beneficial ownership of the
shares.
|
(24)
|
Konred
Ackermann is the director of this selling stockholder and has the sole
voting and dispositive power over the securities held for the account of
this selling stockholder.
|
(25)
|
Arie
Rabinowitz has the sole voting and dispositive power over the securities
held for the account of this selling
stockholder.
|
(26)
|
Frederick
Berdon has the sole voting and dispositive power over the securities held
for the account of this selling
stockholder.
|
(27)
|
In
connection with the private placement transactions in January 2011 and
December 2010, we engaged Hunter Wise Securities, LLC (“Hunter Wise”) as
one of our placement agents. As part of consideration for Hunter Wise’s
services, we issued Hunter Wise Financial Group, LLC three year warrants
to purchase an aggregate of 99,096 shares of Common Stock at an exercise
price of $2.40 per share. Hunter Wise Financial Group, LLC is an affiliate
of Hunter Wise Securities, LLC, a registered broker-dealer. Fred G. Jager
has the sole voting and dispositive power over the securities held for the
account of this selling
stockholder.
|
(28)
|
In
connection with the private placement transactions in January 2011 and
December 2010, we engaged Pacific Summit Securities (“Pacific Summit”) as
one of our placement agents. As part of consideration for Pacific Summit’s
services, we issued Pacific Summit Capital three year warrants to purchase
an aggregate of 26,296 shares of Common Stock at an exercise price of
$2.40 per share. Pacific Summit Capital is an affiliate of Pacific Summit,
a registered broker-dealer.
|
(29)
|
In
connection with the private placement transactions in January 2011 and
December 2010, we engaged Anderson & Strudwick, Inc. (“Anderson”) as
one of our placement agents. As part of consideration for Anderson’s
services, we issued Anderson and /or its designees three year warrants to
purchase an aggregate of 5,693 shares of Common Stock at an exercise price
of $2.40 per share. Damon Joyner has the sole voting and dispositive power
over the securities held for the account of this selling stockholder.
Anderson is a registered
broker-dealer.
|
(30)
|
In
connection with the private placement transactions in January 2011 and
December 2010, we engaged National Securities Corporation (“National
Securities”) as one of our placement agents. As part of consideration for
National Securities’ services, we issued National Securities and /or its
designees three year warrants to purchase an aggregate of 37,147 shares of
Common Stock at an exercise price of $2.40 per share. Based on National
Securities’ instruction, warrants to purchase a total of 15,086 shares of
Common Stock were issued to its designees. The names of the designees of
National Securities and the number of shares underlying the warrants
issued to them are as follows:
|
Name
|
Number of Shares underlying the Warrants
|
|||
Jeff
Auerbach
|
6,347 | |||
Scott
Shames
|
6,347 | |||
David
Rich
|
236 | |||
Robert
Bookbinder
|
130 | |||
Carmelo
Troccoli
|
405 | |||
Jonathan
C. Rich
|
1,621 |
45
Mark
Goldwasser is the CEO of National Securities and has the sole voting and
dispositive power over the securities held by National Securities. Jeff
Auerbach, Scott Shames, David Rich, Robert Bookbinder, Camelo Troccoli and
Jonathan C. Rich are affiliates of National Securities, a registered
broker-dealer.
PLAN
OF DISTRIBUTION
The selling stockholders and any of
their pledgees, donees, transferees, assignees and successors-in-interest may
sell the Common Stock offered by this prospectus directly or through brokers or
dealers who may act solely as agents or may acquire Common Stock as principals.
Such sales may be made at prevailing market prices, at prices related to such
prevailing market prices, or at variable prices negotiated between the sellers
and purchasers. The selling stockholders may distribute the Common Stock in one
or more of the following methods:
|
·
|
ordinary
brokers transactions, which may include long or short sales through the
facilities of the Over-the-Counter Bulletin Board (if a market maker
successfully applies for inclusion of our Common Stock in such market) or
other market;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
transactions
involving cross or block trades or otherwise on the open
market;
|
|
·
|
sales
“at the market” to or through market makers or into an existing market for
the Common Stock;
|
|
·
|
sales
in other ways not involving market makers or established trading markets,
including direct sales to purchasers or sales made through
agents;
|
|
·
|
through
transactions in puts, calls, options, swaps or other derivatives (whether
exchange listed or otherwise); or
|
|
·
|
any
combination of the above, or by any other legally available
means.
|
In addition, the selling stockholders
may enter into hedging transactions with broker-dealers who may engage in short
sales of Common Stock or options or other transactions that require delivery by
broker-dealers of the Common Stock.
The selling stockholders and/or the
purchasers of Common Stock may compensate brokers, dealers, underwriters or
agents with discounts, concessions or commissions (compensation may be in excess
of customary commissions). The selling stockholders and any broker dealers
acting in connection with the sale of the shares being registered may be deemed
to be underwriters within the meaning of Section 2(11) of the Securities Act, as
amended, and any profit realized by them on the resale of shares as principals
may be deemed underwriting compensation under the Securities Act. We do not know
of any arrangements between the selling stockholders and any broker, dealer, or
agent relating to the sale or distribution of the shares being
registered.
We and the selling stockholders and any
other persons participating in a distribution of our Common Stock will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M, which may
restrict certain activities of, and limit the timing of purchases and sales of
securities by, these parties and other persons participating in a distribution
of securities. Furthermore, under Regulation M, persons engaged in a
distribution of securities are prohibited from simultaneously engaging in market
making and certain other activities with respect to such securities for a
specified period of time prior to the commencement of such distributions subject
to specified exceptions or exemptions.
The selling stockholders may sell any
securities that this prospectus covers under Rule 144 of the Securities Act
rather than under this prospectus if they qualify.
We cannot assure you that the selling
stockholders will sell any of their shares of Common Stock.
46
In order to comply with the securities
laws of certain states, if applicable, the selling stockholders will sell the
Common Stock in jurisdictions only through registered or licensed brokers or
dealers. In addition, in certain states, the selling stockholders may not sell
or offer the Common Stock unless the holder registers the sale of the shares of
Common Stock in the applicable state or the applicable state qualifies the
Common Stock for sale in that state, or the applicable state exempts the Common
Stock from the registration or qualification requirement.
We have agreed to pay all fees and
expenses incident to the registration of the shares being offered under this
prospectus (estimated to be $35,224.81). However each selling stockholder is
responsible for paying any discounts, commissions and similar selling expenses
they incur.
We have agreed to indemnify the selling
stockholders whose shares we are registering from all liability and losses
resulting from any misrepresentations we make in connection with the
registration statement.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
The Company's directors and executive
officers are indemnified as provided by the Nevada Revised Statutes Chapter 78
and the Company's Bylaws. These provisions state that the Company's directors
may cause the Company to indemnify a director or former director against all
costs, charges and expenses, including an amount paid to settle an action or
satisfy a judgment, actually and reasonably incurred by him as a result of him
acting as a director. The indemnification of costs can include an amount paid to
settle an action or satisfy a judgment. Such indemnification is at the
discretion of the Company's board of directors and is subject to the Securities
and Exchange Commission's policy regarding indemnification.
Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers or persons controlling the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
The rights of our shareholders are
governed by our articles of incorporation and bylaws and the Nevada Revised
Statutes (or NRS). The summary below is not an exhaustive or a complete
description of the matters described, and is qualified in its entirety by
reference to the NRS, the Company’s articles of incorporation, as amended and
restated, and bylaws. The Company's articles of incorporation, as amended and
restated, and its bylaws are available for inspection and copying upon request
by any shareholder.
The NRS has provisions and limitations
regarding directors' liability. The NRS permit a corporation to include in its
articles of incorporation a provision that eliminates or limits the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of fiduciary duties as a director. Under the NRS, the
limitation of liability is for other than acts or omissions that involve a
breach of fiduciary duty by the director to the Company and that involve
intentional misconduct, fraud, or a knowing violation of law.
The NRS generally permits a corporation
to indemnify its directors and officers against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with a
third-party action, other than a derivative action, and against expenses
actually and reasonably incurred in the defense or settlement of a derivative
action, provided that there is a determination that the individual acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation. That determination must be made, in the case of an
individual who is a director or officer at the time of the determination, by a
majority of the disinterested directors, even though less than a quorum; by
independent legal counsel, regardless of whether a quorum of disinterested
directors exists; or by a majority vote of the shareholders, at a meeting at
which a quorum is present.
47
The NRS requires indemnification of
directors and officers for expenses relating to a successful defense on the
merits or otherwise of a derivative or third-party action. Under the NRS,
indemnification may not be made for any claim, issue or matter as to which such
a person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to the corporation or for
amounts paid in settlement to the corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines upon application that in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
With respect to the advancement of
expenses incurred by an officer or director in defending a civil or criminal
action, suit or proceeding, under the NRS, the articles of incorporation, the
bylaws or an agreement made by the corporation may provide that the expenses of
officers and directors incurred in defending a civil or criminal action, suit or
proceeding must be paid by the corporation as they are incurred and in advance
of the final disposition of the action, suit or proceeding, upon receipt of an
undertaking by or on behalf of the director or officer to repay the amount if it
is ultimately determined by a court of competent jurisdiction that he is not
entitled to be indemnified by the corporation.
LEGAL
MATTERS
Our legal counsel, Sichenzia Ross
Friedman Ference LLP, located at 61 Broadway, New York, NY 10006, is passing on
the validity of the issuance of the Common Stock offered under this
prospectus.
EXPERTS
The consolidated financial statements
of our company as of December 31, 2009 and 2008 included in this prospectus have
been audited by Goldman Kurland and Mohidin LLP, an independent registered
public accounting firm, as stated in its report appearing herein and elsewhere
in this prospectus, and have been so included in reliance upon the report of
this firm given upon their authority as experts in auditing and
accounting.
INTERESTS OF NAMED EXPERTS AND
COUNSEL
No “expert” or “counsel” as defined by
Item 509 of Regulation S-K promulgated under the Securities Act, whose services
were used in the preparation of this Form S-1, was hired on a contingent basis
or will receive a direct or indirect interest in us or our parents or
subsidiaries, nor was any of them a promoter, underwriter, voting trustee,
director, officer or employee of the Company.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
WHERE
YOU CAN FIND MORE INFORMATION
We have filed a registration statement
on Form S-1 under the Securities Act of 1933 with the Securities and Exchange
Commission with respect to the shares of our Common Stock offered through this
prospectus. This prospectus is filed as a part of that registration statement
and does not contain all of the information contained in the registration
statement and exhibits. We refer you to our registration statement and each
exhibit attached to it for a more complete description of matters involving us,
and the statements we have made in this prospectus are qualified in their
entirety by reference to these additional materials. You may inspect the
registration statement and exhibits and schedules filed with the Securities and
Exchange Commission at the Commission’s principal office in Washington, D.C.
Copies of all or any part of the registration statement may be obtained from the
Public Reference Section of the Securities and Exchange Commission, 100 F Street
NE, Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. The
Securities and Exchange Commission also maintains a web site at
http://www.sec.gov that contains reports, proxy statements and information
regarding registrants that file electronically with the Commission. In addition,
we file electronic versions of our annual and quarterly reports on the
Commission’s Electronic Data Gathering Analysis and Retrieval, or EDGAR System.
Our registration statement and the referenced exhibits can also be found on this
site as well as our quarterly and annual reports. We will not send the annual
report to our shareholders unless requested by the individual
shareholders.
48
WEIKANG
BIO-TECHNOLOGY GROUP COMPANY, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Contents
Page
|
||||
Report
of Independent Registered Public Accounting Firm
|
F-2 | |||
Financial
Statements:
|
||||
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-3 | |||
Consolidated
Statements of Operations and Comprehensive Income
for
the years ended December 31, 2009 and 2008
|
F-4 | |||
Consolidated
Statement of Stockholders' Equity (Deficiency) for the years
ended
December
31, 2009 and 2008
|
F-5 | |||
Consolidated
Statements of Cash Flows for the years ended
December
31, 2009 and 2008
|
F-6 | |||
Notes
to Consolidated Financial Statements
|
F-7 |
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
shareholders
Weikang
Bio-Technology Group Company, Inc.
We have
audited the consolidated balance sheets of Weikang Bio-Technology Group Company,
Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the
related consolidated statements of operations and comprehensive income,
shareholders equity (deficiency) and cash flows for the years ended December 31,
2009 and 2008. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of internal control
over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion, the statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company as of December 31,
2009 and 2008, and the consolidated results of its operations and its cash flows
for the years ended December 31, 2009 and 2008 in conformity with U.S. generally
accepted accounting principles.
Goldman
Parks Kurland Mohidin LLP
Encino,
California
March 22,
2010
F-2
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
& equivalents
|
$ | 11,380,019 | $ | 16,927 | ||||
Advances
to suppliers and other receivables
|
24,334 | 41,697 | ||||||
Inventory
|
285,395 | 151,942 | ||||||
Due
from management
|
1,745 | 1,243,672 | ||||||
Total
current assets
|
11,691,493 | 1,454,238 | ||||||
NONCURRENT
ASSETS
|
||||||||
Property
and equipment, net
|
10,162,946 | 11,098,046 | ||||||
Intangible
assets
|
15,558,731 | 12,214,405 | ||||||
Total
noncurrent assets
|
25,721,677 | 23,312,451 | ||||||
TOTAL
ASSETS
|
$ | 37,413,170 | $ | 24,766,689 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 12,668 | $ | 12,996 | ||||
Unearned
revenue
|
11,716 | 224,271 | ||||||
Taxes
payable
|
2,247,410 | 1,250,087 | ||||||
Other
payables
|
7,620,321 | 11,434,937 | ||||||
Advance
from officer
|
650,000 | 650,000 | ||||||
Total
current liabilities
|
10,542,115 | 13,572,291 | ||||||
CONTINGENCIES
|
||||||||
DEFERRED
TAX LIABILITY
|
3,450,005 | 3,551,025 | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Common
stock, $.00001 par value; authorized shares 100,000,000; issued
and outstanding shares 25,486,600 and 25,229,800 at December 31, 2009 and
2008, respectively
|
255 | 252 | ||||||
Additional
paid in capital (deficit)
|
139,245 | (252 | ) | |||||
Statutory
reserve
|
1,069,507 | 512,637 | ||||||
Accumulated
other comprehensive income
|
844,526 | 823,151 | ||||||
Retained
earnings
|
21,367,517 | 6,307,585 | ||||||
Total
stockholders' equity
|
23,421,050 | 7,643,373 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 37,413,170 | $ | 24,766,689 |
The
accompanying notes are an integral part of these consolidated
statements.
