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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
       For the quarterly period ended June 30, 2011

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
       For the transition period from ________ to __________

Commission File Number: 000-24977

LINKWELL CORPORATION
(Exact name of small business issuer as specified in charter)
 
FLORIDA
 
65-1053546
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
1104 Jiatong Road, Jiading District, Shanghai, China 201807
(Address of principal executive offices)
 
(86) 21-5566-6258
(Issuer's telephone number)
 
not applicable
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
   
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of [August 15, 2011], there were [94,605,475] shares of our common stock issued and outstanding.
 
 

 
 
LINKWELL CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011

INDEX
 
     
Page
PART I - FINANCIAL INFORMATION
   
       
Item 1. 
Financial Statements.
 
       
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
  24 
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
    35
       
Item 4.
Controls and Procedures.
    35
       
PART II - OTHER INFORMATION
   
       
Item 1.
Legal Proceedings.
    36
       
Item 6.
Exhibits.
    36
       
Signature
    37
 
 
2

 

 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the risk of doing business in the People's Republic of China, or the PRC, our ability to implement our strategic initiatives, our access to sufficient capital, the effective integration of our subsidiaries in the PRC into a U.S. public company structure, economic, political and market conditions and fluctuations, government and industry regulation, Chinese and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
 
OTHER PERTINENT INFORMATION

As used herein, unless the context indicates otherwise, the terms:

“Linkwell”, the “Company”, “we” and “us” refers to Linkwell Corporation,
a Florida corporation;

“Linkwell Tech” refers to our 90% owned subsidiary Linkwell Tech Group, Inc.,
a Florida corporation;

“LiKang Disinfectant” refers to Shanghai LiKang Disinfectant High-Tech Company, Limited,
a wholly-owned subsidiary of Linkwell Tech;

“LiKang Biological” refers to Shanghai LiKang Biological High-Tech Co., Ltd.,
a wholly owned subsidiary of LiKang Disinfectant; and

“LiKang International” refers to Shanghai LiKang International Trade Co., Ltd.,
formerly a wholly owned subsidiary of LiKang Disinfectant which was sold to Linkwell International Trading Co., Limited on May 31, 2008.

We also use the following terms when referring to certain related parties:

“Shanhai” refers to Shanghai Shanhai Group, a Chinese company which used to be the minority owner of LiKang Disinfectant;
 
“Meirui” refers to Shanghai LiKang Meirui Pharmaceuticals High-Tech Co., Ltd., a company of which Shanhai is a majority shareholder; and

“ZhongYou” refers to Shanghai ZhongYou Pharmaceutical High-Tech Co., Ltd., a company owned by Shanghai Jiuqing Pharmaceuticals Company, Ltd., whose 65% owner is Shanghai Ajiao Shiye Co. Ltd. Our Chairman and Chief Executive Officer Xuelian Bian is a 60% shareholder of Shanghai Ajiao Shiye Co. Ltd.
 
The People's Republic of China is herein referred to as China or the PRC.

The information which appears on our web site at www.linkwell.us is not part of this report.
 
 
3

 
 
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
 
       
   
June 30, 2011
(Unaudited)
   
December 31, 2010
(Audited)
 
ASSETS
           
             
CURRENT ASSETS
           
      Cash and cash equivalent
  $ 1,095,952     $ 3,170,529  
      Accounts receivable, net
    2,389,960       2,949,855  
      Accounts receivable - related parties, net
    8,024,456       7,376,366  
      Due from related party
   
1,102,131
      2,100,204  
      Other receivables
   
4,913,455
      152,337  
      Inventories, net
    2,811,824       2,072,976  
      Prepaid expenses and other current assets
    979,993       957,633  
                 
                Total current assets
    21,317,771       18,779,900  
                 
NON-CURRENT ASSETS
               
      Property, plant and equipment, net
    2,056,451       2,192,295  
      Deposit
    554,000       554,000  
      Construction in progress
    150,778       -  
      Intangible assets
    359,554       410,918  
                Total non-current assets
    3,120,783       3,157,213  
TOTAL ASSETS
  $ 24,438,554     $ 21,937,113  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
      Loans payable
  $ 1,545,213     $ 1,132,469  
      Accounts payable and accrued expenses
    3,574,386       2,338,609  
      Advances from customers
    293,613       286,914  
      Taxes payable
    209,930       365,375  
      Other payables
    2,305       61,247  
      Due to related parties
    1,001,046       1,380,628  
                  Total current liabilities
    6,626,493       5,565,242  
       Put option liability
    2,400,000       2,400,000  
                  Total liability
    9,026,493       7,965,242  
COMMITMENT AND CONTINGENCY
               
STOCKHOLDERS' EQUITY
               
      Preferred Stock, No par value; 10,000,000
        authorized, no shares issued and outstanding at
        June 30, 2011 and December 31, 2010, respectively
    -       -  
      Common Stock, $.0005 par value, 150,000,000
         authorized, 94,605,475 and 86,605,475 shares issued and
         outstanding at June 30, 2011 and December 31, 2010,
         respectively
    47,302       43,303  
      Additional paid-in capital
    7,870,021       7,474,021  
      Statutory surplus reserve
    802,749       802,749  
      Deferred compensation
    (9,792 )     (109,042 )
      Retained earnings
    4,638,991       4,188,519  
      Accumulated other comprehensive income
    1,438,233       1,066,622  
                 
                     Total Linkwell Corporation stockholder's equity
    14,787,504       13,466,172  
                 
NONCONTROLLING INTEREST
    624,557       505,699  
TOTAL STOCKHOLDERS' EQUITY
    15,412,061       13,971,871  
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
  $ 24,438,554     $ 21,937,113  
 
See accompanying notes to these consolidated financial statements.
 
 
4

 
 
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
 
   
SIX MONTHS ENDED
JUNE 30,
   
THREE MONTHS ENDED
JUNE 30,
 
   
2011
   
2010
   
2011
   
2010
 
NET SALES
                       
     Non-related companies
  $ 3,454,099     $ 4,423,073     $ 1,839,839     $ 2,574,186  
     Related companies
    3,566,996       1,441,775       1,958,047       266,773  
        Total Net Sales
    7,021,095       5,864,848       3,797,886       2,840,959  
COST OF SALES
    3,781,224       2,993,896       2,101,993       1,442,850  
GROSS PROFIT
    3,239,871       2,870,952       1,695,893       1,398,109  
OPERATING EXPENSES
                               
     Selling expenses
    521,059       690,883       317,894       334,913  
     General and administrative
    1,860,681       1,582,126       1,079,103       713,955  
         Total Operating Expenses
    2,381,739       2,273,009       1,396,996       1,048,868  
INCOME FROM OPERATIONS
    858,132       597,943       298,897       349,241  
OTHER INCOME (EXPENSES)
                               
     Other income (expenses)
    (19,781 )     26,753       25,924       18,606  
     Interest expense
    (33,907 )     (36,867 )     (22,246 )     (15,127 )
        Total Other Expenses, net
    (53,688 )     (10,114 )     3,678       3,479  
INCOME BEFORE INCOME TAX
    804,444       587,829       302,575       352,720  
INCOME TAX EXPENSE
    (235,115 )     (142,885 )     (134,962 )     (74,253 )
NET INCOME INCLUDING NONCONTROLLING INTEREST
    569,329       444,944       167,613       278,467  
                                 
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
    (118,858 )     (60,178 )     (76,189 )     (32,818 )
NET INCOME ATTRIBUTABLE TO LINKWELL CORP
    450,471       384,766       91,424       245,649  
OTHER COMPREHENSIVE INCOME
                               
     Foreign currency translation
    371,611       71,298       205,325       67,845  
COMPREHENSIVE INCOME
  $ 822,082     $ 456,064     $ 296,749     $ 313,494  
                                 
BASIC AND DILUTED INCOME PER COMMON SHARE:
                               
    Basic earnings per shares
  $ 0.01     $ 0.00     $ 0.00     $ 0.00  
    Diluted earnings per shares
  $ 0.01     $ 0.00     $ 0.00     $ 0.00  
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING:
                               
    Basic
    88,240,834       86,605,475       89,858,222       86,605,475  
    Diluted
    88,240,834       86,605,475       89,858,222       86,605,475  
 
See accompanying notes to these consolidated financial statements.
 
