ITEM 1. BUSINESS.
We operate under a holding company structure and currently have one direct wholly-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 May 31, 2008, LiKang Disinfectant sold 100% of Shanghai LiKang International Trade Company, Limited (“LiKang International”). On February 15, 2008, Linkwell Tech sold 10% of its issued and outstanding capital stock to Ecolab Inc., a Delaware corporation (“Ecolab”). We regard LiKang Disinfectant's business of hospital disinfectant products as our primary business.
Linkwell Corporation, through Linkwell Tech’s wholly-owned subsidiary, LiKang Disinfectant, is engaged in the development, manufacture, sale and distribution of disinfectant health care products primarily to the medical industry in China. The Company has a national marketing and sales presence throughout all 22 provinces as well as four autonomous regions and five municipalities in China. We currently employ 52 full-time sales and marketing people based in Shanghai. Shanghai ZhongYou Pharmaceutical High-Tech Co., Ltd, (“ZhongYou Pharmaceutical”) a company 90% owned by Linkwell’s Chairman and Chief Executive Officer Xuelian Bian, also sells our products using 72 independent sales representatives in China.
Currently, we market our products to the medical industry in China, however we are making efforts to diversify and expand our reach to the retail market. Recently, we have made efforts to grow our customer base by expanding into the civil, industrial, livestock and agricultural disinfection markets of China. As of now, we offer a variety of disinfectant products for the following applications:
· Skin and mucous membrane disinfectants;
· Hand disinfectants (external);
· Environment and surface disinfectants;
· Medical devices and equipment disinfectants;
· Machine disinfectants; and
· Animal disinfectants.
LiKang Disinfectant has 56 marketed products, 50 of which are certified by one or more government authorities; the Chinese Ministry of Health, State Food and Drug Administration, or Ministry of Agriculture. China’s Ministry of Health approves those products that require the highest level of licensing and have granted 28 hygiene licenses to Linkwell. We also sell products which have been developed and manufactured by third parties. These parties manufacture disinfectant products that generated approximately 7.38% of our revenue for the fiscal year ended December 31, 2008. Products that we manufacture account for approximately 91.33% of our total net revenues for the fiscal year ended December 31, 2008. Products manufactured by third parties that we distributed accounted for approximately 1.29% of our total net revenue for the fiscal year ended December 31, 2008.
Prior to May 31, 2008, Linkwell Corporation owned 100% of Shanghai LiKang International Trade Co. Ltd., through its subsidiary LiKang Disinfectant. The primary business of LiKang International is the import and export of a variety of products and services ranging from small medical equipment and chemical products to computers. On May 31, 2008, LiKang Disinfectant sold 100% of the capital stock of LiKang International to Linkwell International Trading Co., Ltd. a company registered in Hong Kong which is 100% owned by Mr. Wei Guan, the Company’s Vice President, Secretary and Director.
Industry Background
In 2007, Frost & Sullivan stated, “The Chinese healthcare industry has been one of the fastest growing healthcare industries in the world. It is expected to become the fifth largest by 2010. Its growth is mainly driven by the government’s initiatives to simplify regulatory procedures, enhance trade relations, and attract foreign investment through friendly policies.”
According to the China Federation of Industrial Economics, China’s disinfectant industry is estimated at well over $6.5 billion. Other experts believe the Chinese market demand for biocides will increase by approximately 7.9% annually to 574,000 metric tons by the year 2010.
The disinfectant industry in China may be characterized as an emerging industry, populated by approximately 1,000 small domestic manufacturers and distributors, and half a dozen large international companies with limited presence and products.
Major contributing factors responsible for the vigor of China’s disinfectant industry growth include the transition to a market economy, increasing health consciousness in the general population and increasing government health standards and education.
Increasing Domestic Demand
Since the shift to a market economy, the Chinese government has initiated several policies to improve public health and living standards and improve the Chinese healthcare industry. Consequently, these initiatives and traditional market forces have driven increasing demand for disinfectant products. According to Frost & Sullivan, China’s healthcare expenditures grew from 5.0% of GDP in 1999 to 6.7% in 2005, representing a growth rate of approximately 5%. During the same period, USA healthcare expenditures grew from 13.2% to 15.9%, representing a growth rate of approximately 3%.