F-3
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEAR ENDED
|
||||||||
DECEMBER
31, 2009
|
DECEMBER
31, 2008
|
|||||||
Net
sales
|
$ | 47,484,188 | $ | 12,852,884 | ||||
Cost
of goods sold
|
21,640,326 | 4,584,093 | ||||||
Gross
profit
|
25,843,862 | 8,268,791 | ||||||
Operating
expenses
|
||||||||
Selling
|
2,583,202 | 351,840 | ||||||
General
and administrative
|
1,321,838 | 857,158 | ||||||
Research
and development
|
1,951,000 | - | ||||||
Total
operating expenses
|
5,856,040 | 1,208,998 | ||||||
Income
from operations
|
19,987,822 | 7,059,793 | ||||||
Non-operating
income (expenses)
|
||||||||
Interest
income
|
13,206 | 997 | ||||||
Financial
expense
|
(1,664 | ) | (4,973 | ) | ||||
Other
income
|
1,034,885 | 1,032,896 | ||||||
Other
expenses
|
(61,689 | ) | (69,185 | ) | ||||
Total
non-operating income, net
|
984,738 | 959,735 | ||||||
Income before
income tax
|
20,972,560 | 8,019,528 | ||||||
Income
tax
|
5,355,758 | 748,919 | ||||||
Net
income
|
15,616,802 | 7,270,609 | ||||||
Other
comprehensive income
|
||||||||
Foreign
currency translation gain
|
21,375 | 626,719 | ||||||
Comprehensive
Income
|
$ | 15,638,177 | $ | 7,897,328 | ||||
Basic
and diluted weighted average shares outstanding
|
25,375,581 | 25,229,800 | ||||||
Basic
and diluted net earnings per share
|
$ | 0.62 | $ | 0.29 |
The accompanying notes are an
integral part of these consolidated statements.
F-4
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS
ENDED DECEMBER 31, 2009 AND 2008
Common stock
|
Additional
|
|
Statutory
|
Other
comprehensive
|
Retained
Earnings /
(Accumulated
|
|||||||||||||||||||||||
Shares
|
Amount
|
paid in capital
|
reserves
|
income
|
Deficit)
|
Total
|
||||||||||||||||||||||
Beginning
at January 1, 2008
|
25,229,800 | $ | 252 | $ | (252 | ) | $ | 19,961 | $ | 196,432 | $ | (470,348 | ) | $ | (253,955 | ) | ||||||||||||
Net
income for the year
|
- | - | - | - | - | 7,270,609 | 7,270,609 | |||||||||||||||||||||
Transfer
to statutory reserves
|
- | - | - | 492,676 | - | (492,676 | ) | - | ||||||||||||||||||||
Foreign
currency translation gain
|
- | - | - | - | 626,719 | 626,719 | ||||||||||||||||||||||
Balance
at December 31, 2008
|
25,229,800 | $ | 252 | $ | (252 | ) | $ | 512,637 | $ | 823,151 | $ | 6,307,585 | $ | 7,643,373 | ||||||||||||||
Shares
issued for capital contribution
|
257,000 | 3 | 139,497 | - | - | - | 139,500 | |||||||||||||||||||||
Net
income for the year
|
- | - | - | - | - | 15,616,802 | 15,616,802 | |||||||||||||||||||||
Transfer
to statutory reserves
|
- | - | - | 556,870 | - | (556,870 | ) | - | ||||||||||||||||||||
Foreign
currency translation gain
|
- | - | - | - | 21,375 | - | 21,375 | |||||||||||||||||||||
Balance
at December 31, 2009
|
25,486,800 | $ | 255 | $ | 139,245 | $ | 1,069,507 | $ | 844,526 | $ | 21,367,517 | $ | 23,421,050 |
The accompanying notes are an
integral part of these consolidated statements.
F-5
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEAR
ENDED
|
YEAR
ENDED
|
|||||||
DECEMBER
31, 2009
|
DECEMBER
31, 2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 15,616,802 | $ | 7,270,609 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
and amortization
|
1,176,909 | 1,338,326 | ||||||
Stock
issued for consulting expenses
|
139,500 | - | ||||||
Changes
in deferred tax
|
(104,306 | ) | (38,104 | ) | ||||
(Increase)
decrease in current assets:
|
||||||||
Accounts
receivable
|
- | 416,885 | ||||||
Advances
to suppliers and other receivables
|
(1,903 | ) | 113,384 | |||||
Inventory
|
(133,257 | ) | 104,205 | |||||
Increase
(decrease) in current liabilities:
|
||||||||
Accounts
payable
|
(340 | ) | (12,856 | ) | ||||
Unearned
revenue
|
(212,677 | ) | 220,706 | |||||
Other
payables
|
8,559 | 243 | ||||||
Taxes
payable
|
979,150 | 765,211 | ||||||
Net
cash provided by operating activities
|
17,468,437 | 10,178,609 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Acquisition
of property & equipment
|
(3,563,305 | ) | (808,739 | ) | ||||
Net
cash used in investing activities
|
(3,563,305 | ) | (808,739 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Changes
in due from management
|
1,261,882 | 1,712,790 | ||||||
Cash
acquired at purchase of business
|
- | 10,176 | ||||||
Payment
for purchase of Tianfang
|
(3,812,596 | ) | (11,278,744 | ) | ||||
Changes
in due from related party
|
- | (79,890 | ) | |||||
Net
cash used in financing activities
|
(2,550,714 | ) | (9,635,668 | ) | ||||
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & EQUIVALENTS
|
8,674 | 165,485 | ||||||
INCREASE
(DECREASE) IN CASH & EQUIVALENTS
|
11,363,092 | (100,313 | ) | |||||
CASH
& EQUIVALENTS, BEGINNING OF YEAR
|
16,927 | 117,240 | ||||||
CASH
& EQUIVALENTS, END OF YEAR
|
$ | 11,380,019 | $ | 16,927 | ||||
Supplemental
Cash flow data:
|
||||||||
Income
tax paid
|
$ | 4,163,362 | $ | 372,423 | ||||
Interest
paid
|
$ | - | $ | - |
The accompanying notes are an
integral part of these consolidated statements.
F-6
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Weikang
Bio-Technology Group Co., Inc., a Nevada corporation (“Weikang” or “the Company)
was incorporated on May 12, 2004 in Florida as Expedition Leasing, Inc.
(“Expedition”). The Company reincorporated in Nevada and changed to its present
name on July 12, 2008, pursuant to a merger with Weikang, a wholly-owned
subsidiary, with Weikang as the surviving entity. The Company is engaged in
the development, manufacture and distribution of Traditional Chinese Medicine
("TCM") through its indirect wholly-owned operating subsidiary,
Heilongjiang Weikang Biotechnology Group Co., Ltd. (“Heilongjiang Weikang”) in
the People’s Republic of China (“PRC” or “China”).
On
December 7, 2007, the Company (as Expedition) entered into an exchange agreement
with Sinary Bio-Technology Holdings Group, Inc., a Nevada corporation (“Sinary”)
and its sole shareholder (the “Sinary Stockholder”), pursuant to which the
Company issued 24,725,200 shares of common stock to the Sinary Stockholder for
all of the common shares of Sinary. Concurrently, Sinary paid $650,000 to
certain former shareholders of the Company, who surrendered 24,725,200 shares of
the Company’s common stock held by them to the Company for cancellation. As a
result, the Sinary Stockholder currently owns 98% of the Company. On the
Closing Date, Sinary became a wholly-owned subsidiary of the
Company.
Prior to
the acquisition of Sinary, the Company was a non-operating public shell
corporation. Pursuant to Securities and Exchange Commission (“SEC”) rules, the
merger or acquisition of a private operating company into a non-operating public
shell corporation with nominal net assets is considered a capital transaction,
rather than a business combination. Accordingly, for accounting purposes, the
transaction was treated as a reverse acquisition and recapitalization, and
pro forma information is not presented. Transaction costs incurred in the
reverse acquisition were expensed.
Sinary
was incorporated under the laws of the State of Nevada on August 31, 2007. On
October 25, 2007, Sinary entered into an equity interests transfer agreement
with the stockholders of Heilongjiang Weikang, a limited liability company in
the PRC, to acquire 100% of the equity interests of Heilongjiang Weikang for 57
million Renminbi (“RMB”), or approximately $7.6 million.
Heilongjiang
Weikang was incorporated in the Heilongjiang Province, PRC on March 29,
2005, and was formerly known as Heilongjiang Province Weikang Bio-Engineering
Co., Ltd. Heilongjiang Weikang is engaged in development, manufacture and
distribution of Traditional Chinese Medicine ("TCM") in the
PRC.
On July
22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued
and outstanding equity interests of Tianfang (Guizhou) Pharmaceutical Co., Ltd.
(“Tianfang”), a Chinese limited liability company, for $15,000,000 (the
“Consideration”), pursuant to a stock transfer agreement entered into on June
30, 2008 by and among the Heilongjiang Weikang, Tianfang, and Tianfang’s two
shareholders: Beijing Shiji Qisheng Trading Co., Ltd., a Chinese limited
liability company (“Shiji Qisheng”) and Tri-H Trade (U.S.A.) Co., Ltd., a
California corporation (“Tri-H”, and together with Shiji Qisheng collectively as
the “Selling Shareholders”).
Tianfang
was incorporated in the Guizhou Province, PRC in 1998. Tianfang is
engaged in the development, manufacture and distribution of Over the Counter
(“OTC”) Pharmaceuticals. The Company believes its market share can be
expanded to the southern part of China through the acquisition of
Tianfang.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Sinary, and the results of operations
of Weikang, Sinary’s wholly-owned subsidiary, Tianfang, Weikang’s wholly-owned
subsidiary from the date of acquisition (August 1, 2008). All significant
inter-company accounts and transactions were eliminated in
consolidation.
Use
of Estimates
In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”), management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting year. Significant estimates, required by
management, include the recoverability of long-lived assets, allowance for
doubtful accounts, and the reserve for obsolete and slow-moving inventories.
Actual results could differ from those estimates.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less as cash
equivalents.
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. There was no bad debt allowance recorded based on
the Company’s past payment collection experience.
F-7
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Inventory
Inventories
are valued at a lower cost or market with cost determined on a moving weighted
average basis. Costs of work in progress and finished goods comprise direct
material, direct production cost and an allocated portion of production
overheads.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using the
straight-line method for all assets with estimated lives ranging from 3 to 20
years as follows:
Building
|
20
|
Vehicle
|
5
|
Office
Equipment
|
3-7
|
Production
Equipment
|
3-10
|
Land
Use Right
Right to
use land is stated at cost less accumulated amortization. Amortization is
provided using the straight-line method over 50 years.
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 between the
carrying amount of an asset and 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
the amount that the carrying amount of the asset exceeds the fair value of the
assets. Fair value is generally determined by the assets expected future
discounted cash flows or market value, if readily determinable. Based on its
review, the Company believes that, as of December 31, 2009 and 2008, there were
no significant impairments of its long-lived assets.
Income
Taxes
The
Company uses Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes,” codified in FASB ASC Topic 740, which
requires recognition of deferred tax assets and liabilities for expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are considered as the
tax consequences in future years for 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 FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes at inception of the business (codified in FASB ASC
Topic 740) on August 31, 2007. Based on FIN 48, the Company made a
comprehensive review of its portfolio of tax positions in accordance with
recognition standards established by FIN 48. Based on FIN 48, the Company
recognized no material adjustments to liabilities or stockholders’ equity. 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 positions taken or the amount of the
positions 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 to be realized upon settlement
with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above is
reflected as a liability for unrecognized tax benefits in the accompanying
balance sheets along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. Interests
associated with unrecognized tax benefits are classified as interest expenses
and penalties are classified in selling, general and administrative expenses in
the statements of income. At December 31, 2009 and 2008, the Company
did not take any uncertain positions that would necessitate recording of tax
related liability.
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104, codified in FASB ASC Topic
480. Sales revenue is recognized at the date of shipment to customers
when a formal arrangement exists, the price is fixed or determinable, the
delivery is completed, no other significant obligations of the Company exist and
collectability is reasonably assured. Payments received before all the relevant
criteria for revenue recognition is met are recorded as unearned
revenue.
Sales
revenue represents the invoiced value of goods, which is subject to net of
value-added tax (“VAT”). All of the Company’s products are sold in the PRC and
are subject to Chinese value-added tax of 17% of the gross sales price. This VAT
may be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing their end product. The Company recorded VAT
payable and VAT receivable net of payments in the financial statements. The VAT
tax return is filed offsetting the payables against the
receivables.
Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not affected by the income
tax holiday.
Sales
returns and allowances was $0 for the years ended December 31, 2009 and
2008. The Company does not provide unconditional right of return, price
protection or any other concessions to its dealers or other
customers.
Cost
of Goods Sold
Cost of
goods sold consists primarily of material costs, employee compensation,
depreciation and related expenses, which are directly attributable to the
production of products. Write-down of inventory to lower cost or market is
also recorded in cost of goods sold.