 
5

 
 
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
SIX MONTHS ENDED JUNE 30,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
            Income including noncontrolling interest
  $ 569,329     $ 444,944  
            Adjustments to reconcile income including noncontrolling
               
            Interest to net cash provided by (used in) operating activities:
               
            Stock compensation expense
    400,000       -  
            Deferred compensation
    99,250       99,250  
            Depreciation and amortization
    224,006       176,492  
            Loss from disposal of property
    42,155       973  
         Increase(decrease) in current assets
               
            Accounts receivable
    622,088       7,509  
            Accounts receivable - related party
    (440,835 )     (328,579 )
            Other receivables
    (4,005,829 )     (134,672 )
            Inventories
    (683,112 )     (547,537 )
            Deposits, prepaid expenses and other current assets
    (85,613 )     (42,187 )
         Increase(decrease) in current liabilities
               
            Accounts payable and accrued expenses
    1,111,259       642,484  
            Other payables
    -       (78,544 )
            Taxes payable
    (162,234 )     (108,642 )
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    (2,309,537 )     131,491  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
            Construction in progress
    (149,176 )     (42,636 )
            Purchase of property, plant and equipment
    (29,754 )     (117,575 )
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    (178,930 )     (160,211 )
CASH FLOWS FROM FINANCING ACTIVITIES:
               
            Change in due to related parties
    (405,498 )     (255,761 )
            Change in due from related parties
    376,839       -  
            Proceeds from loans payable
    382,199       703,276  
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    353,540       447,515  
EFFECT OF EXCHANGE RATE ON CASH
    60,349       13,792  
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (2,074,577 )     432,587  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    3,170,529       2,144,360  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 1,095,952     $ 2,576,947  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:
               
             Cash paid for:
               
                  Interest
  $ 27,680     $ 11,636  
                  Income taxes
  $ 306,374     $ 126,455  
 
See accompanying notes to these consolidated financial statements.
 
 
6

 
 
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2011 AND DECEMBER 31, 2010

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Linkwell Corporation (formerly Kirshner Entertainment & Technologies, Inc.) (the “Company”) was incorporated in the State of Colorado on December 11, 1996. On May 31, 2000, the Company acquired 100% of HBOA.com, Inc. On December 28, 2000, the Company formed a new subsidiary, Aerisys Incorporated (“Aerisys”), a Florida corporation, to handle commercial private business. In June 2003, the Company formed its entertainment division and changed its name to reflect this new division. Effective as of March 31, 2003, the Company discontinued its entertainment division and its technology division, except for the Aerisys operations that continue on a limited basis.

On May 2, 2005, the Company entered into and consummated a share exchange with all of the shareholders of Linkwell Tech Group, Inc. (“Linkwell Tech”). Pursuant to the share exchange, the Company acquired 100% of the issued and outstanding shares of Linkwell Tech's common stock, in exchange for 36,273,470 shares of our common stock, which at closing represented approximately 87.5% of the issued and outstanding shares of the Company’s common stock. As a result of the transaction, Linkwell Tech became our wholly-owned subsidiary. For financial accounting purposes, the exchange of stock was treated as a recapitalization of Kirshner with the former shareholders of the Company retaining 7,030,669 or approximately 12.5% of the outstanding stock. The consolidated financial statements reflect the change in the capital structure of the Company due to the recapitalization and in the operations of the Company and its subsidiaries for the periods presented.

Linkwell Tech was founded on June 22, 2004, as a Florida corporation. On June 30, 2004, Linkwell Tech acquired 90% of Shanghai LiKang Disinfectant High-Tech Company, Ltd. (“LiKang Disinfectant”), a PRC company, through a stock exchange. This transaction resulted in the formation of a U.S. holding company by the shareholders of LiKang Disinfectant as it did not result in a change in the underlying ownership interest of LiKang Disinfectant. LiKang Disinfectant is a science and technology enterprise founded in 1988. LiKang Disinfectant is involved in the development, production, marketing and sale, and distribution of disinfectant health care products.

LiKang Disinfectant has developed a line of disinfectant product offerings which are utilized by the hospital and medical industry in China. LiKang Disinfectant has developed a line of disinfectant product offerings. LiKang Disinfectant regards hospital disinfectant products as the primary segment of its business and has developed and manufactured several series of products in the field of skin mucous disinfection, hand disinfection, surrounding articles disinfection, medical instruments disinfection and air disinfection.
 
On June 30, 2005, the Company's Board of Directors approved an amendment of its Articles of Incorporation to change the name of the Company to Linkwell Corporation. The effective date of the name change was after close of business on August 16, 2005.
 
On March 5, 2009, the Company’s subsidiary, Likang Disinfectant acquired 100% of Likang Biological, a company owned by related parties.
 
 
7

 
 
On March 25, 2008, the Company’s subsidiary, Linkwell Tech acquired the remaining 10% of Likang Disinfectant that it did not own.  The purchase price for the remaining 10% interest in Likang Disinfectant was $684,057, consisting of $399,057 in cash and 1,500,000 shares of the Company’s common stock valued at $285,000. The 10% interest in Likang Disinfectant had a value of $577,779 prior to the Company’s purchase. The $126,278 difference between purchase price and its value was deemed a dividend and deducted from retained earnings upon closing of the acquisition.
 
On February 15, 2008, the Company entered into a stock purchase agreement with Ecolab Inc., a Delaware corporation (“Ecolab”), pursuant to which Ecolab agreed to purchase 888,889 of shares of Linkwell Tech, or 10% of the issued and outstanding capital stock of Linkwell Tech, for $2,000,000. On March 28, 2008 and June 4, 2008, Linkwell Tech received $200,000 and $1,388,559, respectively from Ecolab. Including a $400,000 loan that Linkwell Tech received from Ecolab and accrued interest thereon of $11,441, Linkwell Tech received a total investment of $2,000,000 from Ecolab. On May 31, 2008, the Company, Linkwell Tech and Ecolab entered into a Linkwell Tech Group Inc. Stockholders Agreement, whereby both the Company and Ecolab are subject to, and beneficiaries of, certain pre-emptive rights, transfer restrictions and take along rights relating to the shares of Linkwell Tech that the Company and Ecolab each hold. As of May 31, 2008, the principal and accrued interest of $11,441 on the short-term $400,000 loan became part of Ecolab’s investment and does not need to be repaid.
 
The unaudited financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) that are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s 2010 Annual Report on Form 10-K.  The results for the six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011. 

BASIS OF PRESENTATION

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and are expressed in US dollars.  All material intercompany transactions and balances have been eliminated in the consolidation.

Certain reclassifications have been made to the prior year to conform to current year’s presentation. The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The consolidated financial statements of the Company include the accounts of its 90% owned subsidiary, Linkwell Tech, and 100% owned subsidiaries LiKang Disinfectant and Likang Biological. All significant inter-company balances and transactions have been eliminated.
 
USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates in the six months ended June 30, 2011 and 2010 include the allowance for doubtful accounts, useful life of property and equipment, and inventory reserve.

 
8

 
NON-CONTROLLING INTEREST

Effective January 1, 2009, the Company adopted Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which established new standards governing the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability (as was previously the case), that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also requires changes to certain presentation and disclosure requirements. Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.

FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, advances from customers, short-term loans payable and amounts due from or to related parties, the carrying amounts approximate their fair values due to their short maturities.  ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.  The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
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 June 30, 2011 and December 31, 2010, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

CASH AND CASH EQUIVALENTS

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents.
 
 
9

 
 
ACCOUNTS RECEIVABLE

The Company has a policy of reserving for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of June 30, 2011 and December 31, 2010, the Company established that, based on a review of its third party accounts receivable outstanding balances, allowances for doubtful accounts in the amounts of $974,465 and $952,232, respectively. As of June 30, 2011 and December 31, 2010, the Company established that, based on a review of its related party accounts receivable outstanding balances, allowances for doubtful accounts in the amounts of $611,996 and $598,033, respectively.

INVENTORIES

Inventories, consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower of cost or market utilizing the weighted average method.  The valuation of inventory requires the Company to estimate obsolete or excess inventory based on analysis of future demand for our products. Due to the nature of the Company’s business and our target market, levels of inventory in the distribution channel, changes in demand due to price changes from competitors and introduction of new products are not significant factors when estimating the Company’s excess or obsolete inventory. If inventory costs exceed expected market value due to obsolescence or lack of demand, inventory write-downs may be recorded as deemed necessary by management for the difference between the cost and the market value in the period that impairment is first recognized. As of June 30, 2011 and December 31, 2010, the reserve for obsolete inventory amounted to $0.
 
PROPERTY AND EQUIPMENT

Property and equipment are carried at cost. Depreciation is provided using the straight-line method over the estimated economic lives of the assets, which range from five to twenty years. The cost of repairs and maintenance are expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the income statement in the year of disposition.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, during the six months ended June 30, 2011 and 2010, there were no significant impairment of its long lived assets.
 