After nearly 30 years of sustaining economic growth in China, both the Chinese government and the public have become more concerned about the quality and cost of healthcare in China. A greater public awareness of the health benefits of our products, as well as these new public concerns have led to a surge in interest for disinfectant products in China with consumers maintaining stockpiles of disinfectant products. Other factors that support the growth in demand for disinfectant products include:
·
China’s population of 1.3 billion; a large and rapidly aging population base that require better sanitization standards to protect their health. According to a United Nations study released in 2005, the number of people aged 60 or over in China is expected to rise to more than 430 million people;
·
Healthcare professionals and citizens who want a healthcare system and hygienic standards as advanced as western countries;
·
Ongoing government reforms in hospital sanitation, medical standards and disinfectant regulations;
·
Government educational program to increase public awareness of public health and hygienic standards; and
·
An increase in government investment in healthcare and medical services to achieve sustainable development of the disinfectant industry.
Recent Health Concerns in China
The most critical factors that triggered health concerns in China are the recent and recurring health crises that have led to several epidemics (see Table below) and potential pandemics. In response, the Chinese government has taken initiatives to improve public health and living standards, including the establishment of The Ministry of Public Health in China for the disinfectant industry in China.
Outbreak time
Location
Disease
Situation
January,
Shanghai
Hepatitis A
310,000 reported cases of Hepatitis A, 47 deaths
April - May, 1998
Shenzhen
Sub- Tuberculosis bacillus disease
M. chelonae
Shenzhen Woman and Children Hospital reports an airborne infection. 168 patients infected, 46 severe cases
November
Throughout China
SARS
8,000 reported cases, 800 deaths
June 24 - August 20 2005
Sichuan Province
Streptococcus suis in swine and humans
reported cases of humans infected with the Swine streptococci in Sichuan, 38 deaths
April
Throughout China
Pulmonary tuberculosis, Hepatitis B
Pulmonary tuberculosis, Hepatitis B remain top two priorities on the infectious disease list in China
June,
Tibet
Bubonic plague
Five infected cases reported, two deaths
July-September
Hunan, Fujian, Zhejiang provinces
Cholera
cases reported, two deaths
August,
Guizhou, Ningxia, Liaoning, Jilin
Anthrax
cases reported, one death
October,
Inner Mongolia , Hunan , Anhui , Liaoning , and Hubei provinces
Avian Flu
Three confirmed cases reported, two deaths
October,
Zhejiang, Anhui provinces
highly pathogenic bird flu
One confirmed case in each province reported
March 24, 2006
Shanghai
highly pathogenic bird flu
One confirmed case reported
June 16,2006
Guangdong Province
highly pathogenic bird flu
One confirmed case reported
August 14, 2006
XinJiang Province
highly pathogenic bird flu
One confirmed case reported
January 9, 2007
Anhui provinces
highly pathogenic bird flu
One confirmed case reported
February 27, 2007
Fujian provinces
highly pathogenic bird flu
One confirmed case reported
March 28, 2007
Anhui provinces
highly pathogenic bird flu
One confirmed case reported
May 24, 2007
People’s Liberation Army X department
highly pathogenic bird flu
One confirmed case reported
December 2, 2007
Jiangsu provinces
highly pathogenic bird flu
One confirmed case reported
December 6, 2007
Jiangsu provinces
highly pathogenic bird flu
One confirmed case reported
January-February , 2008
Xinjiang municipality
Measles Virus
11,000 cases reported, 21 deaths
February,
Guangdong, Guangxi and Hunan provinces
Avian Flu
Three cases reported, three deaths
April-May,
Nationwide
Hand, Foot and Mouth Disease
176,321 cases reported, 40 deaths
January-September,
Nationwide
HIV
44,839 cases reported, 6,897 deaths
October-November,
Hainan province
Cholera
cases reported,
October-November,
Hainan province
Diarrhea
cases reported
January,
Nationwide
Avian Flu
Eight cases reported, five deaths
SARS - Severe Acute Respiratory Syndrome
In recent years, the Severe Acute Respiratory Syndrome (SARS) has threatened the public community. SARS, which is a viral respiratory illness caused by a corona virus, called SARS-associated corona virus (SARS-CoV), was first reported in Asia in November 2002. Over the next few months, the illness spread to more than two dozen countries in North America, South America, Europe, and Asia before the SARS global outbreak of 2003 was contained. In April 2004, the Chinese Ministry of Health reported several new cases of possible SARS outbreaks in Beijing and the Anhui Province, which is located in east-central China.