Goodwill
Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses
acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
codified in FASB Accounting Standards Codification (“ASC”) Topic 350, goodwill
is not amortized but is tested for impairment annually, or when circumstances
indicate a possible impairment may exist. Impairment testing is performed at a
reporting unit level. An impairment loss generally would be recognized when the
carrying amount of the reporting unit exceeds the fair value of the reporting
unit, with the fair value of the reporting unit determined using a discounted
cash flow (DCF) analysis. A number of significant assumptions and estimates are
involved in the application of the DCF analysis to forecast operating cash
flows, including the discount rate, the internal rate of return, and projections
of realizations and costs to produce. Management considers historical experience
and all available information at the time the fair values of its reporting units
are estimated.
F-8
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts and other receivables. The Company does not require
collateral or other security to support these receivables. The Company conducts
periodic reviews of its clients' financial condition and customer payment
practices to minimize collecting risk on accounts receivable.
The
operations of the Company are located in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
overall performance of the PRC’s economy.
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
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 sheet. Cash flows from operating,
investing and financing activities exclude the effect of the acquisition of
Tianfang in 2008.
Fair
Value of Financial Instruments
For
certain of the Company’s financial instruments, including cash and equivalents,
accounts and other payables, accrued liabilities and short-term debt, 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 instrument.
Level 3
inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
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 December 31, 2009, the Company did not identify any assets and liabilities
that are required to be presented on the balance sheet at fair
value.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB were 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. Revenues 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 stockholders' 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.
The
Company uses SFAS No 130, “Reporting Comprehensive Income,” codified in FASB ASC
Topic 220. Comprehensive income is comprised of net income and all changes to
the statements of stockholders’ equity, except the changes in paid-in capital
and distributions to stockholders due to investments by stockholders.
Comprehensive income for the years ended December 31, 2009 and 2008 included net
income and foreign currency translation adjustments.
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 Topic 718. The Company recognizes in the
statement of operations the grant-date fair value of stock options and other
equity-based compensation issued to employees and
non-employees.
Basic
and Diluted Earnings per Share (EPS)
Basic EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similarly to basic net income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Diluted net earnings per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. For the years ended December 31, 2009 and 2008, the Company did
not have any dilutive securities.
Segment
Reporting
SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
requires a use of the “management approach” model for segment reporting,
codified in FASB ASC Topic 280. 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 manners 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.
Research
and Development
Research
and development costs are related primarily to the development of new
nutritional and health supplements products. Research and development costs are
expensed as incurred.
On
January 20, 2009, the Company made an agreement with Botany medicine research
center of Northeast Forestry University (“the University”) to develop
certain new medicine and health supplemental products. The Company is
responsible for funding the research and development expense and project
examination and registration fee of RMB 15,000,000 (or $2,195,000). According to
the contract, upon successful completion of the research by the University, the
Company is required to pay 85% of total fund to the University and will own the
rights to the research findings, and is required to pay the remaining 15% upon
registration and approval of the researching findings from State Food and Drug
Administration and Department of Public Health of Heilongjiang Province.
The Company is responsible for registration of the research findings and getting
approval from related authorities. In case the registration
application is not approved by the authorities, the Company will not be entitled
to the refund of the amount it already paid and will not be required to pay the
remaining 15% or RMB 2,300,000 ($336,000). During the second quarter of
2009, the research and development of the new medicine and health supplemental
products was completed successfully. During the term of the contract, the
Company paid RMB 12,700,000 (or $1,859,000) to the University and obtained the
ownership rights of the research findings. The Company is registering the
research findings with the related authorities. The Company recorded
the payment for the R&D project as R&D expense.
F-9
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Reclassifications
Certain
prior year amounts were reclassified to conform to the manner of presentation in
the current year.
New
Accounting Pronouncements
In
October 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding
accounting for own-share lending arrangements in contemplation of convertible
debt issuance or other financing. This ASU requires that at the date
of issuance of the shares in a share-lending arrangement entered into in
contemplation of a convertible debt offering or other financing, the shares
issued shall be measured at fair value and be recognized as an issuance cost,
with an offset to additional paid-in capital. Further, loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs, at which time the loaned shares would be
included in the basic and diluted earnings-per-share
calculation. This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years.
The Company is currently evaluating the impact of this ASU on its consolidated
financial statements.
In August
2009, the FASB issued an ASU regarding measuring liabilities at fair value. This
ASU provides additional guidance clarifying the measurement of liabilities at
fair value in circumstances in which a quoted price in an active market for the
identical liability is not available; under those circumstances, a reporting
entity is required to measure fair value using one or more of valuation
techniques, as defined. This ASU is effective for the first reporting period,
including interim periods, beginning after the issuance of this ASU. The
adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
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.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”), codified as FASB ASC Topic 810-10, which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. SFAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. SFAS 167 also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. SFAS 167 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS 167 will have an impact on its financial condition, results of operations
or cash flows.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140” (“SFAS 166”), codified as FASB
Topic ASC 860, which requires entities to provide more information regarding
sales of securitized financial assets and similar transactions, particularly if
the entity has continuing exposure to the risks related to transferred financial
assets. SFAS 166 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS 166 will have an impact on its financial condition, results of operations
or cash flows.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) codified in
FASB ASC Topic 855-10-05, which provides guidance to establish general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
SFAS 165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was selected.
SFAS 165 is effective for interim and annual periods ending after June 15, 2009,
and accordingly, the Company adopted this pronouncement during the second
quarter of 2009. SFAS 165 requires that public entities evaluate subsequent
events through the date that the financial statements are
issued.
In April
2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim Disclosures
about Fair Value of Financial Instruments,” which is codified in FASB ASC Topic
825-10-50. This FSP essentially expands the disclosure about fair value of
financial instruments that were previously required only annually to also be
required for interim period reporting. In addition, the FSP requires certain
additional disclosures regarding the methods and significant assumptions used to
estimate the fair value of financial instruments. These additional disclosures
are required beginning with the quarter ending June 30, 2009. This FSP had no
material impact on the Company’s financial position, results of operations or
cash flows.
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments,” which is codified in FASB
ASC Topic 320-10. This FSP modifies the requirements for recognizing
other-than-temporarily impaired debt securities and changes the existing
impairment model for such securities. The FSP also requires additional
disclosures for both annual and interim periods with respect to both debt and
equity securities. Under the FSP, impairment of debt securities will be
considered other-than-temporary if an entity (1) intends to sell the security,
(2) more likely than not will be required to sell the security before recovering
its cost, or (3) does not expect to recover the security’s entire amortized cost
basis (even if the entity does not intend to sell). The FSP further indicates
that, depending on which of the above factor(s) causes the impairment to be
considered other-than-temporary, (1) the entire shortfall of the security’s fair
value versus its amortized cost basis or (2) only the credit loss portion would
be recognized in earnings while the remaining shortfall (if any) would be
recorded in other comprehensive income. FSP 115-2 requires entities to initially
apply the provisions of the standard to previously other-than-temporarily
impaired debt securities existing as of the date of initial adoption by making
a
cumulative-effect
adjustment to the opening balance of retained earnings in the period of
adoption. The cumulative-effect adjustment potentially reclassifies the
noncredit portion of a previously other-than-temporarily impaired debt security
held as of the date of initial adoption from retained earnings to accumulate
other comprehensive income. The Company adopted FSP No. SFAS 115-2 and SFAS
124-2 beginning April 1, 2009. This FSP had no material impact on the Company’s
financial position, results of operations or cash flows.
In April
2009, the FASB issued FSP No. SFAS 157-4, “Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP
No. SFAS 157-4”). FSP No. SFAS 157-4, which is codified in
FASB ASC Topics 820-10-35-51 and 820-10-50-2, provides additional guidance for
estimating fair value and emphasizes that even if there has been a significant
decrease in the volume and level of activity for the asset or liability and
regardless of the valuation technique(s) used, the objective of a fair value
measurement remains the same. The Company adopted FSP No. SFAS 157-4
beginning April 1, 2009. This FSP had no material impact on the Company’s
financial position, results of operations or cash flows.
F-10
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
3. INVENTORY
Inventory
at December 31, 2009 and 2008 was as follows:
2009
|
2008
|
|||||||
Raw
materials
|
$ | 148,519 | $ | 33,676 | ||||
Packing
materials
|
54,777 | 22,409 | ||||||
Finished
goods
|
82,099 | 95,857 | ||||||
Total
|
$ | 285,395 | $ | 151,942 |
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at December 31, 2009 and,
2008:
2009
|
2008
|
|||||||
Building
|
$ | 8,252,397 | $ | 8,244,669 | ||||
Building
improvements
|
912,316 | 911,462 | ||||||
Production
equipment
|
2,338,779 | 2,319,654 | ||||||
Office
furniture and equipment
|
192,458 | 179,752 | ||||||
Vehicles
|
118,559 | 118,448 | ||||||
11,814,509 | 11,773,985 | |||||||
Less:
Accumulated depreciation
|
(1,651,563 | ) | (675,939 | ) | ||||
$ | 10,162,946 | $ | 11,098,046 |
Depreciation
for the years ended December 31, 2009 and 2008 was $976,000 and $619,000,
respectively.
5.
ADVANCES TO SUPPLIERS AND OTHER RECEIVABLES
Advances
to suppliers represented prepayment for the raw material. Other
receivables represented cash advances to employees and sales representatives for
normal business purposes such as advances for traveling
expense.
6.
RELATED PARTY TRANSACTIONS
Due
from Management
At
December 31, 2009, due from management represented advance payment of $1,745 to
one of the Company’s officers for his paying certain expenses relating to the
Company’s daily operations.
At
December 31, 2008, due from management mainly represented lease payments
received by Weikang’s CEO on behalf of Weikang for leasing the workshop of
manufacturing royal jelly and the right to use its technology for manufacturing
royal jelly from January 1, 2008 through June 30, 2010. During 2008,
Weikang’s CEO received lease income of $1,008,000 (RMB 7,000,000) and prepaid
lease payment of $219,000 (RMB 1,500,000) on behalf of the Company.
Advance
from Officer
Advance
from officer represented the payment of $650,000 made by an officer of
Heilongjiang Weikang on behalf of Sinary to certain former shareholders of
the Company in connection with the reverse acquisition between the Company
and Sinary on December 7, 2007. The advance from officer bears no
interest and is payable on demand.
7.
INTANGIBLE ASSETS
Intangible
assets consisted of the following at December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Land
use right
|
$ | 12,266,864 | $ | 8,723,411 | ||||
Goodwill
arising from acquisition of Tianfang
|
3,581,715 | 3,578,359 | ||||||
Software
|
7,216 | 7,209 | ||||||
15,855,795 | 12,308,979 | |||||||
Less:
Accumulated amortization
|
(297,064 | ) | (94,574 | ) | ||||
$ | 15,558,731 | $ | 12,214,405 |
All land
in the PRC is government owned and cannot be sold to any individual or company.
However, the government grants the user a “land use right” to use the land. The
Company has the right to use the land for 50 years and amortizes the right on a
straight-line basis for 50 years.
Amortization
for the years ended December 31, 2009 and 2008 was $202,000 and $93,000,
respectively. Amortization for the next five years from
December 31, 2009 is expected to be $273,000, $273,000, $273,000, $272,000 and
$272,000, respectively.
8. MAJOR
CUSTOMERS AND VENDORS
There
were no customers which accounted for over 10% of the Company’s sales for the
year ended December 31, 2009.
Five
customers who are dealers of the Company accounted for 47% of the Company’s net
revenues for 2008. Each customer accounted for 14%, 12%, 11% and 10%
of sales, of which, one was the related party owned by the shareholder
of Weikang accounting for about 1% of total sales. At December
31, 2009, the total receivable balance due from these five customers was
$0.
Three and
two vendors provided 38% and 26% of the Company’s purchases of raw material for
the year ended December 31, 2009 and 2008, respectively. For 2009, each vendor
accounted for 16%, 11%, 11%. For 2008, each vendor accounted for 16% and 10%.
Accounts payable to these vendors is $0 at December 31, 2009 and
2008.
F-11
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
9.
TAXES PAYABLE
Taxes
payable consisted of the following at December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Income
tax payable
|
$ | 1,679,250 | $ | 381,659 | ||||
Value
added tax payable
|
505,545 | 306,012 | ||||||
Individual
income tax withholding payable
|
22 | 504,123 | ||||||
Sales
tax payable
|
29,290 | 51,210 | ||||||
Other
|
33,303 | 7,083 | ||||||
$ | 2,247,410 | $ | 1,250,087 |
10.
OTHER PAYABLES
At
December 31, 2009, other payable is $7.62 million that Sinary was obligated to
pay Heilongjiang Weikang’s former owners within one year from the closing of the
acquisition of Heilongjiang Weikang. This payable does not bear any
interest, and was extended to June 30, 2010.
At
December 31, 2008, other payables consisted of $7.62 million purchase price of
Heilongjiang Weikang and the unpaid portion of the purchase price of
approximately $3.8 million Heilongjiang Weikang was obligated to pay to
Tianfang’s former owners within one year from the closing of acquisition
date. The $3.8 million was paid during 2009.
11.
DEFFERED TAX LIABILITY, NET
Deferred
tax represented differences between the tax bases and book bases of property,
equipment and land use right.
At
December 31, 2009 and, 2008, deferred tax asset (liability) consisted of the
following:
2009
|
2008
|
|||||||
Deferred
tax asset on property and equipment for bases differences
|
$ | 142,141 | $ | 37,758 | ||||
Deferred
tax asset arising from the acquisition of Heilongjiang
Weikang
|
29,620 | 29,591 | ||||||
Deferred
tax liability arising from the acquisition of Tianfang
|
(3,621,766 | ) | (3,618,374 | ) | ||||
Deferred
tax liability, net
|
$ | (3,450,005 | ) | $ | (3,551,025 | ) |
12.
INCOME TAXES
Weikang
and Sinary were incorporated in the US and have net operating losses (NOL) for
income tax purposes. Weikang and Sinary had net operating loss carry
forwards for income taxes of $139,500 and $650,000 at December 31, 2009,
respectively, which may be available to reduce future years’ taxable income
as NOL; NOL can be carried forward up to 20 years from the year the loss is
incurred. Management believes the realization of benefits from these losses
uncertain due to the Company’s limited operating history and continuing losses.