 
10

 
 
ADVANCES FROM CUSTOMERS

As of June 30, 2011 and December 31, 2010, advances from customers were $293,613 and $286,914, respectively. These advances consisted of prepayments from third party customers to the Company for merchandise that had not yet been shipped by the Company. The Company will recognize the prepayments as revenue as customers take delivery of the goods, in compliance with its revenue recognition policy.

INCOME TAXES

The Company utilizes Statement of Financial Accounting Standards ("SFAS") No. 109, “Accounting for Income Taxes,” (codified in Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC” Topic 740), which requires recognition of deferred tax assets and liabilities for expected future tax consequences of events that were included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company adopted the provisions of the Financial Accounting Standards Board's ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (codified in FASB ASC Topic 740). When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  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 June 30, 2011 and December 31, 2010, the Company did not take any uncertain positions that would necessitate recording of tax related liability.
 
BASIC AND DILUTED EARNINGS PER SHARE

The Company presents net income (loss) per share (“EPS”) in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share” (codified in FASB ASC Topic 740). Accordingly, basic income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding, without consideration for common stock equivalents. Diluted net income per share is computed by dividing the net income by the weighted-average number of common shares outstanding as well as common share equivalents outstanding for the period determined using the treasury-stock method for stock options and warrants and the if-converted method for convertible notes. The Company has made an accounting policy election to use the if-converted method for convertible securities that are eligible to common stock dividends, if declared. If the if-converted method was anti-dilutive (that is, the if-converted method resulted in a higher net income per common share amount than basic net income per share calculated under the two-class method), then the two-class method was used to compute diluted net income per common share, including the effect of common share equivalents. Diluted earnings per share reflects the potential dilution that could occur based on the exercise of stock options or warrants, unless such exercise would be anti-dilutive, with an exercise price of less than the average market price of the Company’s common stock.  

 
11

 
 
            The following table presents a reconciliation of basic and diluted earnings per share for the six months ended June 30, 2011 and 2010:
 
  
 
2011
   
2010
 
Net income
 
$
450,471
   
$
384,766
 
                 
Weighted average shares outstanding - basic
   
88,240,834
     
86,605,475
 
Effect of dilutive securities:
               
Unexercised warrants 
   
-
     
-
 
Weighted average shares outstanding - diluted
   
88,240,834
     
86,605,475
 
                 
Earnings per share - basic
 
$
0.01
   
$
0.00
 
Earnings per share - diluted
 
$
0.01
   
$
0.00
 
 
            The following table presents a reconciliation of basic and diluted earnings per share for the three months ended June 30, 2011 and 2010:
 
  
 
2011
   
2010
 
Net income
 
$
91,424
   
$
245,649
 
                 
Weighted average shares outstanding - basic
   
89,858,222
     
86,605,475
 
Effect of dilutive securities:
               
Unexercised warrants 
   
-
     
 
 
Weighted average shares outstanding - diluted
   
89,858,222
     
86,605,475
 
                 
Earnings per share - basic
 
$
0.00
   
$
0.00
 
Earnings per share - diluted
 
$
0.00
   
$
0.00
 
 
 
12

 
 
REVENUE RECOGNITION

The Company's revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). The Company records revenue when an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. The following policies reflect specific criteria for the various revenue streams of the Company. The Company's revenues from the sale of products are recorded when the goods are shipped, title passes, and collectibility is reasonably assured.
 
The Company's revenues from the sale of products to related parties are recorded when the goods are shipped to the customers from our related parties. Upon shipment, title passes, and collectibility is reasonably assured. The Company receives purchase orders from our related parties on an as need basis from the related party customers. Generally, the related party does not hold the Company’s inventory. If the related party has inventory on hand at the end of a reporting period, the sale is reversed and the inventory is included on the Company’s balance sheet.

STATEMENT OF CASH FLOWS

In accordance with SFAS No. 95, “Statement of Cash Flows,” codified in FASB ASC Topic 230, cash flows from the Company's operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheets.  
 
CONCENTRATION OF BUSINESS AND CREDIT RISK

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions in the U.S. and in China. The majority of the Company’s bank accounts in banks located in the PRC are not covered by any type of protection similar to that provided by the FDIC on funds held in U.S banks. As of June 30, 2011 and December 31, 2010, the Company maintained cash in the U.S. in a financial institution insured by the FDIC in the approximate amounts of $9,029 and $2,315, respectively. 
 
Almost all of the Company's sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables are limited due to the wide distribution of our products and shorter payment terms than customary in the PRC. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk. For the six months ended June 30, 2011 and 2010, sales to related parties accounted for 51% and 25% of net revenue, respectively.  For the three months ended June 30, 2011 and 2010, sales to related parties accounted for 52% and 9% of net revenue, respectively.
 
The Company is operating in the People’s Republic of China, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the U.S. dollar and the RMB.

Payments of dividends may be subject to some restrictions.

 
13

 
 
FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME

The Company primarily operates in the PRC. The financial position and results of operations of the subsidiaries are determined using the local currency (“Renminbi” or “RMB”) as the functional currency.

Translation from RMB into United States dollars (“USD” or “$”) for reporting purposes is performed by translating the results of operations denominated in foreign currency at the weighted average rates of exchange during the reporting periods. Assets and liabilities denominated in foreign currencies at the balance sheet dates are translated at the market rate of exchange in effect at that date. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into USD are reported as a component of accumulated other comprehensive income in shareholders’ equity. The exchange rates used in translation from RMB to USD amount were published by People’s Bank of the People’s Republic of China.

 
   
June 30,
2011
 
December 31,
2010
   
(Unaudited)
 
(Audited)
Balance sheet items, except for the registered and paid-up capital and retained earnings as of June 30, 2011 and December 31, 2010.
 
US$1=RMB6.4716
 
US$1=RMB6.6227
 
   
Six Months Ended June 30,
   
2011
 
2010
   
(Unaudited)
 
(Unaudited)
Amounts included in the statements of operations, and statements of cash flow for the six months ended June 30, 2011 and 2010.
 
US$1=RMB6.5411
 
  US$1=RMB6.8252
 
SHIPPING COSTS

Shipping costs are included in selling expenses and totaled $268,837 and $211,512 for the six months ended June 30, 2011 and 2010, respectively.  Shipping costs were $120,855 and $91,732, respectively for the three months ended June 30, 2011 and 2010.

ADVERTISING

Advertising is expensed as incurred and included in selling expenses. For the six months ended June 30, 2011 and 2010, advertising expenses amounted to $24,381 and $33,222, respectively.  For the three months ended June 30, 2011 and 2010, advertising expenses amounted to $5,173 and $17,297, respectively.

STOCK-BASED COMPENSATION
 
The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123” (codified in FASB ASC Topics 718 & 505). The Company recognizes in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
 
 
14

 
 
NON-EMPLOYEE STOCK BASED COMPENSATION

The cost of stock-based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in Emerging Issues Task Force Issue, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.
 
REGISTRATION RIGHTS AGREEMENTS

The Company accounts for payment arrangements under registration rights agreement in accordance with FASB Staff Position EITF 00-19-2 (codified in FASB ASC Topic 815), which requires the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies (codified in FASB ASC Topic 450).
 
The Company has adopted “Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument. Accordingly, the Company classifies as liability instruments, the fair value of registration rights agreements when such agreements (i) require it to file, and cause to be declared effective under the Securities Act, a registration statement with the SEC within contractually fixed time periods, and (ii) provide for the payment of liquidating damages in the event of its failure to comply with such agreements. Accordingly, (i) registration rights with these characteristics are accounted for as derivative financial instruments at fair value and (ii) contracts that are (a) indexed to and potentially settled in an issuer's own stock and (b) permit gross physical or net share settlement with no net cash settlement alternative are classified as equity instruments.
 
RESEARCH AND DEVELOPMENT COST

Research and development costs are expensed as incurred and included in general and administrative expenses. These costs primarily consist of cost of materials used and salaries paid for the development department of the Company and fees paid to third parties. Research and development costs for the six months ended June 30, 2011 and 2010 were $65,284 and $103,506, respectively.  Research and development costs for the three months ended June 30, 2011 and 2010 were $10,571 and $34,566, respectively.

SEGMENT REPORTING

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (codified in FASB ASC Topic 280) requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
 
SFAS 131 has no effect on the Company's financial statements as substantially all of the Company's operations are conducted in one industry segment. All of the Company's assets are located in the PRC.