According to the Center for Disease Control of the central government of China, the common manner in which SARS seems to spread is by close person-to-person contact. The virus that causes SARS is thought to be transmitted most readily by respiratory droplets (“droplet spread”) when an infected person coughs or sneezes. Droplet spread occurs as germs from the cough or sneeze of an infected person are propelled a short distance (generally up to three feet) through the air and deposited on the mucous membranes of the mouth, nose, or eyes of nearby persons. The virus also can spread when a person touches a surface or object contaminated with infectious droplets and then touches his or her mouth, nose, or eye(s). Ultimately, there is much the global community does not know about SARS, and it is possible that the SARS virus might spread more broadly through the air (airborne spread) or by other ways that are not yet known.
In the fiscal year ended 2008, there were no confirmed cases of SARS reported in China.
Avian Influenza
In 2005, the threat of a global pandemic as a result of the avian flu began to capture the attention of the global community. The avian flu is a type of the A strain virus that infects birds. Typically, it is not common for humans to be infected with the virus via contact with birds, however a few bird-to-human outbreaks have been reported and most have been in Asia. Humans were infected when they came into contact with sick birds or contaminated surfaces. In most cases, infected persons reported flu-like symptoms, but some had more serious complications, including pneumonia and acute respiratory distress. The avian flu has led to increased concerns for improved health conditions.
Up to February 5, 2009, there were 405 confirmed cases of highly pathogenic bird flu reported throughout the world, that resulted in 254 deaths. Within China there were 11 confirmed cases resulting in eight deaths during 2008.
China Health Standards
In July 2002, the Chinese Ministry of Public Health issued the 27th order of Ministry of Health of the People's Republic of China establishing national standards for the disinfection industry. The first criterion of the new order stipulated that disinfectant manufacturers in China must obtain a license to manufacture hygiene disinfectants. Secondly, prior to release, all disinfectant instruments must obtain the official hygiene permit document of both the local provincial hygiene administrative department and the Ministry of Public Health.
The table below details the 28 licenses issued to LiKang Disinfectant by the Ministry of Public Health of the central government of China.
#
Products
Date
An’erdian Skin Disinfectant
2003.2.13
An’erdian-type 2nd skin disinfectant
2002.11.22
An’erdian-type 3rd skin and mucous membrane disinfectant
2005.1.19
Dian’erkang Aerosol Disinfectant
2004.3.22
Dian’erkang 2% glutaraldehyde disinfectant
2002.11.22
Aiershi disinfectant tablets
2004.2.9
Aiershi disinfectant
2004.2.9
Dian’erkang PVP-I disinfectant
2005.3.30
Dian’erkang Iodophor disinfectant
2004.2.19
Jifro disinfectant gel
2005.1.19
Dian’erkang alcohol disinfectant
2003.12.23
Dian’erkang compound iodine disinfectant
2004.4.28
Lvshaxing disinfectant granule
2004.2.19
Lvshaxing disinfectant tablets
2004.3.29
LiKang test paper of chlorine
2004.1.16
Jifro 4% Chlorhexidine gluconate surgical hand scrub
2004.9.7
JifroSongning disinfectant
2004.9.7
Lineng glutaraldehyde disinfectant
2005.2.17
LiKang 121 steam pressure sterilization chemical indicator
2005.3.30
LiKang 132 steam pressure sterilization chemical indicator
2005.3.30
LiKang steam pressure sterilization chemical indicator
2005.4.1
LiKang 84 disinfectant
2005.6.27
LiKang Glutaraldehyde Monitors (Strip)
2005.12.14
PuTai Skin Disinfectant
2007.1.11
PuTai washless surgical hand scrub
2007.1.11
PuTai washless surgical hand foam disinfectant
2007.1.11
LiKang disinfectant detergent
2007.4.19
JifroTaixin disinfectant
2007.6.4
Product Lines
We market 56 products, which range from air disinfection machines to hot press bags, disinfection swabs, and disinfection indicators. Our products fall into five categories and six product types.