Accordingly, a 100% deferred tax asset valuation allowance was
provided.
Heilongjiang
Weikang and Tianfang are governed by the Income Tax Law of the PRC concerning
the private enterprises that are generally subject to tax at a statutory rate of
25% on income reported in the statutory financial statements after appropriate
tax adjustments. Heilongjiang Weikang was exempt from income tax for three years
from 2006 to 2008. Tianfang is subject to 25% income tax rate. Net income for
year ended December 31, 2008 would have been lower by approximately $1,251,000
or $0.05 earnings per share, if Heilongjiang Weikang was not subject an income
tax holiday.
Foreign
pretax earnings approximated $21,112,000 and $8,020,000 for the years ended
December 31, 2009 and 2008 respectively. Pretax earnings of a foreign subsidiary
are subject to U.S. taxation when effectively repatriated. The Company provides
income taxes on the undistributed earnings of non-U.S. subsidiaries except to
the extent that such earnings are indefinitely invested outside the US. At
December 31, 2009, $22,157,000 of accumulated undistributed earnings of non-U.S.
subsidiaries was indefinitely invested. At the existing U.S. federal income tax
rate, additional taxes of $1,994,000 would have to be provided if such earnings
were remitted currently.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||
US
statutory rates
|
34.0 | % | 34.0 | % | ||||
Tax
rate difference
|
(9.1 | )% | (9.0 | )% | ||||
Effect
of tax holiday
|
- | % | (16.0 | )% | ||||
Other
|
0.4 | % | - | % | ||||
Valuation
allowance for US NOL
|
0.2 | % | - | % | ||||
Tax
per financial statements
|
25.5 | % | 9.0 | % |
The
provisions for income tax expenses for the years ended December 31, 2009 and
2008 consisted of the following:
2009
|
2008
|
|||||||
Income
tax expenses – current
|
$ | 5,460,063 | $ | 787,023 | ||||
Income
tax benefit – deferred
|
(104,306 | ) | (38,104 | ) | ||||
Total
income tax expenses
|
$ | 5,355,758 | $ | 748,919 |
13.
OTHER INCOME
Other
income consisted of income for leasing the workshop of manufacturing the royal
jelly and the right to use its technology for manufacturing royal jelly from
January 1, 2008 through June 30, 2010. Total lease payment from
leasing out the workshop for the lease term is RMB 7,500,000, and RMB
10,000,000for leasing out the use right of the technology. The Company
received $1,034,885 and $1,032,896 lease income for 2009 and 2008,
respectively.
14.
STATUTORY RESERVES
Pursuant
to the corporate law of the PRC effective on 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 the 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
Common
welfare fund is a voluntary fund 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 didn’t contribute to this
fund.
F-12
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
15.
CONTINGENCIES
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’ s operations may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be conducted only by
authorized financial institutions. Remittances in currencies other than RMB may
require certain supporting documentation in order to affect the
remittance.
16.
ACQUISITION OF TIANFANG AND UNAUDITED PRO FORMA INFORMATION
On July
22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued
and outstanding equity interests of Tianfang for $15,000,000 (RMB
102,886,500). For convenience of reporting the acquisition for
accounting purposes, August 1, 2008 was designated the acquisition date. Cash
from operating, investing and financing activities in 2008, exclude the effect
of this acquisition.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed of Tianfang, at the date of acquisition. The
total consideration for acquisition exceeded fair value of the net assets
acquired by $3,565,578. The excess was recorded as goodwill.
Cash
|
$ | 10,146 | ||
Accounts
receivable
|
388,641 | |||
Other
receivables
|
3,988 | |||
Inventory
|
45,161 | |||
Property
and equipment
|
7,194,302 | |||
Land
use right
|
8,117,686 | |||
Goodwill
|
3,565,578 | |||
Tax
payable
|
(498,259 | ) | ||
Advances
from shareholder
|
(221,794 | ) | ||
Deferred
tax liability
|
(3,605,449 | ) | ||
Purchase
price
|
$ | 15,000,000 |
The
intangible asset, which is principally land use rights, is being amortized over
50 years.
The
following unaudited pro forma consolidated results of operations for
Heilongjiang Weikang and Tianfang for the year ended December 31, 2008 presents
the operations of Heilongjiang Weikang and Tianfang as if the acquisitions
occurred on January 1, 2008. 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.
Net
revenue
|
$ | 13,925,832 | ||
Cost
of revenue
|
5,102,876 | |||
Gross
profit
|
8,822,956 | |||
Total
operating expenses
|
1,317,008 | |||
Income
from operations
|
7,505,948 | |||
Total
non-operating (income)
|
(959,016 | ) | ||
Income
before income tax
|
8,464,964 | |||
Income
tax
|
881,677 | |||
Net
income
|
$ | 7,583,287 | ||
Basic
and diluted weighted average shares outstanding
|
25,229,800 | |||
Basic
and diluted net earnings per share
|
$ | 0.30 |
17.
SUBSEQUENT EVENT
On
January 20, 2010, the Company entered into Subscription Agreements with
"accredited" investors. Pursuant to the Purchase Agreements, the Investors
purchased 1,470,588 shares of Company common stock at $1.70 per share. The
Company raised $2,500,000 in gross proceeds and received net proceeds of
$2,047,500, after placement agent fees and other offering expenses.
The
Investors received one Series A Warrant and one Series B Warrant for every $8.00
invested in the Company under the Purchase Agreement. Series A Warrants grant
the holder the right to purchase shares of Common Stock at an exercise price of
$3.00. Series B Warrants grant the holder the right to purchase shares of Common
Stock at an exercise price of $5.00. At the closing the Investors received
Series A Warrants to purchase 312,500 shares of Common Stock and Series B
Warrants to purchase 312,500 shares of Common Stock.
The
Series A and Series B Warrants expire three years from the date of issuance. The
Warrants provide for antidilution adjustments to the exercise price for certain
convertible securities issued with conversion prices lower than the Warrants'
exercise price. The value of warrants was determined by using the Black-Scholes
pricing model with the following assumptions: discount
rate – 2.76%; dividend yield – 0%; expected
volatility – 100% and term of 3 years. The value of the
Warrants was $1,212,278.
In
connection with the Financing the Company entered into an Investor Relations
Escrow Agreement, pursuant to which the Company agreed to establish an escrow
account of $150,000 which may be allocated and released to investor relations
firms for marketing purposes at the sole discretion of a representative of the
Investors.
In
connection with the Financing the Company paid the following: (i) $150,000 to an
Investment Relations escrow account described above, (ii) $250,000 in placement
agent fees, and (iii) $52,500 in offering expenses, including legal
fees.
In
addition the Company issued the following securities: (i) Series A Warrants to
purchase 73,528 shares of Common Stock to placement agents, (ii) Series B
Warrants to purchase 73,528 shares of Common Stock to placement agents, (iii)
180,000 shares of Common Stock to an investor relations firm, (iv) 600,000
shares of Common Stock to a consultant for business development and capital
markets advice, and (v) 7,000 shares of Common Stock for legal
services. The value of warrants was determined by using the
Black-Scholes pricing model with the following assumptions: discount
rate – 2.76%; dividend yield – 0%; expected
volatility – 100% and term of 3 years. The value of the
Warrants was $285,236.
The
Company agreed to file a resale Registration Statement on Form S-1 by April 9,
2010 registering the Investor Shares and the Investors' Warrants with the SEC.
In the event the Company has not filed the Registration Statement by the
Required Filing Date, or the Registration Statement is not declared effective by
the SEC by 120 days after the Required Filing Date, the Company agreed to pay
liquidated damages to each Investor, from and including the day following such
Filing Default until the date the Registration Statement is filed with the SEC,
or until the Registration Statement is declared effective, as applicable, at a
rate per month (or portion thereof) equal to 0.50% of the total purchase price
of the Shares purchased by such Investor pursuant to the Purchase Agreement. In
no event, however, may the penalties exceed 9% in the aggregate of such total
purchase price.
F-13
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER 30, 2010
|
DECEMBER 31, 2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
& equivalents
|
$ | 29,949,501 | $ | 11,380,019 | ||||
Accounts
receivable
|
925,028 | - | ||||||
Advances
to suppliers and other receivables
|
133,262 | 26,079 | ||||||
Inventory
|
364,441 | 285,395 | ||||||
Deferred
tax asset
|
84,553 | - | ||||||
Total
current assets
|
31,456,785 | 11,691,493 | ||||||
NONCURRENT
ASSETS
|
||||||||
Property
and equipment, net
|
9,675,213 | 10,162,946 | ||||||
Construction
in progress
|
475,863 | - | ||||||
Intangible
assets
|
15,639,935 | 15,558,731 | ||||||
Total
noncurrent assets
|
25,791,011 | 25,721,677 | ||||||
TOTAL
ASSETS
|
$ | 57,247,796 | $ | 37,413,170 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 14,038 | $ | 12,668 | ||||
Unearned
revenue
|
783,453 | 11,716 | ||||||
Taxes
payable
|
3,186,403 | 2,247,410 | ||||||
Other
payables
|
230,462 | - | ||||||
Due
to related party
|
25,369 | - | ||||||
Total
current liabilities
|
4,239,725 | 2,271,794 | ||||||
ADVANCE
FROM OFFICER
|
- | 650,000 | ||||||
OTHER
PAYABLES - LONG TERM
|
- | 7,620,321 | ||||||
CONTINGENCIES
|
||||||||
DEFERRED
TAX LIABILITY
|
3,447,049 | 3,450,005 | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Common
stock, $.00001 par value; authorized shares 100,000,000; issued
and outstanding shares 28,024,388 and 25,486,800 at September 30, 2010 and
December 31, 2009, respectively
|
280 | 255 | ||||||
Additional
paid in capital
|
13,365,240 | 139,245 | ||||||
Deferred
compensation
|
(479,232 | ) | - | |||||
Statutory
reserve
|
1,702,111 | 1,069,507 | ||||||
Accumulated
other comprehensive income
|
1,713,415 | 844,526 | ||||||
Retained
earnings
|
33,259,208 | 21,367,517 | ||||||
Total
stockholders' equity
|
49,561,022 | 23,421,050 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 57,247,796 | $ | 37,413,170 |
The
accompanying notes are an integral part of these consolidated financial
statements
F-33
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. 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
|
$ | 41,878,410 | $ | 34,534,249 | $ | 17,426,211 | $ | 11,227,275 | ||||||||
Cost
of goods sold
|
16,976,845 | 15,803,400 | 6,962,482 | 5,238,634 | ||||||||||||
Gross
profit
|
24,901,565 | 18,730,849 | 10,463,729 | 5,988,642 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Selling
|
2,416,638 | 1,569,270 | 622,337 | 651,056 | ||||||||||||
General
and administrative
|
3,373,023 | 939,378 | 755,640 | 191,622 | ||||||||||||
Research
and development
|
1,760,631 | 1,937,928 | 957,724 | - | ||||||||||||
Total
operating expenses
|
7,550,292 | 4,446,576 | 2,335,701 | 842,678 | ||||||||||||
Income
from operations
|
17,351,273 | 14,284,273 | 8,128,028 | 5,145,964 | ||||||||||||
Non-operating
income (expenses)
|
||||||||||||||||
Interest
income
|
53,054 | 5,584 | 16,864 | 3,968 | ||||||||||||
Other
income
|
246,776 | 778,095 | 246,582 | 256,181 | ||||||||||||
Other
(expenses)
|
(1,947 | ) | (48,479 | ) | (40 | ) | (13,045 | ) | ||||||||
Total
non-operating income, net
|
297,883 | 735,200 | 263,406 | 247,104 | ||||||||||||
Income
before income tax
|
17,649,156 | 15,019,473 | 8,391,434 | 5,393,068 | ||||||||||||
Income
tax
|
5,124,858 | 3,853,312 | 2,325,991 | 1,414,837 | ||||||||||||
Net
income
|
12,524,298 | 11,166,161 | 6,065,443 | 3,978,231 | ||||||||||||
Other
comprehensive income
|
||||||||||||||||
Foreign
currency translation gain
|
868,889 | 18,175 | 646,247 | 11,030 | ||||||||||||
Comprehensive
Income
|
$ | 13,393,187 | $ | 11,184,336 | $ | 6,711,690 | $ | 3,989,261 | ||||||||
Basic
and diluted weighted average shares outstanding
|
27,814,024 | 25,339,690 | 28,052,649 | 25,339,690 | ||||||||||||
Basic
and diluted net earnings per share
|
$ | 0.45 | $ | 0.44 | $ | 0.22 | $ | 0.16 |
The
accompanying notes are an integral part of these consolidated financial
statements
F-34
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE
MONTHS ENDED SEPTEMBER 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 12,524,298 | $ | 11,166,161 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
and amortization
|
894,867 | 881,636 | ||||||
Stock
issued for consulting expenses
|
192,400 | 127,500 | ||||||
Deferred
compensation
|
2,086,567 | - | ||||||
Changes
in deferred tax
|
(150,571 | ) | (78,033 | ) | ||||
(Increase)
decrease in current assets:
|
||||||||
Accounts
receivable
|
(910,677 | ) | (329,328 | ) | ||||
Advances
to suppliers and other receivables
|
(106,552 | ) | (103,775 | ) | ||||
Inventory
|
(72,491 | ) | (346,268 | ) | ||||
Increase
(decrease) in current liabilities:
|
||||||||
Accounts
payable
|
1,112 | 942 | ||||||
Unearned
revenue
|
759,546 | (219,552 | ) | |||||
Other
payables
|
226,886 | 6,024 | ||||||
Taxes
payable
|
882,460 | 219,946 | ||||||
Net
cash provided by operating activities
|
16,327,845 | 11,325,254 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Construction
in progress
|
(468,480 | ) | - | |||||
Acquisition
of property & equipment
|
(14,351 | ) | (27,751 | ) | ||||
Net
cash used in investing activities
|
(482,831 | ) | (27,751 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Changes
in due from management
|
- | 1,198,035 | ||||||
Net
proceeds from shares issued
|
2,197,500 | - | ||||||
Payment
for purchase of Tianfang
|
- | (3,812,466 | ) | |||||
Changes
in due from related party
|
24,975 | - | ||||||
Net
cash provided by (used in) financing activities
|
2,222,475 | (2,614,430 | ) | |||||
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & EQUIVALENTS
|
501,993 | 8,443 | ||||||
INCREASE
IN CASH & EQUIVALENTS
|
18,569,482 | 8,691,516 | ||||||
CASH
& EQUIVALENTS, BEGINNING OF PERIOD
|
11,380,019 | 16,927 | ||||||
CASH
& EQUIVALENTS, END OF PERIOD
|
$ | 29,949,501 | $ | 8,708,443 | ||||
Supplemental
Cash flow data:
|
||||||||
Income
tax paid
|
$ | 5,355,503 | $ | 3,318,514 | ||||
Interest
paid
|
$ | - | $ | - |
The
accompanying notes are an integral part of these consolidated financial
statements
F-35
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (UNAUDITED)
AND
DECEMBER 31, 2009
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Weikang
Bio-Technology Group Co., Inc., a Nevada corporation (“Weikang” or “the
Company”) was incorporated on May 12, 2004 in Florida as Expedition Leasing,
Inc. (“Expedition”). The Company reincorporated in Nevada and changed to its
present name on July 12, 2008, pursuant to a merger with Weikang, a wholly-owned
subsidiary, with Weikang as the surviving entity. The Company developments,
manufactures and distributes Traditional Chinese Medicine ("TCM") through its
indirect wholly-owned operating subsidiary, Heilongjiang Weikang Biotechnology
Group Co., Ltd. (“Heilongjiang Weikang”) in the People’s Republic of China
(“PRC” or “China”).