 
15

 
 
RECLASSIFICATIONS

Certain prior year amounts were reclassified to conform to the manner of presentation in the current period.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic 220):  Presentation of Comprehensive Income.  Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. In addition, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.  The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently assessing the effect that the adoption of this pronouncement will have on its financial statements.

In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to retained earnings beginning in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted the disclosure requirements for the business combinations in 2011.
 
 
16

 
 
In April 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This Update provides amendments to Accounting Standards Codification (ASC) Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. 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 January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
 
17

 
 
NOTE 2 – INVENTORIES

A summary of inventories by major category as of June 30, 2011 and December 31, 2010 were as follows:
 
   
2011
   
2010
 
   
(Unaudited)
   
(Audited)
 
Raw materials
  $ 1,094,397     $ 820,293  
Work-in-process
    41,402       31,398  
Finished goods
    1,676,025       1,221,285  
Net inventories
  $ 2,811,824     $ 2,072,976  
   
NOTE 3 – PROPERTY AND EQUIPMENT

At June 30, 2011 and December 31, 2010, property and equipment consisted of the following:

  
Estimated
Useful Life
(In years)
 
 
2011
   
 
2010
 
     
(Unaudited)
   
(Audited)
 
Office equipment and furniture
3-7
 
$
420,421
   
$
404,130
 
Autos and trucks
5
   
343,815
     
327,479
 
Manufacturing equipment
2-10
   
844,380
     
826,136
 
Building
5-20
   
1,637,329
     
1,643,684
 
Subtotal
     
3,245,945
     
3,201,429
 
Less: Accumulated depreciation
     
(1,189,494
)
   
(1,009,134
)
Property and equipment, net
   
$
2,056,451
   
$
2,192,295
 

           For the six months ended June 30, 2011 and 2010, depreciation expenses amounted to approximately $172,000 and $125,000, respectively. For the three months ended June 30, 2011 and 2010, depreciation expenses amounted to approximately $102,000 and $68,000, respectively.
 
NOTE 4 – CONSTRUCTION IN PROGRESS

The Company had construction in progress of $150,778 for constructing a warehouse for its finished products.  The project was completed in July 2011.

NOTE 5 - INTANGIBLE ASSETS

At June 30, 2011 and December 31, 2010, intangible assets consisted of customers’ lists arising from the acquisition of Likang Biological, amortized over 5 years. Net intangible assets as of June 30, 2011 and December 31, 2010 totaled $359,554 and $410,918, respectively.  Amortization expenses for the six months ended June 30, 2011 and 2010 were $51,365 and $51,365, respectively.  Amortization expenses for the three months ended June 30, 2011 and 2010 were 25,682 and $25,682. Annual amortization expenses for the next five years from June 30, 2011 are expected to be: $102,730, $102,730, $102,730, $51,363 and $0.
 
 
18

 
 
NOTE 6 - DEPOSITS

At June 30, 2011 and December 31, 2010, deposits mainly represented prepaid application fee of $544,000 for the deposit of purchasing an acquisition target in China.

NOTE 7 - OTHER RECEIVABLES
 
At June 30, 2011 and December 31, 2010, the Company had other receivables of $4,913,455 (net of bad debt allowance $120,527) and $152,337, respectively. Other receivables at June 30, 2011 primarily includes short-term advances to Wuhai Likang of approximately $2,500,000 made during the six months ended June 30, 2011. This short-term advance accrues interest at an annual rate of 4%, and is payable upon demand.
 
Wuhai Likang was a related party of the Company in 2010 due to the Company being in the process of acquiring a controlling position in Wuhai Likang. As of December 31, 2010, the Company had made advances totaling $1,567,337 to Wuhai Likang to advance this purchase and to provide operating funds to Wuhai Likang. Any portion of such advances in support of acquisition, or to provide operating funds to Wuhai Likang, was classified as of due from related party as of December 31, 2010 pending approval of the acquisition. As of June 30, 2011 government approval for this acquisition has not occurred and is unable to be completed. During the six months ended June 30, 2011, the existing shareholders of Wuhai Likang contributed additional capital into Wuhai Likang, which resulted in a reduction of the Company’s ownership position in Wuhai Likang to approximately 7.65% of Wuhai Likang as of June 30, 2011. With this reduction in ownership, and reduction in influence over Wuhai Likang, the Company’s management has determined that Wuhai Likang is not deemed a related party. Accordingly, the due from related party of $1,567,337 as of December 31, 2010 and the aforementioned approximate $2,500,000 advances made during the six months ended June 30, 2011, have been classified as an other receivable as of June 30, 2011.
 
NOTE 8 - LOANS PAYABLE

Loans payable consisted of the following at June 30, 2011 and December 31, 2010:

  
 
2011
   
2010
 
   
(Unaudited)
   
(Audited)
 
    Loan from Shanghai Rural Commercial Bank, Dachang Branch due on May 10, 2012 with interest rate of 6.94% per annum. Guaranteed by Shanhai Group and Mr. Bian, Chairman of the Company (RMB 7,400,000).
 
 $
1,143,458
   
 $
739,880
 
    Loan from Shanghai Rural Commercial Bank, Dachang Branch due on July 13, 2011 with interest rate of 5.31% per annum. Guaranteed by Shanhai Group and Mr. Bian, Chairman of the Company (RMB 2,600,000)
   
401,755
     
392,589
 
   
$
1,545,213
   
$
1,132,469
 
 
NOTE 9 – RELATED PARTY TRANSACTIONS

Linkwell Tech's wholly-owned subsidiary, LiKang Disinfectant, is engaged in business activities with three related parties: Shanghai ZhongYou Pharmaceutical High-Tech Co., Ltd., (“ZhongYou”), Shanghai Jiuqing Pharmaceuticals Company, Ltd. (“Shanghai Jiuqing”) and Linkwell International Trading Co., Ltd. (“Linkwell Trading”).
 
The Company’s Chairman and Chief Executive Officer, Xuelian Bian, and Vice President and Director, Wei Guan, own 90% and 10% respectively, of the capital stock of ZhongYou. In March 2007, Wei Guan sold his 10% ownership to Bing Chen, the President of LiKang Disinfectant. In August 2007, Xuelian Bian sold his 90% ownership to his mother, Xiuyue Xing. In October 2007, the two new shareholders, Bing Chen (10%) and Xiuyue Xing (90%) sold all of their shares in ZhongYou to Shanghai Jiuqing, whose 100% owner is Shanghai Ajiao Shiye Co. Ltd. Mr. Bian is currently a 60% shareholder of Shanghai Ajiao Shiye Co. Ltd.
 
For the six months ended June 30, 2011 and 2010, the Company recorded sales of $3,566,996 and $1,440,292 to ZhongYou, respectively.  For the three months ended June 30, 2011 and 2010, the Company recorded sales of $1,958,047 and $266,262 to ZhongYou, respectively.  At June 30, 2011 and December 31, 2010, accounts receivables from sales to ZhongYou were $7,303,259 and $6,701,229, respectively.

Shanghai Ajiao Shiye Co. Ltd. owns 100% of Shanghai Jiuqing. Xuelian Bian is a 60% shareholder of Shanghai Ajiao Shiye Co. Ltd. During the six months ended June 30, 2011 and 2010, the Company recorded sales of $0 and $1,483 to Shanghai Jiuqing, respectively.  During the three months ended June 30, 2011 and 2010, the Company recorded sales of $0 and $345 to Shanghai Jiuqing, respectively.  At June 30, 2011 and December 31, 2010, accounts receivable from sales to Shanghai Jiuqing were $90,339 and $88,278, respectively. 
  
 
19

 
 
As of June 30, 2011 and December 31, 2010, $1,102,131 and $2,100,204 were due from related parties, respectively, representing short-term advances and other receivables not including the receivables from sales. Wuhai Likang was a related party of the Company at December 31, 2010 due being in the process of acquiring a controlling position in Wuhai Likang. As of June 30, 2011 government approval for this acquisition has not occurred and is unable to be completed. During the six months ended June 30, 2011, the existing shareholders of Wuhai Likang contributed additional capital into Wuhai Likang, which resulted in a reduction of the Company’s ownership position in Wuhai Likang to approximately 7.65% of Wuhai Likang as of June 30, 2011. With this reduction in ownership, and reduction in influence over Wuhai Likang, the Company’s management has determined that Wuhai Likang is not deemed a related party (See note 7).

As of June 30, 2011, the Company owed its management $54,000 and other related parties $947,046.  As of December 31, 2010, the Company owed its management $54,000 and other related parties $1,326,628. 
 