Five Product Categories:
· Skin and Mucous Membrane Disinfectants - 8 Products
· Hand Disinfectants - 8 Products
· Environment and Surface Disinfectants - 10 Products
· Medical Devices and Equipment Disinfectants - 5 Products
· Air disinfection equipment - 7 Products
· Other products - 18 Products
Six Product Types:
· Liquids - gel
· Tablets - powder
· Aerosol
· Chemical indicator
· Disinfectant appliance
· Liquids - foam
We believe our varied product line gives us a marketing advantage to build a national customer base for our products and services. Approximately 91.33% of our sales are derived from products we have internally developed and produced and 7.38% of sales are produced by outside companies, and the remaining 1.29% of sales are distribution of other’s products. The tables below offer a summary of our current product offerings:
Skin and Mucous Membrane Disinfectants
Skin and mucous membrane disinfectants target both external and internal applications. Prior to operations, incisions, or injections the products are used to clean the skin surface. Mucous membrane disinfectants target internal germs located in the mouth, eye, perineum, and other internal sources. This product group accounted for approximately 51.7% of our fiscal year 2008 sales, and approximately 57% of our fiscal year 2007 sales. The table below lists our skin and/or mucous membrane disinfectants.
Product Names
Ingredients
Application
Industry Standard
An’erdian Skin Disinfectant
iodine, alcohol
Skin disinfectant
Q/SUVE 20-2003
An’erdian-type 3rd skin and mucous membrane disinfectant
iodine, chlorhexidine
Skin & mucous membrane disinfectant
Q/SUVE 22-2003
Dian’erkang PVP-I disinfectant
Povidone-iodine
Skin & mucous membrane disinfectant
Q/SUVE 28-2004
Dian’erkang alcohol disinfectant
alcohol
Skin disinfectant
Q/SUVE 08-2004
PuTai Skin disinfectant
Chlorhexidine gluconate, alcohol
Skin disinfectant
Q/SUVE 37-2006
Hand Disinfectants
These disinfectants target the skin surface. Products are applied to the skin prior to medial procedures. This product group accounted for approximately 18.7% of our fiscal year 2008 sales and approximately 15% of our fiscal year 2007 sales. The table below lists our hand disinfectants.
Product Names
Ingredients
Application
Industry Standard
Jifro antimicrobial hand washing
Chlorhexidine
Hand washing
Q/SUVE 04-2003
Jifro disinfectant gel
DP300 (Triclosan)
Hand disinfectant
Q/SUVE 02-2003
Jifro 4% Chlorhexidine gluconate surgical hand scrub
Chlorhexidine gluconate
Surgical hand disinfectant
Q/SUVE 09-2004
PuTai washless surgical hand scrub
Chlorhexidine gluconate, alcohol
Hand disinfectant
Q/SUVE 39-2006
PuTai washless surgical hand foam disinfectant
Chlorhexidine gluconate, alcohol
Hand disinfectant
Q/SUVE 38-2006
Environment and Surface Disinfectants
These disinfectants target a variety of surfaces, such as floors, walls, tables, and medical devices. Additionally the products can be applied to cloth materials including furniture and bedding. This product group accounted for approximately 17.7% of our fiscal year 2008 sales and approximately 15.0% of our fiscal year 2007 sales. The table below lists our environment and surface disinfectants.
Product Names
Ingredients
Application
Industry Standard
Aiershi disinfectant tablets
Trichloroisocyanuric acid
Environment and surface disinfection
Q/SUVE 34-2004
Lvshaxing disinfectant tablets
Dichloro dimethylhydantoin
Environment and surface disinfection
Q/SUVE 33-2003
Dian’erkang aerosol disinfectant
Benzethonium Chloride
Environment and surface disinfection, preventing the spread of airborne viruses such as human influenza virus, SARS, and the Bird flu virus.