On
December 7, 2007, the Company (as Expedition) entered into a Share Exchange
Agreement (the “Exchange Agreement”) with Sinary Bio-Technology Holdings Group,
Inc., a Nevada corporation (“Sinary”) and Weili Wang, its sole shareholder,
pursuant to which the Company issued 24,725,200 shares of common stock to Weili
Wang for all of the common shares of Sinary. Concurrently, Sinary paid $650,000
to certain former shareholders of the Company, who surrendered 24,725,200 shares
of the Company’s common stock held by them to the Company for cancellation. This
payment was advanced to Sinary by Yin Wang (the “Advance”). As a result, Weili
Wang owned 98% of the Company after the share exchange. On the Closing Date,
Sinary became a wholly-owned subsidiary of the Company and Mr. Yin Wang was
appointed the Company’s Chief Executive Officer and Chairman of the
Board.
Prior to
the acquisition of Sinary, the Company was a non-operating public shell
corporation. Pursuant to Securities and Exchange Commission (“SEC”) rules, the
merger or acquisition of a private operating company into a non-operating public
shell corporation with nominal net assets is considered a capital transaction,
rather than a business combination. Accordingly, for accounting purposes, the
transaction was treated as a reverse acquisition and recapitalization, and pro
forma information is not presented. Transaction costs incurred in the reverse
acquisition were expensed.
Sinary
was incorporated under the laws of the State of Nevada on August 31, 2007. On
October 25, 2007, Sinary entered into an Equity Interests Transfer Agreement
(the “Transfer Agreement”) with Yin Wang and Wei Wang, the stockholders of
Heilongjiang Weikang, a limited liability company (“LLC”) in the PRC, (the
“Heilongjiang Shareholders”) to acquire 100% of the equity interests of
Heilongjiang Weikang for 57 million Renminbi (“RMB”), or approximately $7.6
million (the “Acquisition Price”).
On August
6, 2010, Sinary and Yin Wang and Wei Wang, entered into a Settlement Agreement
and Release pursuant to which Yin Wang and Wei Wang waived their rights to
payment of both the Acquisition Price of approximately $7.6 million and the
Advance of $650,000 and contributed the Acquisition Price and the Advance to the
Company's capital.
Heilongjiang
Weikang was incorporated in Heilongjiang Province, PRC, on March 29, 2005, and
was formerly known as Heilongjiang Province Weikang Bio-Engineering Co., Ltd.
Heilongjiang Weikang develops, manufactures and distributes TCM in the PRC.
On July
22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued
and outstanding equity interests of Tianfang (Guizhou) Pharmaceutical Co., Ltd.
(“Tianfang”), a Chinese LLC, for $15,000,000, pursuant to a stock transfer
agreement entered into on June 30, 2008 by and among Heilongjiang Weikang,
Tianfang, and Tianfang’s two shareholders: Beijing Shiji Qisheng Trading Co.,
Ltd., a Chinese LLC (“Shiji Qisheng”) and Tri-H Trade (U.S.A.) Co., Ltd., a
California corporation (“Tri-H”, and together with Shiji Qisheng collectively as
the “Selling Shareholders”).
F-36
Tianfang
was incorporated in Guizhou Province, PRC, in 1998. Tianfang is engaged in the
development, manufacture and distribution of over the counter (“OTC”)
pharmaceuticals. The Company has expanded its market share to the southern part
of China through the acquisition of Tianfang.
On
January 6, 2010, Weili Wang formed Lucky Wheel Limited (“Lucky Wheel”), a
British Virgin Islands corporation and issued to herself 10,000 ordinary shares
which represents 100% of the issued and outstanding share capital of Lucky
Wheel. In June 2010 Ms. Weili Wang transferred 22,925,200 of her shares of the
Company’s common stock (representing approximately 82% of the Company’s issued
and outstanding common stock) to Lucky Wheel. On May 5, 2010, Ms. Weili Wang and
Ying Wang entered into a Call Option Agreement (the “Option Agreement”),
pursuant to which Weili Wang granted Yin Wang an irrevocable and unconditional
option to purchase all of her ordinary shares of Lucky Wheel (the “Option
Shares”) for U.S. $0.10 per ordinary share for a total of $1,000. Mr. Wang has
the right to purchase thirty-four percent (34%) of the Option Shares on December
31, 2010 and thirty-three percent (33%) on December 31, 2011 and December 31,
2012, respectively. The Option Agreement expires June 29, 2015. If and when the
option is fully exercised, Yin Wang will become the sole shareholder of Lucky
Wheel whose sole asset is 22,925,200 shares of the Company’s common stock. Mr.
Wang is expected to use his personal funds to pay for the Option
Shares.
In
connection with the transactions described in the Transfer Agreement, on
November 9, 2007, the Heilongjiang Office of the State Administration for
Industry and Commerce registered Sinary as the 100% owner of Heilongjiang
Weikang’s registered capital and issued a foreign invested enterprise business
license (the “FIE Business License”) to Heilongjiang Weikang. The initial FIE
Business License was valid until June 30, 2010. On March 12, 2010, the Harbin
City of Administration for Industry and Commerce extended the FIE Business
License until November 9, 2027.
The
unaudited financial statements included herein were prepared by the Company,
pursuant to the rules and regulations of the 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”) were omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the audited financial
statements and footnotes accompanying the Company’s 2009 audited financial
statements included in the Company’s Annual Report on Form 10-K. The results for
the nine and three months ended September 30, 2010 are not necessarily
indicative of the results to be expected for the full year ending December 31,
2010.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Sinary, and the results of operations
of Weikang, Sinary’s wholly-owned subsidiary; and Tianfang. All significant
inter-company accounts and transactions were eliminated in
consolidation.
Use
of Estimates
In
preparing financial statements in conformity with US GAAP, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting year. Significant estimates, required by
management, include the recoverability of long-lived assets, allowance for
doubtful accounts, and the reserve for obsolete and slow-moving inventories.
Actual results could differ from those estimates.
Cash
and Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less as cash
equivalents.
F-37
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. There was no bad debt allowance recorded based on
the Company’s past payment collection experience.
Inventory
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Costs of work in progress and finished goods are
comprised of direct material cost, direct production cost and an allocated
portion of production overhead.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for all assets with estimated lives, as follows:
Building
|
20
years
|
Vehicle
|
5
years
|
Office
Equipment
|
3-7
years
|
Production
Equipment
|
3-10
years
|
Land
Use Right
Right to
use land is stated at cost less accumulated amortization. Amortization is
provided using the straight-line method over 50 years.
Impairment
of Long-Lived Assets
We
evaluate the recoverability of long-lived assets with finite lives in accordance
with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Subtopic 360-10-35, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, which requires recognition of impairment of
long-lived assets whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. When events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable
based on estimated undiscounted cash flows, the impairment loss would be
measured as the difference between the carrying amount of the asset and its fair
value based on the present value of estimated future cash flows. Fair value is
generally determined by the asset’s expected future discounted cash flows or
market value, if readily determinable. Based on its review, the Company believes
that, as of September 30, 2010 and December 31, 2009, there were no significant
impairments of its long-lived assets.
Income
Taxes
The
Company uses FASB ASC Topic 740, “Accounting for Income Taxes”, which requires
recognition of deferred tax assets and liabilities for expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are considered as the tax
consequences in future years for 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.
F-38
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 positions taken or the amount of the
positions 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 to be realized upon settlement
with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above is
reflected as a liability for unrecognized tax benefits in the accompanying
balance sheets along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. Interests associated with
unrecognized tax benefits are classified as interest expenses and penalties are
classified in selling, general and administrative expenses in the statements of
income. At September 30, 2010 and December 31, 2009, the Company did not take
any uncertain positions that would necessitate recording of tax related
liability.
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with FASB ASC Topic
605, “Revenue Recognition”. Sales revenue is recognized at the date of shipment
to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectability is reasonably assured. Payments received before
all the relevant criteria for revenue recognition is met are recorded as
unearned revenue.
Sales
revenue consists of the invoiced value of goods, which is net of
value-added tax (“VAT”). All of the Company’s products are sold in the PRC and
are subject to Chinese VAT of 17% of the gross sales price. This VAT may be
offset by VAT paid by the Company on raw materials and other materials included
in the cost of producing their end product. The Company recorded VAT payable and
VAT receivable net of payments in the financial statements. The VAT tax return
is filed offsetting the payables against the receivables.
Sales and
purchases are recorded net of VAT collected and paid. VAT taxes are not affected
by the income tax holiday.
Sales
returns and allowances was $0 for the nine and three months ended September 30,
2010 and 2009. The Company does not provide unconditional right of return, price
protection or any other concessions to its dealers or other
customers.
Cost
of Goods Sold
Cost of
goods sold consists primarily of material costs, employee compensation,
depreciation and related expenses, which are directly attributable to the
production of products. Write-down of inventory to the lower of cost or market
is also recorded in cost of goods sold.
Concentration
of Credit Risk
Cash
includes cash on hand and demand deposits in accounts maintained within the PRC
and the US. The Company maintains balances at financial institutions which, from
time to time, may exceed Federal Deposit Insurance Corporation (“FDIC”) insured
limits for the banks located in the US. Balances at financial institutions
within the PRC are not covered by insurance. As of September 30, 2010 and
December 31, 2009, the Company had $0 deposits in the bank located in US which
was in excess of federally insured limits; the Company had $29,925,250 and
$11,372,437 deposits in the banks in China, respectively. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant risks on its cash in bank accounts.
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts and other receivables. The Company does not require
collateral or other security to support these receivables. The Company conducts
periodic reviews of its clients' financial condition and customer payment
practices to minimize collecting risk on accounts receivable.
F-39
The
operations of the Company are located in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
overall performance of the PRC’s economy.
Statement
of Cash Flows
In
accordance with FASB ASC Topic 230, “Statement of Cash Flows”, cash flows from
the Company's operations are calculated based upon 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 sheet. During the nine months ended September 30, 2010, cash from
financing activities excluded the conversion of other payables of $7.62 million
and advance from officer of $650,000 to paid-in capital by the Company’s
officers.
Fair Value of Financial
Instruments
For
certain of the Company’s financial instruments, including cash and cash
equivalents, accounts and other receivables, accounts and other payables,
accrued liabilities and short-term debt, 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 instrument.
Level 3
inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
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 and December 31, 2009, the Company did not identify any
assets and liabilities that were required to be presented on the balance sheet
at fair value.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB were translated into United States Dollars ("USD" or “$”) as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues 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 stockholders' 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.
The
Company uses FASB ASC Topic 220, “Reporting Comprehensive Income”. Comprehensive
income is comprised of net income and all changes to the statements of
stockholders’ equity, except the changes in paid-in capital and distributions to
stockholders due to investments by stockholders. Comprehensive income for the
nine and three months ended September 30, 2010 and 2009 included net income and
foreign currency translation adjustments.
F-40
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with FASB ASC
Topic 718, “Share Based Payment”. The Company recognizes in the statement of
operations the grant-date fair value of stock options and other equity-based
compensation issued to employees and non-employees.
Basic
and Diluted Earnings per Share (EPS)
Basic EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similarly to basic net income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Diluted net earnings per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. For the nine and three months ended September 30, 2010, the Company
had 772,056 dilutive securities due to anti-dilution feature of the warrants
issued in connection with the equity financing. For the nine and three months
ended September 30, 2009, the Company did not have any dilutive
securities.
Segment Reporting
FASB ASC
Topic 280, "Disclosures about Segments of an Enterprise and Related Information"
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 manners in which management
disaggregates a company.
FASB ASC
Topic 280 has no effect on the Company's financial statements as substantially
all of the Company's operations are conducted in one industry segment.
Research
and Development
Research
and development costs are primarily for the development of new drugs,
nutritional and health supplement products. Research and development costs are
expensed as incurred.