NOTE 10 – TAXES PAYABLE

Taxes payable consisted of the following at June 30, 2011 and December 31, 2010, respectively:

   
2011
   
2010
 
   
(Unaudited)
   
(Audited)
 
Income tax payable
 
$
103,273
   
$
132,140
 
Value added tax payable
   
97,917
     
225,810
 
Other taxes payable
   
8,740
     
7,425
 
   
$
209,930
   
$
365,375
 
 
NOTE 11 –PUT OPTION LIABILITY

On February 15, 2008, the Company entered into a stock purchase agreement with Ecolab pursuant to which Ecolab agreed to purchase and Linkwell Tech agreed to sell 888,889 of its shares, or 10% of the issued and outstanding capital stock of Linkwell Tech for $2,000,000. On May 31, 2008, the Company, Linkwell Tech and Ecolab entered into a Stockholders Agreement (“Stockholders Agreement”), whereby both the Company and Ecolab are subject to, and the benefit of, certain pre-emptive rights, transfer restrictions and take along rights relating to the shares of Linkwell Tech, the Company and Ecolab each hold.
 
Pursuant to the terms of the Stockholders Agreement, Ecolab has an option (“Put Option”) to sell the 888,889 shares (“Shares”) of common stock, par value $0.001, of Linkwell Tech that Ecolab purchased under the Stock Purchase Agreement back to Linkwell Tech in exchange for, as determined by Linkwell, cash in the amount of $2,400,000 or the lesser of (a) 10,000,000 shares of Linkwell common stock, or (b) such number of shares of Linkwell common stock as is determined by dividing 3,500,000 by the average daily closing price of Linkwell common stock for the twenty days on which Linkwell shares of common stock were traded on the OTC Bulletin Board prior to the date the Put Option is exercised (“Put Shares”). The Put Option is exercisable during the period between the second and fourth anniversaries of May 30, 2008, or upon the occurrence of certain events including material breach by Linkwell Tech or its subsidiaries, of the Consulting Agreement, Distributor Agreements or Sales Representative Agreement entered into in connection with the Stock Purchase Agreement.
 
Under the Stockholders Agreement, Ecolab also has a call option (“Call Option”), exercisable if Linkwell is subject to a change of control transaction, to require the Company to sell to Ecolab all of the equity interests in Linkwell Tech, or any of Linkwell Tech’s subsidiaries, then owned by the Company. The Company recognized the maximum expenses of the Put Option and the Call Option described above as $2,400,000 put option liability.

 
20

 
 
NOTE 12 - INCOME TAXES

The Company is subject to income taxes by entity on income arising in or derived from the tax jurisdiction in which each entity is domiciled.

Linkwell Corp and Linkwell Tech were incorporated in the U.S. and have net operating losses (NOL) for income tax purposes.  Linkwell Corp and Linkwell Tech had net operating loss carry forwards for income taxes of approximately $2,674,000 at June 30, 2011, which may be available to reduce future years’ taxable income as NOL’s can be carried forward up to 20 years from the year the loss is incurred. Under IRC section 382, certain of these loss carry-forward amounts may be limited due to the more than 50% change in ownership which took place during 2004. The Company’s management believes that the realization of benefits from these losses are uncertain due to the Company’s limited operating history and continuing losses. Accordingly, a 100% valuation allowance has been provided on the deferred tax asset of approximately $1,015,000.

Likang Disinfectant and Likang Biological are governed by the Income Tax Law of the PRC concerning privately-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriated tax adjustments.  Likang Disinfectant is subject to preferential income tax rate of 12.5% for 2011 and 2010; Likang Biological is subject to income tax rate of 25% since 2010.
 
NOTE 13 - STATUTORY RESERVES

Pursuant to the PRC’s corporate law effective as of January 1, 2006, the Company is now only required to maintain one statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.

Surplus Reserve Fund

The Company is now only required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.

The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

Common Welfare Fund

The common welfare fund is a voluntary fund that provides that the Company can elect to transfer 5% to 10% of its net income to this fund. This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation.  The Company did not make any reserve to this fund during six months ended June 30, 2011 and 2010.
 
 
21

 
 
NOTE 14 – STOCKHOLDERS’ EQUITY

Common Stock
 
 
On July 1, 2009, the Company entered into a two year consulting agreement with FirsTrust Group, Inc. for business development and capital markets advisory services. In connection with this agreement, the Company issued 1,800,000 shares of common stock valued at $0.09 per share to FirsTrust Group, Inc. and recorded $162,000 as deferred compensation. The Company had accumulated amortization of $162,000 for stock-based compensation as of June 30, 2011. This agreement has a penalty to the stock recipient for non-compliance with its terms. The Company recorded stock based compensation of $40,500 during the six months ended June 30, 2011 and 2010 with respect to this agreement. The stock-based compensation expense was fully expensed in June 2011.

On August 1, 2009, the Company entered into a two year agreement with Shanghai Hai Mai Law Firm for legal services. In connection with this agreement, the Company issued 2,350,000 shares of common stock valued at $0.10 per share to Shanghai Hai Mai Law Firm and recorded $235,000 as deferred compensation. The Company had accumulated amortization of $225,208 for stock-based compensation as of June 30, 2011. This agreement has a penalty to the stock recipient for non-compliance with its terms. The Company recorded stock based compensation of $58,750 during the six months ended June 30, 2011 and 2010 with respect to this agreement.

On December 30, 2009, the Company issued 4,000,000 shares of common stock in exchange for acquiring a 51% equity interest in an acquisition target in China for $544,000 which was accounted for as a deposit as of March 31, 2011. However, the acquisition target has increased its registered capital to RMB 50 million by the contribution of new investors in April 2010, which resulted in a decrease of the equity interest owned by Linkwell to 9.18%. The Company is in the process of closing the acquisition, which is contingent upon receiving governmental approval. This acquisition has not closed as of June 30, 2011.

On May 25, 2011, the Company issued 8,000,000 shares of common stock to two directors and two employees under the Companys 2005 Equity Compensation Plan, as amended.
 
 
NOTE 15 - COMMITMENTS
 
       On July 16, 2008, the Company entered a two-year lease agreement for its administrative office with expiration date on July 15, 2010, for monthly rent of $4,400 (RMB 30,237) until April 2009, the monthly rent increased to $9,470 (RMB 64,669) after April 2009.  The Company renewed this lease after the expiration and monthly rent increased to $11,000 (RMB 73,173). The lease will expire at December 31, 2011. 
 
On November 1, 2008, the Company entered another two-year lease agreement for its branch office with expiration date on October 31, 2010, for monthly rent of $3,500 (RMB 24,000). The Company renewed this lease with the same amount of rent after the expiration. The new lease will expire on October 31, 2011.

Future minimum rental payments required under these operating leases are as follows:

As of  June 30, 2011
     
Remainder of Fiscal 2011
 
$
80,000
 
 
 
22

 
 
NOTE 16 – CONTINGENCY
 
On May 23, 2011, we entered into a Settlement Agreement (“Settlement Agreement”) with Alpha Capital Aktiengesellschaft (“Alpha”) and Osher Capital Inc. (“Osher”) (Alpha and Osher collectively the “Plaintiffs”) for the lawsuit the Plaintiffs filed against us in the Supreme Court of the State of New York, County of New York, as previously disclosed in the Quarterly Report Form 10-Q filed with the SEC on May 16, 2011. In satisfaction of all the obligations stated under the terms of the Settlement Agreement, we agreed to pay Alpha Eighty Thousand Dollars ($80,000) and Osher Forty Thousand Dollars ($40,000). Upon the execution of the Settlement Agreement and in consideration of the terms and conditions in the Agreement, both parties will mutually release and forever discharge any and all claims, whether known or unknown, that the parties may now have or may hereafter have against each other from the beginning of time through the date of the Settlement Agreement. The Company recorded $120,000 as expense accordingly.
 
NOTE 17 – OPERATING RISK

(a)
Country risk

Currently, the Company’s revenues are primarily derived from the sale of a line of disinfectant product to customers in the PRC. The Company hopes to expand its operations to countries outside the PRC, however, such expansion has not been commenced and there are no assurances that the Company will be able to achieve such an expansion successfully. Therefore, a downturn or stagnation in the economic environment of the PRC could have a material adverse effect on the Company’s financial condition.
 
(b)
Products risk

In addition to competing with other domestic manufacturers of disinfectant product offerings, the Company competes with larger U.S. companies who have greater funds available for expansion, marketing, research and development and the ability to attract more qualified personnel. These U.S. companies may be able to offer products at a lower price. There can be no assurance that the Company will remain competitive should this occur.
 