Q/SUVE 07-2004
Lvshaxing disinfectant granule
Dichloro dimethylhydantoin
Environment and surface disinfection
Q/SUVE 32-2003
LiKang disinfectant detergent
Sodium hypochlorite
Surface disinfectant
Q/SUVE 37-2006
Medical Devices and Equipment Disinfectants
This line of disinfectants targets medical equipment, including the sterilization of thermo sensitive instruments and endoscope equipment. This product group accounted for approximately 10.6% of our fiscal year 2008 sales and approximately 11.0% of our fiscal year 2007 sales. The table below lists our medical device and equipment disinfectants.
Product Names
Ingredients
Application
Industry Standard
Dian’erkang 2% glutaraldehyde disinfectant
Glutaraldehyde
Disinfection and sterilization of device
Q/SUVE 10-2003
Dian’erkang 2% glutaraldehyde disinfectant (sales to Olympus Corporation)
Glutaraldehyde
Disinfection and sterilization of endoscopes
Q/SUVE 10-2003
Dian’erkang multi-enzyme rapid detergents
Multi-Enzyme
Rinsing and decontamination of device
Q/SUVE 14-2004
Machine Series
This line of disinfectants targets air quality. This product group accounted for approximately 1.1% of our fiscal year 2008 sales and approximately 2.0% of our fiscal year 2007 sales. The table below lists our machine series disinfectants.
Product Names
Ingredients
Application
Industry Standard
Lvshaxing LKQG-1000 air disinfection machine
Ozone, ultraviolet radiation, electrostatic
Air disinfection
Q/SUPE 09-2003
An’erdian disinfection swab
An’erdian
Skin and disinfection
Q/NYMN07-2003
LiKang test paper of chlorine
reagent
Indicates disinfectant concentration
Q/SUVE 40-2003
LiKang 121 steam pressure sterilization chemical indicator (card and adhesive tape)
Indication oil
Indicates sterilization effect
Q/SUVE 16-2005
LiKang 132 steam pressure sterilization chemical indicator (label)
Indication oil
Indicates sterilization effect
Q/SUVE 17-2005
LiKang steam pressure sterilization chemical indicator
Indication oil
Indicates sterilization effect
Q/SUVE 18-2005
Retail products
In 2005, we began to expand our distribution reach to the retail market. As a result, our products have gained access to hotels, schools, supermarkets, and drugstores. We have repackaged commercial disinfectant products for sale to the consumer market. Since October 1999, we redeveloped four separate products for distribution to the retail market. LiKang Disinfectant redeveloped the following products in the months and years listed:
·
Jin Zhongda collutory (mouthwash)
October
·
Antibacterial lubricant
October
·
LiKang Disinfectant 84
August
·
Dian’erkang aerosol disinfectant
October
Customers
We sell our products on a wholesale and retail basis to the medical community in China. We have approximately 6,000 active and recurring customers including hospitals, medical suppliers, and distribution companies throughout China. We maintain over 20 distribution contracts with wholesale dealers and agents. We generally offer payment terms of four to six months before payment for the products is due. For the fiscal year ended December 31, 2008 two affiliated entities that are our customers, ZhongYou Pharmaceutical and Shanghai Jiuqing Pharmaceuticals Co. Ltd., represented approximately 21% of our total net revenues. For the fiscal year ended Decmber 31, 2007, our affiliated entities LiKang Pharmaceutical and Shanghai Likang Meirui Pharmaceuticals High-Tech Co., Ltd. represented approximately 17% of our total net revenues. We have contracts with all our dealer and agent customers.
Manufacturing
We operate two production facilities in Shanghai, one located in the Shanghai Jiading district and one located in the Shanghai Jinshan district. Products are manufactured primarily in liquid, tablet, and powder form. Approximately 91.33% of LiKang Disinfectant’s revenues for fiscal 2008 were derived from products manufactured in these two factories.
The Shanghai Jiading district factory is approximately 21,500 square feet, all of which is used for production. This factory meets the good manufacturing practice (GMP) standards established by the central government; however, the equipment utilized in the factory is not GMP certified for the production of medical and chemical products. The main products produced at the Shanghai Jiading district factory are liquid and index disinfectant devices. The manufacturing facility has the capacity to produce approximately 9 million liters of liquid disinfectant annually. The manufacturing cycle for the liquids, from formulation to finished product, is one day.