On
January 20, 2009, the Company entered an agreement with Botany medicine research
center of Northeast Forestry University (“the University”) to develop certain
new medicine and health supplemental products. The Company is responsible for
funding the research and development expense and project examination and
registration fee of RMB 15,000,000 (or $2,195,000). According to the contract,
upon successful completion of the research work by the University, the Company
is required to pay 85% of total fund to the University and will own the rights
to the research findings, and is required to pay the remaining 15% upon
successful registration and approval of the research findings from State Food
and Drug Administration and Department of Public Health of Heilongjiang
Province. The Company is responsible for registration of the research findings
and getting approval from related authorities. In case the registration
application is not approved by the authorities, the Company will not be entitled
to refund of the amount it already paid and will not be required to pay the
remaining 15% of RMB 2,300,000 (or $336,000). At June 30, 2009, the research and
development of the new medicine and health supplemental products was completed
successfully. During the term of the contract, the Company paid RMB 12,700,000
(or $1,859,000) to the University and obtained the ownership rights of the
research findings. The Company is in the process of registering the research
findings with the related authorities. The Company recorded the payment for the
R&D project as R&D expense.
F-41
On March
20, 2010, the Company entered into a one year contract with a professional
research and development team to research and develop licorice flavonoids
extraction technology for industrialization of use in therapeutics. The Company
is responsible for all the research and development expense with the total
payment expected to be approximately $2.95 million. As of September 30, 2010,
the Company paid research and development expenses of approximately $1.74
million under this agreement and is committed to pay an additional $0.47 million
by the end of 2010, and the remaining $0.74 million to be paid upon the
successful development of the technology. The Company will own the research and
development results and related intellectual property
Reclassifications
Certain
prior year amounts were reclassified to conform to the manner of presentation in
the current year.
New
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.
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.
3.
ADVANCES TO SUPPLIERS AND OTHER RECEIVABLES
Advances
to suppliers and other receivables at September 30, 2010 and December 31, 2009
were as follows:
2010
|
2009
|
|||||||
Prepaid
IR expense
|
$ | 97,808 | $ | - | ||||
Advance
to suppliers
|
33,056 | 24,334 | ||||||
Other
|
2,398 | 1,745 | ||||||
Total
|
$ | 133,262 | $ | 26,079 |
F-42
The
Company prepaid $150,000 from financing proceeds to an IR firm for IR services
over two years on January 20, 2010. For the nine and three months ended
September 30, 2010, the Company incurred $52,192 and $18,904 in IR expense,
respectively.
4. INVENTORY
Inventory
at September 30, 2010 and December 31, 2009 was as follows:
2010
|
2009
|
|||||||
Raw
materials
|
$ | 81,408 | $ | 148,519 | ||||
Packing
materials
|
90,433 | 54,777 | ||||||
Finished
goods
|
192,600 | 82,099 | ||||||
Total
|
$ | 364,441 | $ | 285,395 |
5.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at September 30, 2010 and December 31,
2009:
2010
|
2009
|
|||||||
Building
|
$ | 8,408,921 | $ | 8,252,397 | ||||
Building
improvements
|
929,620 | 912,316 | ||||||
Production
equipment
|
2,395,791 | 2,338,779 | ||||||
Office
furniture and equipment
|
197,197 | 192,458 | ||||||
Vehicles
|
120,808 | 118,559 | ||||||
12,052,337 | 11,814,509 | |||||||
Less:
Accumulated depreciation
|
(2,377,124 | ) | (1,651,563 | ) | ||||
$ | 9,675,213 | $ | 10,162,946 |
Depreciation
for the nine months ended September 30, 2010 and 2009 was $683,465 and
$730,000, respectively; and for the three months ended September 30, 2010 and
2009 was $225,657 and $244,000, respectively.
6.
CONSTRUCTION IN PROGRESS
At
September 30, 2010, construction in progress consisted of the payment made for
constructing a manufacturing line for producing licorice flavonoids. Total
estimated cost for the construction is approximately $0.75 million; the Company
spent approximately $0.47 million for the construction as of September 30, 2010,
and is committed to pay approximately $0.28 million to complete the
construction. The project is estimated to be completed at the end of
2010.
7.
INTANGIBLE ASSETS
Intangible
assets consisted of the following at September 30, 2010 and December 31,
2009:
2010
|
2009
|
|||||||
Land
use right
|
$ | 12,499,531 | $ | 12,266,864 | ||||
Goodwill
arising from acquisition of Tianfang (Note 18)
|
3,649,648 | 3,581,715 | ||||||
Software
and internet domain
|
8,188 | 7,216 | ||||||
16,157,367 | 15,855,795 | |||||||
Less:
Accumulated amortization
|
(517,432 | ) | (297,064 | ) | ||||
$ | 15,639,935 | $ | 15,558,731 |
F-43
All land
in the PRC is government owned and cannot be sold to any individual or company.
However, the government grants users a “land use right” to use the land. The
Company has the right to use the land for 50 years and amortizes the right on a
straight-line basis over 50 years.
Amortization
for the nine months ended September 30, 2010 and 2009 was $211,400 and $152,000,
respectively. Amortization for the three months ended September 30, 2010 and
2009 was $68,500 and $51,000, respectively. Amortization for the next five years
from September 30, 2010 is expected to be $274,000, $274,000, $274,000, $273,000
and $273,000, respectively.
8.
RELATED PARTY TRANSACTIONS
Dues to Related
Party
At
September 30, 2010, due to related party represented Company’s expenses of
$25,369 paid by a related party company owned by one of the Company’s officers.
This advance bears no interest and is payable upon demand.
9.
MAJOR CUSTOMERS AND VENDORS
There
were no customers which accounted for over 10% of the Company’s total sales for
the nine and three months ended September 30, 2010 and 2009,
respectively.
Three
vendors collectively provided 63% and 62% of the Company’s purchases of raw
materials for the nine and three months ended September 30, 2010, respectively.
Each vendor accounted for 38%, 15% and 10% of the purchases for the nine months
ended September 30, 2010, and 34%, 18% and 10% for the three months ended
September 30, 2010, respectively. The Company did not have any outstanding
accounts payable to these vendors at September 30, 2010.
Three
vendors collectively provided 41% and 49% of the Company’s purchases of raw
materials for the nine and three months ended September 30, 2009, respectively.
Each vendor accounted for 19%, 12%, and 10% of the purchases for the nine months
ended September 30, 2009, and 26%, 12%, and 12% for the three months ended
September 30, 2009, respectively. The Company did not have accounts payable to
these vendors at September 30, 2009.
10.
UNEARNED REVENUE
On June
30, 2010, the Company entered into an agreement with a medicine manufacturing
company for leasing the use right of a product manufacturing technology and
related workshop for one year. The total lease payment was RMB 7 million ($1.04
million), RMB 4 million ($597,000) was for the technology use right and RMB 3
million ($447,700) was for the workshop rental. During the quarter ended
September 30, 2010, the Company received $1.04 million. For the three months
ended September 30, 2010, RMB 1.75 million ($0.25 million) was recognized as
other income, and RMB 5.25 million ($0.78 million) was recognized as unearned
revenue as of September 30, 2010.
11.
TAXES PAYABLE
Taxes
payable consisted of the following at September 30, 2010 and December 31,
2009:
2010
|
2009
|
|||||||
Income
taxes
|
$ | 2,285,682 | $ | 1,679,250 | ||||
Value
added taxes
|
843,357 | 505,545 | ||||||
Sales
tax payable
|
- | 29,290 | ||||||
Other
|
57,364 | 33,325 | ||||||
$ | 3,186,403 | $ | 2,247,410 |
F-44
12.
OTHER PAYABLES
Other
payables consisted of the following at September 30, 2010 and December 31,
2009:
2010
|
2009
|
|||||||
Sales
commission
|
$ | 225,827 | $ | - | ||||
Payroll
and welfare
|
4,635 | - | ||||||
Payable
to Heilongjiang Weikang’s former owners – long term
|
- | 7,620,321 | ||||||
$ | 230,462 | $ | 7,620,321 |
At
December 31, 2009, other payables mainly represented $7.62 million acquisition
price that Sinary was obligated to pay to Heilongjiang Weikang’s former owners
within one year from the closing of the acquisition of Heilongjiang Weikang.
This payable did not bear any interest, and was extended to June 30, 2010.
On August 6, 2010, the former owners who are also the officers of the Company
waived their right to repayment of this amount. The Company treated this waiver
as a contribution to capital.
13.
DEFFERED TAX ASSET (LIABILITY)
Deferred
tax represented differences between the tax basis and book basis of R&D
expense, property, equipment and land use right.
At
September 30, 2010 and December 31, 2009, deferred tax asset (liability)
consisted of the following:
2010
|
2009
|
|||||||
Deferred
tax asset from Weikang R&D expense - current
|
$ | 84,553 | $ | - | ||||
Deferred
tax asset (net) on property and equipment for basis differences since
acquisition of Heilongjiang Weikang and Tianfang -
noncurrent
|
213,229 | 142,141 | ||||||
Deferred
tax asset arising from the acquisition of Heilongjiang Weikang -
noncurrent
|
30,182 | 29,620 | ||||||
Deferred
tax liability arising from the acquisition of Tianfang -
noncurrent
|
(3,690,460
|
)
|
|
(3,621,766 | ) | |||
Deferred
tax liability, net - noncurrent
|
$ | (3,447,049 |
)
|
|
$ | (3,450,005 | ) |
14. INCOME TAXES
Weikang
and Sinary were incorporated in the US and have net operating losses (NOL) for
income tax purposes. Weikang and Sinary had NOL carry forwards for income taxes
of $2,471,000 and $774,000 at September 30, 2010; $139,500 and $650,000 at
December 31, 2009, respectively, which may be available to reduce future years’
taxable income as NOL; NOLs can be carried forward up to 20 years from the year
the loss is incurred. Management believes the realization of benefits from these
losses are uncertain due to the Company’s limited operating history and
continuing losses. Accordingly, a 100% deferred tax asset valuation allowance
was provided.
Heilongjiang
Weikang and Tianfang are governed by the Income Tax Law of the PRC concerning
the private enterprises that are generally subject to tax at a statutory rate of
25% on income reported in the statutory financial
statements
after appropriate tax adjustments.
Foreign
pretax earnings approximated $20,104,000 and $14,892,000 for the nine months
ended September 30, 2010 and 2009, respectively. Pretax earnings of a foreign
subsidiary are subject to U.S. taxation when effectively repatriated. The
Company provides income taxes on the undistributed earnings of non-U.S.
subsidiaries except to the extent that such earnings are indefinitely invested
outside the US. At September 30, 2010, $36,504,000 of accumulated undistributed
earnings of non-U.S. subsidiaries was indefinitely invested. At the existing
U.S. federal income tax rate, additional taxes of $3,285,000 would have to be
provided if such earnings were remitted currently.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the nine and three months ended September 30, 2010 and
2009:
F-45
|
Nine Months
|
Three Months
|
||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
US
statutory rates
|
34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | ||||||||
Tax
rate difference
|
(10.3 | )% | (9.0 | )% | (9.6 | )% | (9.0 | )% | ||||||||
Valuation
allowance for US NOL
|
4.7 | % | - | % | 2.1 | % | - | % | ||||||||
Non-tax
deductible expenses
|
0.6 | % | - | % | 1.2 | % | - | % | ||||||||
Other
|
- | % | - | % | - | % | 1.0 | % | ||||||||
Tax
per financial statements
|
29.0 | % | 25.0 | % | 27.7 | % | 26.0 | % |
The
provisions for income taxes for the nine and three months ended September 30,
2010 and 2009 consisted of the following:
|
Nine Months
|
Three Months
|
||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Income
tax expense - current
|
$ | 5,192,188 | $ | 3,931,345 | $ | 2,346,556 | $ | 1,442,199 | ||||||||
Income
tax benefit - deferred
|
(67,330 | ) | (78,033 | ) | (20,565 | ) | (27,362 | ) | ||||||||
Total
income tax expenses
|
$ | 5,124,858 | $ | 3,853,312 | $ | 2,325,991 | $ | 1,414,837 |
15. COMMON STOCK
Common Stock with Warrants
Issued for Cash
On
January 20, 2010, the Company entered into Subscription Agreements with
"accredited" investors (or “the Investors”). Pursuant to the Subscription
Agreements, the Investors purchased 1,470,588 shares of Company common stock at
$1.70 per share. The
Company raised $2,500,000 in gross proceeds and received net proceeds of
$2,047,500. In connection with the Financing the Company paid the following: (i)
$150,000 to an Investment Relations escrow account, (ii) $250,000 in placement
agent fees, and (iii) $52,500 in offering expenses, including legal
fees.
The
Investors received one Series A Warrant and one Series B Warrant for every $8.00
invested in the Company under the Purchase Agreement. Series A Warrants grant
the holder the right to purchase shares of Common Stock at $3.00 per share.
Series B Warrants grant the holder the right to purchase shares of Common Stock
at $5.00 per share. At the closing the Investors received Series A Warrants to
purchase 312,500 shares of Common Stock and Series B Warrants to purchase
312,500 shares of Common Stock.
The
Series A and Series B Warrants expire January 20, 2013. The Warrants provide for
antidilution adjustments to the exercise price for certain convertible
securities issued with conversion prices lower than the Warrants' exercise
price. The warrants are exercisable into a fixed number of shares. Accordingly,
the warrants are classified as equity instruments. The Company accounted for the
warrants issued to the investors and placement agents based on the fair value
method under ASC Topic 505.The value of warrants was determined by using the
Black-Scholes pricing model with the following assumptions: discount rate –
2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The
value of the Warrants was $1,212,278.
In
connection with the Financing, the Company entered into an Investor Relations
Escrow Agreement, pursuant to which the Company established an escrow account of
$150,000 which may be allocated and released to investor relations firms for
marketing purposes at the sole discretion of a representative of the Investors.