 (c)
Exchange risk

The Company cannot guarantee that the current exchange rate will remain steady; therefore there is a possibility that the Company could post the same amount of profit for two comparable periods. This is because a fluctuating exchange rate may post a higher or lower profit depending on exchange rate of Renminbi converted to US dollars on that day. The exchange rate could fluctuate depending on changes in the political and economic environments without notice.

(d)
Political risk

Currently, the PRC is in a period of growth and is openly promoting business development in order to bring more business into the country. Additionally, the PRC currently allows a Chinese corporation to be owned by a United States corporation. If the PRC government changes laws or regulations relating to the ownership of a Chinese corporation, then the Company's ability to operate the PRC subsidiaries could be affected.

Note 18 – SUBSEQUENT EVENTS

           For the six months ended June 30, 2011, the Company has evaluated subsequent events for potential recognition and disclosure through the date of the financial statement issuance.

 
23

 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions.  Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our other Securities and Exchange Commission filings.  The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report. Throughout this Quarterly Report, we will refer to Linkwell Corporation. as "Linkwell," the "Company," "we," "us," and "our."

The Management’s Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements in Item 1.

OVERVIEW

We operate under a holding company structure and currently have one direct 90% owned operating subsidiary, Linkwell Tech Group Inc. (“Linkwell Tech”), a Florida corporation.  Linkwell Tech owns 100% of Shanghai LiKang Disinfectant High-Tech Company, Limited (“LiKang Disinfectant”). On February 15, 2008, Linkwell Tech sold 10% of its issued and outstanding capital stock to Ecolab Inc., a Delaware corporation (“Ecolab”).  On March 5, 2009, LiKang Disinfectant purchased 100% of LiKang Biological Company for approximately $292,500 (RMB 2,000,000) and 500,000 shares of our common stock.

We, through Linkwell Tech’s wholly-owned subsidiaries, LiKang Disinfectant and Likang Biological, are engaged in the development, manufacture, sale and distribution of disinfectant health care products primarily to the medical industry in China.
 
Since our incorporation in 1988, we have developed, manufactured and distributed disinfectant health care products primarily to the medical industry in China. In recent years, China has experienced a variety of public health crises, such as the outbreak of SARS, which demonstrated the need for increased health standards in China. In response, since the beginning in 2002, the Chinese government has undertaken various initiatives to improve public health and living standards, including continuing efforts to educate the public about the need for proper sanitation procedures and the establishment of production standards for the disinfectant industry in China. As a result of this heightened license and permit system, all disinfectant manufacturers must comply with “qualified disinfection product manufacturing enterprise requirements” established by the Ministry of Public Health. The requirements include standards for hardware, such as facilities and machinery, and software, including the technology to monitor the facilities, as well as the heightened knowledge and capability of the production staff regarding quality control procedures. Following the adoption of the industry standards in 2002, we were granted thirty-one hygiene licenses by the Ministry of Public Health.
 
 
24

 

We believe that government standards adopted in July 2002 have increased the barriers for competitors to enter into the disinfectant industry in China. The implementation of these improved production standards and license requirements has effectively decreased the competitive landscape as it pertains to small to medium size manufacturers, since the new standards are especially difficult for companies with limited product offerings and inferior technical content. In addition, prior to the adoption of industry standards, disinfectant products were generally marketed and sold based on price as opposed to quality. We believe that as a result of the adoption of industry standards, the marketplace is evolving with a more stringent focus on product quality, which we believe will enable us to increase our base of commercial customers thereby increasing our revenues.

Historically, our focus has been on the commercial distribution of our products. Our customers include hospitals, medical suppliers and distribution companies throughout China. We have made efforts to expand our distribution to reach the retail markets. We have repackaged certain of our commercial disinfectant products for sale to the consumer market and have commenced upon expanding our customer base to include hotels, schools, supermarkets and pharmacies. By virtue of the Chinese government's continuing focus on educating the Chinese population about the benefits of proper sanitation procedures, we believe that another key to increasing our revenue is the continued expansion of the retail distribution of our products.

The disinfectant industry in China is an emerging industry that is populated with small, regional companies. We estimate that there are more than 1,000 manufacturers and distributors of disinfectant products in China; however, most domestic competitors offer a limited line of products and there are only a few domestic companies with a nationwide presence. We believe that our national marketing and sales presence throughout all twenty-two provinces, as well as four autonomous regions and four municipalities in China, give us a competitive advantage over many other disinfectant companies in China and will enable us to leverage the brand awareness for our products with commercial customers to the retail marketplace.
 
Our present manufacturing facilities and production capacities are sufficient for the foreseeable future, and we believe that we have the assets and the capital necessary to enable the increase of our revenue as the market for disinfectant products in China continues to increase.  We will continue to focus our efforts on the retail market for our products, as well as on expanding our traditional base of commercial customers. In addition, we may also consider the possible acquisition of independent sales networks, which may be used to increase our product distribution capacity and align us with small, regional companies in the industry.
 
 
25

 
 
RESULTS OF OPERATIONS

Comparison of the six months ended June 30, 2011 and 2010
 
The table below sets forth the results of operations for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, accompanied by the percentage changes.
 
  
 
2011
   
2010
 
  
 
$
   
% of Sales
   
$
   
% of Sales
 
Net Sales
                           
                             
Non-related companies
 
$
3,454,099
     
49.2
%
 
$
4,423,073
     
75.4
%
                                 
Related companies
   
3,566,996
     
50.8
%
   
1,441,775
     
24.6
%
                                 
Total Net Sales
   
7,021,095
     
100
%
   
5,864,848
     
100
%
                                 
Cost of Sales
   
3,781,224
     
53.9
%
   
2,993,896
     
51.0
%
                                 
Gross Profit
   
3,239,871
     
46.1
%
   
2,870,952
     
49.0
%
                                 
Selling Expense
   
521,059
     
7.4
%
   
690.883
     
11.8
%
                                 
General and Administrative
   
1,860,681
     
26.5
%
   
1,582,126
     
27.0
%
                                 
Total Operating Expenses
   
2,381,739
     
33.9
%
   
2,273,009
     
38.8
%
                                 
Income from Operations
   
858,132
     
12.2
%
   
597,943
     
10.2
%
                                 
Other Income (Expenses), net
   
(53,688)
     
(0.8)
%
   
(10,114)
     
(0.2)
%
                                 
Income tax expense
   
(235,115
)
   
(3.3
)%
   
(142,885
)
   
(2.4
)%
                                 
    Net Income including non-controlling interest
   
569,329
     
8.1
%
   
444,944
     
7.6
%
                                 
    Less: net income attributable non-controlling interest
   
(118,858
)
   
(1.7
)%
   
(60,178
)
   
(1.0
)%
                                 
Net Income attributable to Linkwell Corp
   
450,471
     
6.4
%
   
384,766
     
6.6
%
 
NET SALES
 
Net sales for the six months ended June 30, 2011 were $7,021,095 as compared to net sales of $5,864,848 for the same period in 2010, an increase of $1,156,247, or approximately 19.7%. This increase in net sales was due to our efforts in developing new customer base and diversity of our products, as well as increased demand from our existing customers.   Of our total net sales for the six months ended June 30, 2011, $3,566,996, or approximately 51%, was attributable to related parties as compared to net sales of $1,441,775, or approximately 25%, in 2010.
  
COST OF SALES
 
Cost of sales includes raw materials and manufacturing costs, which include labor, rent and an allocated portion of overhead expenses, such as utilities, directly related to product production. For the six months ended June 30, 2011, cost of sales amounted to $3,781,224, or approximately 53.9% of net sales, as compared to the cost of sales of $2,993,896, or approximately 51.0% of net sales for the same period in 2010.  The increase in cost of sales as a percentage of sales was mainly due to new levied city construction tax and education surcharge tax, which started from December 2010, as well as increase in the price of raw materials.
 
 
26

 
 
GROSS PROFIT
 
Gross profit for the six months ended June 30, 2011 was $3,239,871, or approximately 46.1% of net revenue, as compared to $2,870,952, or approximately 49.0% of net revenue for the same period in 2010. The decrease in gross profit margin was mainly due to the increased cost of revenue as a percentage of revenue.
 
OPERATING EXPENSES
 
Total operating expenses consisted of selling, general and administrative expenses. For the six months ended June 30, 2011, total operating expenses were $2,381,739, an increase of $108,730, or approximately 4.8%, from total operating expenses of $2,273,009 for the same period in 2010. The increase in operating expenses was mainly due to recorded expenses resulted from the settlement of a lawsuit mentioned in further detail in Part II, Item 1, “Legal Proceedings, despite decreased travel expenses, meeting expenses, and meals and entertainment.
 