The Company paid $150,000 to an IR firm for it providing IR services over two
years. For the nine and three months ended September 30, 2010, the Company
recorded $52,192 and $18,904 as IR expense, respectively
In
addition the Company issued the following securities: (i) Series A Warrants to
purchase 73,528 shares of Common Stock to placement agents, (ii) Series B
Warrants to purchase 73,528 shares of Common Stock to placement agents, (iii)
180,000 shares of Common Stock to an investor relations firm, (iv) 600,000
shares of Common Stock to a consultant for business development and capital
markets advice, and (v) 7,000 shares of Common Stock for legal services. The
value of warrants was determined by using the Black-Scholes pricing model with
the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected
volatility – 100% and term of 3 years. The value of the Warrants was
$285,236.
F-46
Following
is a summary of the warrant activity:
|
Number of
Shares
|
Average
Exercise
Price per Share
|
Weighed
Average
Remaining
Contractual
Term in Years
|
|||||||||
Granted
– series A warrants
|
386,028 | 3.00 | 3.00 | |||||||||
Granted
– series B warrants
|
386,028 | 5.00 | 3.00 | |||||||||
Exercised
|
||||||||||||
Forfeited
|
||||||||||||
Outstanding
at March 31, 2010
|
772,056 | 4.00 | 2.81 | |||||||||
Exercisable
at March 31, 2010
|
772,056 | 4.00 | 2.81 | |||||||||
Exercised
|
- | |||||||||||
Forfeited
|
- | |||||||||||
Outstanding
at June 30, 2010
|
772,056 | 4.00 | 2.56 | |||||||||
Exercisable
at June 30, 2010
|
||||||||||||
Exercised
|
- | |||||||||||
Forfeited
|
- | |||||||||||
Outstanding
at September 30, 2010
|
772,056 | 4.00 | 2.31 | |||||||||
Exercisable
at September 30, 2010
|
772,056 | 4.00 | 2.31 |
The
Company agreed to file a resale Registration Statement on Form S-1 by April 9,
2010 registering the Investor Shares and the Investors' Warrants with the SEC.
In the event the Company did not filed the Registration Statement by the
Required Filing Date, or the Registration Statement was not declared effective
by the SEC by 120 days after the Required Filing Date, the Company agreed to pay
liquidated damages to each Investor, from and including the day following such
Filing Default until the date the Registration Statement was filed with the SEC,
or until the Registration Statement was declared effective, as applicable, at a
rate per month (or portion thereof) equal to 0.50% of the total purchase price
of the Shares purchased by such Investor pursuant to the Purchase Agreement. In
no event, however, may the penalties exceed 9% in the aggregate of such total
purchase price. The Form S-1 was filed with SEC on March 25, 2010 and declared
effective on April 21, 2010.
In
connection with the financing, the Company also issued 27,000 shares to several
legal counsels and 200,000 shares to a consultant, First Trust China Ltd. The
fair value of the shares based on the market price at the date of the financing
of $397,250, was recorded as expense of the issuance of equity as a charge to
additional paid in capital.
Stock-Based
Compensation and Deferred
Compensation
On
January 20, 2010, the Company issued 600,000 shares of Common Stock valued at
$3.26 per share (stock price at grant date) to several consultants for providing
consulting services to the Company. In the first quarter of 2010, the Company
recorded $1,793,000 as deferred compensation, which was amortized over periods
ranging from two to six months. During the nine and three months ended September
30, 2010, the Company amortized $1,793,000 and $153,000 as stock-based
compensation expense, respectively.
On
January 20, 2010, the Company issued 180,000 shares to an IR firm for providing
IR services for a period of two years; the stock was valued at $3.26 per share
(stock price at grant date). In the first quarter of 2010, the Company recorded
$586,800 as deferred compensation. During the nine and three months ended
September 30, 2010, the Company amortized $203,371 and $73,953 as stock-based
compensation expense, respectively.
During
the first quarter of 2010, the Company issued 20,000 shares to one employee with
stock valued at $3.26 per share (stock price at grant date). The Company
recorded $65,200 stock-based compensation expense for the shares issued to this
employee.
On April
7, 2010, the Company issued 40,000 shares common stock as annual compensation to
four independent directors of the Company with stock valued at $4.65 per share
(stock price at grant date). The Company recorded $186,000 as deferred
compensation and amortized $90,197 and $46,882 as stock-based compensation
during the nine months and three months ended September 30,
2010.
F-47
On July
28, 2010, the Company issued 40,000 shares common stock as compensation to a
consulting company for a one-month business consulting service with stock valued
at $3.18 per share (stock price at grant date). The Company recorded $127,200 as
stock-based compensation during the quarter ended September 30,
2010.
16.
STATUTORY RESERVES
Pursuant
to the corporate law of the PRC effective on 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 the 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
Common
welfare fund is a voluntary fund 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 didn’t contribute to this fund.
17.
CONTINGENCIES
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s operations may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
The
Company’s sales, purchases and expense transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. RMB is
not freely convertible into foreign currencies under the current law. In China,
foreign exchange transactions are required by law to be conducted only by
authorized financial institutions. Remittances in currencies other than RMB may
require certain supporting documentation in order to affect the
remittance.
18.
GOODWILL
Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses
acquired. In accordance with FASB ASC Topic 350, goodwill is not amortized but
is tested for impairment annually, or when circumstances indicate a possible
impairment may exist. Impairment testing is performed at a reporting unit level.
An impairment loss generally would be recognized when the carrying amount of the
reporting unit exceeds the fair value of the reporting unit, with the fair value
of the reporting unit determined using a discounted cash flow (DCF) analysis. A
number of significant assumptions and estimates are involved in the application
of the DCF analysis to forecast operating cash flows, including the discount
rate, the internal rate of return, and projections of realizations and costs to
produce. Management considers historical experience and all available
information at the time the fair values of its reporting units are
estimated.
F-48
On July
22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued
and outstanding equity interests of Tianfang for $15,000,000 (RMB 102,886,500).
The total consideration for acquisition exceeded fair value of the net assets
acquired by $3,565,578. The excess was recorded as goodwill. Goodwill was
recorded as intangible assets.
19.
SUBSEQUENT EVENTS
On
October 1, 2010, the Company granted stock options to its legal counsel to
acquire 20,000 shares of the Company’s common stock, at $2.70 per share, with a
life of 3 years. The options were vested in the grant date. The fair value of
the options was calculated using the following assumptions: estimated life of
three years, volatility of 100%, risk free interest rate of 2.76%, and dividend
yield of 0%. The grant date fair value of options was $33,982.
F-49
PART
II—INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13.
|
Other
Expenses and Issuance and
Distribution
|
Although we will receive no proceeds
from the sale of shares pursuant to this prospectus, we have agreed to bear the
costs and expenses of the registration of the shares. Our expenses in connection
with the issuance and distribution of the securities being registered are
estimated as follows:
SEC
Registration Fee
|
$ | 1,224.81 | ||
Professional
Fees and Expenses*
|
$ | 30,000.00 | ||
Printing
and Engraving Expenses *
|
$ | 2,000.00 | ||
Transfer
Agent's Fees*
|
$ | 1,000.00 | ||
Miscellaneous
Expenses*
|
$ | 1,000.00 | ||
Total*
|
$ | 35,224.81 |
*
Estimates
Item 14.
|
Indemnification
of Directors and Officers
|
The
Company's directors and executive officers are indemnified as provided by the
Nevada law and the Company's Bylaws. These provisions state that the
Company's directors may cause the Company to indemnify a director or former
director against all costs, charges and expenses, including an amount paid to
settle an action or satisfy a judgment, actually and reasonably incurred by him
as a result of him acting as a director. The indemnification of costs can
include an amount paid to settle an action or satisfy a judgment. Such
indemnification is at the discretion of the Company's board of directors and is
subject to the Securities and Exchange Commission's policy regarding
indemnification.
Indemnification
Against Public Policy
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
Item 15.
|
Recent
Sales of Unregistered Securities
|
December
2010 and January 2011 Financing
In
December 2010 and January 2011, the Company sold in a series of private
placements a total of 520,831 Units, each unit comprised of (i) four shares
of Common Stock, (ii) a three-year warrant to purchase one share of
Common Stock at $3.60 per share (“Series C Warrant”), and (iii) a three-year
warrant to purchase one share of Common Stock at $4.80 per share (“Series D
Warrant”), for an aggregate purchase price of
$4,999,973.60.
In
connection with the private placement transactions, the Company engaged Hunter
Wise Securities, LLC (“Hunter Wise”) as exclusive placement agent for the
private placements, with National Securities Corporation (“NSC”), Pacific Summit
Securities (“Pacific Summit”) and Anderson & Strudwick, Inc. (“Anderson”)as
authorized participating agent (collectively, “Placement Agents”). As
part of consideration for their services, the Company issued the Placement
Agents three-year warrants (“PA Warrants”) to purchase an aggregate of 168,232
shares of Common Stock at $2.40 per share.
49
The
Series C Warrants, Series D Warrants and PA Warrants (collectively, the
“Warrants”) issued to the investors and the Placement Agents are
immediately exercisable and have a term of three years. Such Warrants
may be exercised cashlessly in the event that there is no effective registration
statement providing for the resale of the Common Stock underlying the Warrants
pursuant to the time frame described in more detail below. The exercise
prices of the Warrants are subject to customary adjustments provisions for stock
splits, stock dividends, recapitalizations and the
like. Additionally, for a period of three years following the final
closing of the private placements, anti-dilution protection shall be afforded
the investors, as described in more detail below.
In
connection with the private placements and pursuant to the transaction
agreements:
|
·
|
The Company agreed to list and
trade its shares of Common Stock on the Nasdaq Capital Market, Nasdaq
Global Market, or the NYSE Amex (each, a “National Stock Exchange”) and
shall take all commercially reasonable actions to file an application to
trade its shares on a National Stock Exchange within 90 days after the
final closing date of the Offering. In the event the shares of Common
Stock are not approved for trading on a National Stock Exchange within 120
days from the final closing date of the private placements and
commercially reasonable actions have not been taken to meet such
requirement, the Company shall pay cash liquidated damages to
the investors in the amount equal to 0.5% of the purchase price paid
by each investor, to be paid each month until the listing of the Company’s
shares on a National Stock Exchange is
completed.
|
|
·
|
The Company agreed to file a
registration statement covering the shares of Common Stock issued as part
of the Units and issuable upon exercise of the Warrants issued to the
investors and the placement agent. The Company is to file the
registration statement within 45 days following the final closing of the
private placements and have the registration statement declared effective
within 120 days after such closing, except that the effective date shall
be extended by 30 days in the event that the SEC undertakes a full review
of the registration statement. If the registration statement is
not filed or declared effective within the above-mentioned periods, the
Company shall pay cash liquidated damages to each investor in the amount
equal to 0.5% of the amount subscribed for by such investor, to be paid
each month from the required effectiveness date until the registration
statement is filed or declared effective, as
applicable.
|
|
·
|
Pursuant to a make good escrow
agreement dated December 2, 2010, Lucky Wheel Limited, the principal
shareholder of the Company, whose shares in the Company Yin Wang, the
Company’s chief executive officer, has dispositive and voting power,
agreed to deposit into escrow 2,083,333 shares of Common Stock, which are
to be held in escrow to be returned to Lucky Wheel Limited or delivered to
the investors on a pro-rata basis, depending on whether the Company meets
certain financial performance targets for the years ending December 31,
2010 and December 31, 2011. The performance target for 2010 is
after-tax net income, as defined, of at least $21,000,000. The performance
target for 2011 is after-tax net income of at least
$25,000,000. If the performance target for either 2010 or 2011
is not met, the Company shall allocate to the investors that number of
escrowed shares as equals the shortfall for such year, based on each
investor’s actual investment, on a pro-rata basis.
|
In
determining after-tax net income, the following items shall be excluded: (i) any
losses suffered as a result of a force majeure event; (ii) the effects of EITF
07-5; (iii) any items of expense or deduction arising directly or indirectly
from the private placements and the transaction contemplated by the private
placements; and (iv) any costs and expense incurred in 2010 or 2011 in
establishing an employee stock option plan and granting stock options
thereunder.
|
·
|
Except for certain exempt
issuances, in the event that the Company shall, at any time within three
years following the final closing of the private placements, issue or sell
any additional shares of Common Stock or securities convertible or
exchanged into Common Stock (the “Subsequent Issuance”) at a price per
share less than $3.12, or in the event that additional shares are issued
pursuant to the terms of the make good escrow agreement, at a price per
share less than $2.40, then the investors have full-ratchet anti-dilution
protection, such that:
|
50
|
(i)
|
the Company shall issue such
additional shares of Common Stock to each investor representing the
difference between the number of shares of Common Stock issued to such
investor as part of the Units purchased and the number of shares of
Common Stock that the investor would have received if the Units were sold
at a per share price equivalent to the purchase price for the securities
in the Subsequent Issuance.
|
|
(ii)
|
The respective exercise prices
for the Warrants shall be reduced to such lesser per share price in the
Subsequent Issuance.
|
|
·
|
Pursuant to the terms of the
Investor Relations Escrow Agreement dated December 2, 2010, $150,000 of
the gross proceeds in the private placements have been placed in an escrow
account to be used by the Company in connection with services rendered by
an investor and public relations firm that has been retained by the
Company and is reasonably acceptable to the placement
agent.
|
|
·
|
Pursuant to the terms of a
lock-up agreement, the Company’s executive officers and directors agreed
not to offer, sell, contract to sell, assign, transfer, hypothecate,
pledge or grant a security interest in, or otherwise dispose of, or enter
into any transaction which is designed to, or might reasonably be expected
to, result in the disposition of (whether by actual disposition or
effective economic disposition due to cash settlement or otherwise,
directly or indirectly) any of the shares of the Company’s Common Stock
that such person owns as of December 2, 2010 or may acquire, for a period
of 9 months following the final closing of the private
placements.
|
The
above-mentioned securities were offered and sold to the Investors in private
placement transactions made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, Regulation S, and
Rule 506 promulgated under Regulation D thereunder. Based on representations
from the investors, the Company determined that the investors are either
accredited investors as defined in Rule 501 of Regulation D promulgated under
the Securities Act of 1933 or not a “U.S. person” as that term is defined in
Rule 902(k) of Regulation S under the Securities Act of 1933, and such investors
acquired our Common Stock, for investment purposes for their own respective
accounts and not as nominees or agents, and not with a view to the resale or
distribution thereof, and that the investors understood that the shares of our
Common Stock may not be sold or otherwise disposed of without registration under
the Securities Act of 1933 or an applicable exemption therefrom.