NONCONTROLLING INTEREST

  On February 15, 2008, we entered into a stock purchase agreement with Ecolab, pursuant to which Ecolab purchased and Linkwell Tech sold 888,889 of its shares, or 10% of the issued and outstanding capital stock of Linkwell Tech, for a total of $2,000,000. On March 28, 2008 and June 4, 2008, Linkwell Tech received $200,000 and $1,388,559, respectively, from Ecolab. Linkwell Tech received a total of $2,000,000 from Ecolab, inclusive of a $400,000 loan that Ecolab released to Linkwell Tech and accrued interest of $11,441. On May 31, 2008, Linkwell Tech and Ecolab entered into the Linkwell Tech Group Inc. Stockholders Agreement, whereby both our Company and Ecolab are subject to, and are the beneficiaries of, certain pre-emptive rights, transfer restrictions and take-along rights relating to the shares of Linkwell Tech that we and Ecolab each hold. As of May 31, 2008, the principal and accrued interest of $11,441 on the short-term $400,000 loan became part of Ecolab’s investment and no longer needed to be repaid. After this transaction, Ecolab became a 10% minority interest holder of Linkwell Tech. For the six months ended June 30, 2011, we had a minority interest expense of $118,858 as compared to $60,178 in 2010.

NET INCOME 
 
Our net income for the six months ended June 30, 2011 was $450,471 compared to $384,766 for the same period in 2010, an increase of $65,705 or 17.1%.  Net income as a percentage of revenue was 6.4% for the six months ended June 30, 2011, while it was 6.6% for the same period in 2010. This increase in net income was attributable to an increase in sales.
 
 
27

 

Comparison of the three months ended June 30, 2011 and 2010
 
The table below sets forth the results of operations for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, accompanied by the percentage of changes.
 
  
 
2011
   
2010
 
  
 
$
   
% of Sales
   
$
   
% of Sales
 
Net Sales
                           
                             
Non-related companies
 
$
1,839,839
     
48.4
%
 
$
2,574,186
     
90.6
%
                                 
Related companies
   
1,958,047
     
51.6
%
   
266,773
     
9.4
%
                                 
Total Net Sales
   
3,797,886
     
100
%
   
2,840,959
     
100
%
                                 
Cost of Sales
   
2,101,993
     
55.3
%
   
1,442,850
     
50.8
%
                                 
Gross Profit
   
1,695,893
     
44.7
%
   
1,398,109
     
49.2
%
                                 
Selling Expense
   
317,894
     
8.4
%
   
334,913
     
11.8
%
                                 
General and Administrative
   
1,079,103
     
28.4
%
   
713,955
     
25.1
%
                                 
Total Operating Expenses
   
1,396,996
     
36.8
%
   
1,048,868
     
36.9
%
                                 
Income from Operations
   
298,897
     
7.9
%
   
349,241
     
12.3
%
                                 
Other Income (Expenses), net
   
3,678
     
0.1
%
   
3,479
     
0.1
%
                                 
Income tax expense
   
(134,962
)
   
(3.6
)%
   
(74,253
)
   
(2.6
)%
                                 
    Net Income including non-controlling interest
   
167,613
     
4.4
%
   
278,467
     
9.8
%
                                 
    Less: net income attributable non-controlling interest
   
(76,189
)
   
(2.0
)%
   
(32,818
)
   
(1.2
)%
                                 
Net Income attributable to Linkwell Corp
   
91,424
     
2.4
%
   
245,649
     
8.6
%
 
NET SALES

Net sales for the three months ended June 30, 2011 were $3,797,886 as compared to net sales of $2,840,959 for the same period in 2010, an increase of $956,927, or approximately 33.7%. This increase in net sales was due to our efforts in developing new customer base and diversity of our products, as well as the increased demand from our existing customers.  Of our total net sales for the three months ended June 30, 2011, $1,958,047, or approximately 52%, was attributable to related parties as compared to net sales of $266,773, or approximately 9%, in 2010.
  
COST OF SALES
 
Cost of sales includes raw materials and manufacturing costs, which include labor, rent and an allocated portion of overhead expenses, such as utilities, directly related to product production. For the three months ended June 30, 2011, cost of sales amounted to $2,101,993, or approximately 55.3% of net sales, as compared to the cost of sales of $1,442,850, or approximately 50.8% of net sales for the same period in 2010.   The increase in cost of sales as a percentage of sales was mainly due to new levied city construction tax and education surcharge tax for Likang Disinfectant starting from December 2010, which was previously exempted by the tax authority, as well as the increase in the price of raw materials.
 
 
28

 

GROSS PROFIT
 
Gross profit for the three months ended June 30, 2011 was $1,695,893, or approximately 44.7% of net revenue, as compared to $1,398,109, or approximately 49.2% of net revenue for the same period in 2010. The decrease in gross profit margin was mainly due to the increased cost of revenue as a percentage of revenue.
 
OPERATING EXPENSES
 
Total operating expenses consisted of selling, general and administrative expenses. For the three months ended June 30, 2011, total operating expenses were $1,396,996, an increase of $348,128, or approximately 33.2%, from total operating expenses of $1,048,868 for the same period in 2010. The increase in operating expenses was mainly due to recorded expenses of $120,000 resulted from settlement of lawsuit, and increased employee salaries as a result of overall inflation in China.
 
NONCONTROLLING INTEREST

On February 15, 2008, we entered into a stock purchase agreement with Ecolab, pursuant to which Ecolab purchased and Linkwell Tech sold 888,889 of its shares, or 10% of the issued and outstanding capital stock of Linkwell Tech, for a total of $2,000,000. On March 28, 2008 and June 4, 2008, Linkwell Tech received $200,000 and $1,388,559, respectively, from Ecolab. Linkwell Tech received a total of $2,000,000 from Ecolab, inclusive of a $400,000 loan that Ecolab released to Linkwell Tech and accrued interest of $11,441. On May 31, 2008, Linkwell Tech and Ecolab entered into the Linkwell Tech Group Inc. Stockholders Agreement, whereby both our Company and Ecolab are subject to, and are the beneficiaries of, certain pre-emptive rights, transfer restrictions and take-along rights relating to the shares of Linkwell Tech that we and Ecolab each hold. As of May 31, 2008, the principal and accrued interest of $11,441 on the short-term $400,000 loan became part of Ecolab’s investment and no longer needed to be repaid. After this transaction, Ecolab became a 10% minority interest holder of Linkwell Tech. For the three months ended June 30, 2011, we had a minority interest expense of $76,189 as compared to $32,818 in 2010.

NET INCOME 
 
Our net income for the three months ended June 30, 2011 was $91,424 compared to $245,649 for the same period in 2010, a decrease of $154,225 or 62.8%.  Net income as a percentage of revenue was 2.4% for the three months ended June 30, 2011, while it was 8.6% for the same period in 2010. This decrease in net income was attributable to increased cost of goods sold, general and administrative expenses and income tax for Likang Disinfectant whose income tax rate increased from 12.5% in 2010 to 15% in 2011.
 
LIQUIDITY AND CAPITAL RESOURCES
 
As shown in the accompanying financial statements, our working capital increased $1,476,620, or approximately 11%, from $13,214,658 on December 31, 2010 to $14,691,278 on June 30, 2011. With the expansion of our businesses, we anticipate the need to utilize our capital resources in the near future. In addition to our working capital, we intend to obtain required capital through a combination of bank loans and the sale of our equity securities.
 
 
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We currently have no material commitments for capital expenditures. As of June 30, 2011, we had a total of $1,545,213 in outstanding short-term loans, which will mature in July 2011. Other than our working capital and loans, we presently have no other alternative capital resources available to us. We plan to build additional product lines and upgrade our manufacturing facilities in order to expand our production capacity and improve the quality of our products. Based on our preliminary estimates, upgrades and expansion will require additional capital of approximately $1,000,000.
 
We need to raise additional capital to meet the demands described above. We may raise additional capital through the sale of equity securities. There can be no assurances that any additional debt or equity financing will be available to us on acceptable terms, if at all. The inability to obtain debt or equity financing could have a material adverse effect on our operating results, and as a result, we could be required to cease or significantly reduce our operations, seek a merger partner or sell additional securities on terms that may be disadvantageous to shareholders.
 
The following is a summary of cash provided by or used in each of the indicated types of activities during the six months ended June 30, 2011 and 2010:
 
   
2011
   
2010
 
Cash provided by (used in):
           
Operating Activities
 
$
(2,309,537)
   
$
131,491
 
Investing Activities
   
(178,930)
     
(160,211)
 
Financing Activities
   
(353,540)
     
447,515
 
 
NET CASH FROM OPERATING ACTIVITES
 
Net cash used in operating activities for the six months ended June 30, 2011 was $2,309,537, as compared to net cash provided by operating activities of $131,491 for the same period in 2010, an increase of cash outflow of $2,441,028. The increase in cash outflow in the six months ended June 30, 2011 was mainly a result of an increase in other receivables outstanding, prepaid expense and payment for inventory despite increased net income, and timely collection on accounts receivable from unrelated sales as compared to the same period in 2010.
 
NET CASH FROM INVESTING ACTIVITIES

Net cash used in investing activities for the six months ended June 30, 2011 was $178,930 as compared to net cash used in investing activities of $160,211 in the same period in 2010, an increase of $18,719. Cash used in investing activities in the six months ended June 30, 2011 mainly consisted of $149,176 increase of construction in progress and $29,754 for the purchase of equipment, while in 2010, we spent $117,575 for purchase of fixed assets and $42,636 for construction in progress.
 
NET CASH FROM FINANCING ACTIVITIES

Net cash provided by financing activities was $353,540 for the six months ended June 30, 2011 compared to net cash provided by financing activities of $447,515 in the same period of 2010. This increase was primarily a result of $405,498 decrease in due to related parties, a decrease of $376,839 for due from related parties, and $382,199 proceeds from short-term loan. In comparison to the six months ended June 30, 2010, we had a $703,276 cash inflow from short-term loans, and a $255,761 decrease in due to related parties
 
 
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 CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities.
 
We base our estimates and judgments on historical experiences and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: allowance for doubtful accounts; income taxes; stock-based compensation; asset impairment and option value.

While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements, we believe the following accounting policies are the most critical to help develop a full understanding and evaluation of our management discussion and analysis.
 
ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts could be required. We initially record a provision for doubtful accounts based on our historical experiences, and we then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivables and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider, among other factors: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) our historical provision for doubtful accounts; (v) the credit worthiness of the customer; and (vi) the economic conditions of the customer's industry as well as general economic conditions.

REVENUE RECOGNITION

Our revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 480). We record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. The following policies reflect specific criteria for our various revenue streams.

Our revenue from the sale of products to related parties are recorded when the goods are shipped to the customers from our related parties. Upon shipment, title passes, and collectibility is reasonably assured. We receive purchase orders from our related parties on an as needed basis from the related party customers. Generally, the related party does not hold our inventory. If the related party has inventory on hand at the end of a reporting period, the sale is reversed and the inventory is included in our balance sheet.
 
 
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INCOME TAXES

We account for income taxes in accordance with Accounting for Income Taxes, which prescribes the use of the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, or increase or decrease this allowance in a period, we increase or decrease our income tax provision in our statement of operations. If any of our estimates of our prior period taxable income or loss prove to be incorrect, material differences could impact the amount and timing of income tax benefits or payments for any period. In addition, as a result of the significant change in our ownership, our future use of its existing net operating losses may be limited.

We currently operate in the PRC, however, our operations could change in the near future and we could be subject to tax liability involving a consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across operations in other countries.
 
We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. The tax liabilities are a reflected net of realized tax loss carry forwards. We adjust these reserves upon specific events; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the contingency has been resolved and the liabilities are no longer necessary.
 
Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year.
 
FOREIGN CURRENTY TRANSLATION AND COMPREHENSIVE INCOME (LOSS)

Our functional currency is the Chinese Yuan - Renminbi (“RMB”). For financial reporting purposes, RMB was translated into United States dollars ("USD") as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of shareholders' equity as "Accumulated other comprehensive income." Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.
 
 
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RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic 220):  Presentation of Comprehensive Income.  Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. In addition, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.  The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We are currently assessing the effect that the adoption of this pronouncement will have on our financial statements.

In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to retained earnings beginning in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. The adoption of this ASU did not have a material impact on our consolidated financial statements.

In December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We have adopted the disclosure requirements for the business combinations in 2011.
 
 
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In April 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This Update provides amendments to Accounting Standards Codification (ASC) Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. The adoption of this ASU did not have a material impact on our 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 our Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have a material impact on our Company’s consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU did not have a material impact on our Company’s consolidated financial statements.

CONTRACTUAL OBLIGATION

Loans payable consisted of the following at June 30, 2011 and December 31, 2010:
 
  
 
2011
   
2010
 
             
Loan from Shanghai Rural Commercial Bank, Dachang Branch due on May 10, 2012 with interest rate of 6.94% per annum. Guaranteed by Shanhai Group and Mr. Bian, Chairman of the Company (RMB 7,400,000).
 
$
1,143,458
   
$
739,880
 
Loan from Shanghai Rural Commercial Bank, Dachang Branch due on July 13, 2011 with interest rate of 5.31% per annum. Guaranteed by Shanhai Group and Mr. Bian, Chairman of the Company (RMB 2,600,000)
   
401,755
     
392,589
 
   
$
1,545,213
   
$
1,132,469
 

 
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OFF-BALANCE SHEET ARRANGEMENTS

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties.  We have not entered into any derivative contracts that are indexed to our stocks and classified as shareholder’s equity or that are not reflected in our consolidated financial statements.  Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.  We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Our management, with the participation of our principal executive officer, conducted an evaluation of the design and operation of our disclosure controls and procedures, as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2011.  Our disclosure controls and procedures are designed (i) to ensure that information required to be disclosed by it in the reports that we files or submit under the Exchange Act are recorded, processed,  summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, who also serves as our principal financial officer and principal accounting officer, to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures as of June 30, 2011, our principal executive officer concluded that, as of such date, our disclosure controls and procedures were not effective to ensure that (i) information required to be disclosed by our Company in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our Company’s management, including the Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure by our Company; and (ii) information required to be disclosed by our Company in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specific in the Securities and Exchange Act rules and forms.
 
 There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that occurred during the second quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.

   On May 23, 2011, we entered into a Settlement Agreement (“Settlement Agreement”) with Alpha Capital Aktiengesellschaft (“Alpha”) and Osher Capital Inc. (“Osher”) (Alpha and Osher collectively the “Plaintiffs”) for the lawsuit the Plaintiffs filed against us in the Supreme Court of the State of New York, County of New York, as previously disclosed in the Quarterly Report Form 10-Q filed with the SEC on May 16, 2011. In satisfaction of all the obligations stated under the terms of the Settlement Agreement, we agreed to pay Alpha Eighty Thousand Dollars ($80,000) and Osher Forty Thousand Dollars ($40,000). Upon the execution of the Settlement Agreement and in consideration of the terms and conditions in the Agreement, both parties will mutually release and forever discharge any and all claims, whether known or unknown, that the parties may now have or may hereafter have against each other from the beginning of time through the date of the Settlement Agreement.
ITEM 6. EXHIBITS.

The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:
 
Exhibit No.
 
Description
3.1
 
Articles of Incorporation (1)
     
3.2
 
Articles of Amendment to Articles of Incorporation (2)
     
3.3
 
Articles of Amendment to Articles of Incorporation (3)
     
3.4
 
Articles of Amendment to Articles of Incorporation (4)
     
3.5
 
Articles of Amendment to the Articles of Incorporation (5)
     
3.6
 
Bylaws (1)
     
3.7
 
Articles of Amendment to the Articles of Incorporation (6)
     
31.1
 
Section 302 Certificate of Chief Executive Officer
     
31.2
 
Section 302 Certificate of principal financial and accounting officer *
     
32.1
 
Section 906 Certificate of Chief Executive Officer *
 

*
filed herewith

(1)
Incorporated by reference to the Report on Form 8-K as filed on December 8, 1999.
   
(2)
Incorporated by reference to the Report on Form 8-K as filed on December 27, 2001.
   
(3)
Incorporated by reference to the annual report on Form 10-KSB for the fiscal year ended December 31, 2002.
   
(4)
Incorporated by reference to the Report on Form 8-K as filed on March 17, 2005.
   
(5)
Incorporated by reference to the Report on Form 8-K as filed on August 22, 2006.
   
(6)
Incorporated by reference to the Report on Form 8-K as filed on September 15, 2006.

 
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LINKWELL CORPORATION
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Linkwell Corporation
 
       
Date: August 15, 2011
By:
/s/ Xuelian Bian  
   
Xuelian Bian,
 
   
Chief Executive Officer
 
   
President and Principal Executive Officer
 
 
 
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