Issuance
for Services
In February 2010, the Company issued a
consultant, 200,000 shares as compensation for consulting
services.
On
October 3, 2010 the Company entered into a Business Consulting Services
Agreement with Hunter Wise Financial Group, LLC (“Hunter Wise”). As compensation
for its services, the Company issued 500,000 shares of Common Stock to Hunter
Wise.
On
December 16, 2010, the Company entered into a Business Consulting Services
Agreement with Far East Strategies, LLC for the provision of certain services
related to public market communications. Pursuant to the agreement, in partial
consideration of such services, the Company issued to Far East Strategies, Inc.
a total of 200,000 shares of Common Stock.
On December 29, 2010, the Company
entered into Joint Marketing Agreement, as amended on December 3, 2010, with its
investor relations firm, RedChip Companies Inc. (“RedChip”) for the provision of
certain investor relations services. In partial consideration
of such services, the Company had agreed to issue to RedChip up to 50,000
restricted shares of Common Stock (the “Shares”) in accordance with the
provisions of the Joint Marketing Agreement. As of February 9, 25,000 shares of
Common Stock were issued to RedChip.
The
above-mentioned securities were not registered under the Securities Act of
1933. The issuance of these shares was exempt from registration, in
part pursuant to Regulation S and Regulation D under the Securities Act of 1933
and in part pursuant to Section 4(2) of the Securities Act of
1933.
51
January
20, 2010 Financing
On January 20, 2010, the Company
entered into a Subscription Agreement with three “accredited”
investors. Pursuant to the Subscription Agreement, the
investors purchased 1,470,588 shares of the Company’s Common Stock (“Investor
Shares”) at $1.70 per share. Pursuant to the Subscription Agreement, the Company
has agreed to file a resale Registration Statement on Form S-1 by April 9, 2010
registering the Investor Shares and the shares of Common Stock issuable under
warrants issued to the investors with the Securities and Exchange
Commission. In the event the Company has not filed the
Registration Statement by the required filing date, or the Registration
Statement is not declared effective by the SEC by 120 days after the required
filing date, the Company has agreed to pay liquidated damages to each investor,
at a rate per month equal to 0.50% of the total purchase price of the shares
purchased by such investor pursuant to the Subscription Agreement. In
no event, however, may the penalties exceed 9% in the aggregate of such total
purchase price.
The
Investor Shares were issued to “accredited” investors, as such term is
promulgated by the SEC. In reliance upon each such investor’s
representation as an “accredited investor,” among other representations, the
offer and sale of the securities described above are exempt from the
registration requirements under the Securities Act of 1933, as amended, pursuant
to Section 4(2) thereof and in reliance upon Rule 506 of Regulation D
promulgated by the SEC. We made this determination based on the
representations of the stockholders of Weikang Bio-Technology Group Company,
Inc. that such stockholders were "accredited investors" within the meaning of
Rule 501 of Regulation D promulgated under the Securities Act, and that such
stockholders were acquiring our Common Stock, for investment purposes for their
own respective accounts and not as nominees or agents, and not with a view to
the resale or distribution thereof, and that the entities and individuals
understood that the shares of our Common Stock may not be sold or otherwise
disposed of without registration under the Securities Act or an applicable
exemption therefrom.
Global Hunter Securities, LLC acted as
placement agent with respect to the offering of Investor Shares and received a
cash fee of $125,000 (equal to 5% of the gross proceeds of the Offering) and
warrants to purchase an aggregate of: (a) 36,764 shares of Common Stock at an
exercise price of $3.00 per share and (b) 36,764 shares at an exercise price of
$5.00 per share.
FirsTrust China Ltd. acted as
consultant to the Company with respect to its business and financing and
received a cash fee of $125,000 and warrants to purchase: (a) 36,764 shares of
Common Stock at $3.00 per share and (b) 36,764 shares at $5.00 per
share.
In addition, the Company issued the
following securities: (i) 180,000 shares of Common Stock to Jinsun,
LLC, an investor relations firm, (ii) 600,000 shares of Common Stock to Far East
Strategies, LLC, a consultant, for business development and capital markets
advice, and (iii) 7,000 shares of Common Stock to The Crone Law Group for legal
services.
Such securities were not registered
under the Securities Act of 1933. The issuance of these shares was
exempt from registration, in part pursuant to Regulation S and Regulation D
under the Securities Act of 1933 and in part pursuant to Section 4(2) of the
Securities Act of 1933.
Share
Exchange
On December 7, 2007, we issued
24,725,200 shares of Common Stock to the stockholder of Sinary for 100% of the
issued and outstanding capital stock of Sinary. On December 7, 2007,
we executed (at the time of execution, our corporate name was Expedition
Leasing, Inc.) a Share Exchange Agreement by and among Sinary Bio-Technology
Holdings Group, Inc., a Nevada corporation (or Sinary), and the holder of 100%
of Sinary’s issued and outstanding Common Stock, on the one hand, and us and
certain holders of our Common Stock who held a majority of the issued and
outstanding Common Stock in the aggregate (referred to as the “Expedition
Leasing Stockholders”), on the other hand.
At the closing of this transaction,
which occurred on December 7, 2007, we issued 24,725,200 shares of our Common
Stock to the Sinary Stockholder for 100% of the Common Stock of Sinary (the
“Share Exchange Transaction”). Concurrently on the Closing Date, the Expedition
Leasing Stockholders cancelled 24,725,200 shares of Expedition Common Stock held
by them. Immediately after the Closing, we had a total of 25,229,800 shares of
Common Stock outstanding, with the Sinary Stockholder owning approximately 98%
of our issued and outstanding Common Stock.
52
Except for the Share Exchange Agreement
and the transactions contemplated thereunder, neither the Company nor its sole
director and sole executive officer serving prior to the consummation of the
Share Exchange Transaction had any material relationship with Sinary or the
Sinary Stockholder.
The issuance of these shares was exempt
from registration in reliance on the exemptions for sales of securities not
involving a public offering, as set forth in Rule 506 promulgated under the
Securities Act and in Section 4(2) of the Securities Act, based on the
following: (a) the investor confirmed to us that she was either
an “accredited investor,” as defined in Rule 501 of Regulation D
promulgated under the Securities Act or had such background, education and
experience in financial and business matters as to be able to evaluate the
merits and risks of an investment in the securities; (b) there was no
public offering or general solicitation with respect to the offering;
(c) the investor was provided with certain disclosure materials and all
other information requested with respect to our company; (d) the investor
acknowledged that all securities being purchased were “restricted securities”
for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; and (e) a legend was placed on the certificate
representing each such security stating that it was restricted and could only be
transferred if subsequently registered under the Securities Act or transferred
in a transaction exempt from registration under the Securities Act.
EXHIBITS
Exhibit No.
|
Description
|
|
2.1
|
Share
Exchange Agreement among Expedition Leasing Inc. (“Expedition Leasing”),
certain stockholders of Expedition Leasing, Sinary Bio-Technology Holding
Group, Inc. (“Sinary”) and the sole stockholder of Sinary dated December
7, 2007 (1)
|
|
2.2
|
Equity
Transfer Agreement between Sinary and the owners of 100% of the registered
equity of Heilongjiang Weikang Bio-Technology Group Co., Ltd. Dated
October 25, 2007 (1)
|
|
2.3
|
Agreement
and Plan of Merger dated as of June 4, 2008 between Expedition
Leasing and Weikang (2)
|
|
3.1
|
Articles
of Incorporation of Weikang (2)
|
|
3.2
|
Bylaws
of Weikang (2)
|
|
4.1
|
Form
of Series A and B Common Stock
Warrant (3)
|
|
4.2
|
Form
of Series C Warrant (5)
|
|
4.3
|
Form
of Series D Warrant (5)
|
|
4.4
|
Form
of warrants issued to the placement agents (5)
|
|
4.5
|
Form
of Subscription Agreement, by and between Weikang Bio-Technology Group
Company, Inc. and the investors. (5)
|
|
4.6
|
Form
of Registration Rights Agreement, by and between Weikang Bio-Technology
Group Company, Inc. and the investors. (5)
|
|
4.7
|
Form
of Lock-Up Agreement (5)
|
|
5.1
|
Opinion
of Sichenzia Ross Friedman Ference LLP*
|
|
10.1
|
Stock
Transfer Agreement dated as of June 30, 2008 by and among Heilongjiang
Weikang Bio-Technology Group Co., Ltd., Beijing Shiji Qisheng Trading Co.,
Ltd., Tri-H Trade (U.S.A.) Co., Ltd., and Tianfang (Guizhou)
Pharmaceutical Co., Ltd. (4)
|
|
10.2
|
The
Weikang Bio-Technology Group Company, Inc. 2008 Stock Incentive Plan
(2)
|
|
10.3
|
Subscription
Agreement dated January 20, 2010, between Weikang and the subscribers
identified on the signature pages
thereto (3)
|
|
10.4
|
Investor
Relations Escrow Agreement dated January 20, 2010, among Weikang, the
escrow agent named therein and Opus Holdings Three, Ltd.
(3)
|
|
10.5
|
Lease
Agreement dated January 1, 2008 between Heilongjiang Weikang
Bio-Technology Group and Harbin Dongfeng Pharmaceutical Corp. Ltd.
relating to the lease of the workshop and technology for manufacturing
royal jelly.(6)
|
|
10.6
|
Shell
Company Purchase Agreement dated December 8, 2007 between the Company and
Yin Wang relating the advance from an officer of the
Company(6)
|
|
10.7
|
English
translation of land use right certificate issued by Xiuwen County Land
Bureau and Bureau of Real Estate Management of Guiyang City for the
benefit of Tianfang (Guizhou) Pharmaceutical Co., Ltd., which expires
December 9, 2051(6)
|
53
10.8
|
English
translation of land use right certificate issued by Bureau of Land and
Resources of Shuang-Cheng City for the benefit of Heilongjiang
Weikang Bio-Technology Group, which expires April 8,
2055(6)
|
|
10.9
|
Make
Good Securities Escrow Agreement, dated December 2, 2010, by and between
Weikang Bio-Technology Group Company, Inc., Sichenzia Ross Friedman
Ference LLP, as escrow agent, and Lucky Wheel
Limited.(5)
|
|
10.10
|
Investor
and Public Relations Escrow Agreement, dated December 2, 2010, by and
between Weikang Bio-Technology Group Company, Inc., Sichenzia Ross
Friedman Ference LLP, as escrow agent, and MidSouth Investor Fund LP, as
representative for the investors.(5)
|
|
10.11
|
Escrow
Deposit Agreement, dated October 25, 2010 and amendment thereto dated
November 24, 2010, by and between Weikang Bio-Technology Group Company,
Inc., Hunter Wise Securities, LLC, and Signature Bank, as escrow agent.
(5)
|
|
21.1
|
List
of Subsidiaries (6)
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm*
|
|
23.2
|
Consent
of Sichenzia Ross Friedman Ference LLP (contained in Exhibit
5.1)*
|
* Filed
herewith.
(1)
Incorporated by reference from the Company’s Form 8-K filed with the SEC on
December 10, 2007.
(2)
Incorporated by reference from the Company’s Schedule 14C filed with the SEC on
May 14, 2008.
(3)
Incorporated by reference from the Company’s Form 8-K filed with the SEC on
January 26, 2010.
(4)
Incorporated by reference from the Company’s Form 8-K filed with the SEC on July
24, 2008.
(5)
Incorporated by reference from the Company’s Form 8-K filed with the SEC on
December 8, 2010
(6)
Incorporated by reference from the Company’s Registration Statement on Form S-1
filed with the SEC on March 25, 2010.
Item 17.
|
Undertakings
|
(a) The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
54
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, shall be deemed to be part of
and included in the registration statement as of the date it is first used after
effectiveness. Provided, however
, that no statement made in a registration statement or prospectus that is part
of the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus that is
part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any statement that
was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
(b) The
undersigned registrant hereby undertakes, that for the purpose of determining
liability of the registrant under the Securities Act of 1933, to any purchaser
in the initial distribution of the securities: the undersigned registrant
undertakes that in a primary offering of securities of the undersigned
registrant pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(1) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
(2) Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
(3) The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(4) Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(c)
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
55
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, in Harbin, the People’s Republic of China, on February 14,
2011.
WEIKANG
BIO-TECHNOLOGY GROUP COMPANY, INC.
|
|||
|
By:
|
/s/ Yin Wang | |
Yin Wang | |||
Chief
Executive Officer
|
|||
KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Yin Wang as true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution and for him/her and in
his/her name, place and stead, in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
Registration Statement, as well as any new registration statement filed to
register additional securities pursuant to Rule 462(b) under the Securities Act,
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
stated.
Signature
|
Title
|
Date
|
||
/s/ Yin Wang
|
Director
and Chief Executive Officer
|
February
14, 2011
|
||
Yin
Wang
|
(Principal
Executive Officer)
|
|||
/s/ Baolin Sun
|
Chief
Financial Officer
|
February
14, 2011
|
||
Baolin
Sun
|
(Principal
Financial and Accounting Officer)
|
|||
/s/ Yvonne Zhang
|
Director
|
February
14, 2011
|
||
Yvonne
Zhang
|
||||
/s/ Yilun Jin
|
Director
|
February
14, 2011
|
||
Yilun
Jin
|
||||
/s/ Allen Zhang
|
Director
|
February
14, 2011
|
||
Allen
Zhang
|
||||
/s/ Yan Huang
|
Director
|
February
14, 2011
|
||
Yan
Huang
|
56