The Shanghai Jinshan district factory is approximately 4,300 square feet and is used in the manufacture of the tablet and powder forms of disinfectants. The manufacturing capacity is 300 metric tons of tablet and 180 metric tons of powder disinfectant annually. The average manufacturing cycle for the tablets and powder, from formulation to finished product, is one day.
Products which represent approximately 7.38% of our fiscal year 2008 revenues are manufactured by third parties.
During fiscal 2007, following GMP certification for both the factory and the equipment; we began utilizing the services of LiKang Biological, a related party, to manufacture some of our products including our An'erdian and Dian'erkang lines of disinfectants. On March 25, 2008, Linkwell Tech bought 100% of the issued and outstanding stock of LiKang Biological. See Part III, Item 12. Certain Relationships and Related Transactions, and Director Independence appearing later in this annual report.
We have found in our experience that products manufactured at GMP certified facilities utilizing GMP certified equipment can be sold at higher prices than similar products manufactured at non- GMP certified facilities. While GMP certified products cost more to produce, we are able to increase our selling prices proportionally. Our product packaging varies to meet different needs of the market. We package our liquid and gel disinfectants in popular sizes ranging from 40 ml to 5 liters. We package these tablets in 50 tablet, 100 tablet and 200 tablet bottles. Finally, we package our powder disinfectants in 250 gram and 500 gram containers.
We maintain an inventory of finished products equal to approximately 1 month of average sales. Currently, we are manufacturing at about 50% of full capacity based upon our current product demand, and we have the ability to increase to full capacity if demand continues to increase.
We have an in-house fulfillment and distribution operation, which is used to manage our supply chain, beginning with the placement of the order, continuing through order processing, packaging and shipping the products to each customer. We maintain inventory and fill customer orders from both the Jiading factory and the Jinshan factory.
Raw Materials
We purchase raw materials from six primary suppliers, including a related party, and we have signed purchase contracts with these suppliers in an effort to ensure a steady supply of raw materials. We have maintained stable business relations with these suppliers for over 10 years, and believe that our relationships with these primary suppliers will remain stable. In the event the relationships falter, there are many suppliers with the capability to supply our company. We purchase raw materials on payment terms of 30 days to three months. Some of the suppliers import from foreign countries, as listed below, and we purchase directly from these suppliers.
The table below details the supply relationships for raw materials
Raw materials
Suppliers
Origin
Iodine
Shanghai Wenshui Chemical Co., Ltd
USA
Potassium iodide
Shanghai Wenshui Chemical Co., Ltd
Holland
Glutaraldehyde
Shanghai Jin an tang Hygienical Product Factory
Germany
Triclosan
Ciba Specialty Chemicals (China)LTD
Domestic
Alcohol
Shanghai Jangbo Chemical Co., L td
Domestic
Trichloroisocyanuric acid
Xuzhou Keweisi Disinfectant Co., Ltd
Domestic
Customer Service and Support
We believe that a high level of customer service and support is critical in retaining and expanding our customer base. Customer care representatives participate in ongoing training programs under the supervision of our training managers. These training sessions include a variety of topics such as product knowledge and customer service tips. Our customer care representatives respond to customers’ e-mails and calls that are related to order status, prices and shipping. If our customer care representatives are unable to respond to a customer’s inquiry at the time of the call, we strive to provide an answer within 24 hours. We believe our customer care representatives are a valuable source of feedback regarding customer satisfaction. Our customer returns and credits average approximately 1% of total sales.
New Product Development
We are committed to research and development. LiKang Disinfectant was created as a research and development organization by the Second Military Medical University (SMMU) of the Chinese Army in 1988. We develop our products internally and own all rights associated with these products.
We commercialized four new disinfectant products in 2007, including PuTai Skin Disinfectant, PuTai washless surgical hand scrub, PuTai washless surgical hand foam disinfectant and LiKang disinfectant detergent, which is an environmental and surface disinfectant. In 2008, 8 products were in development and licensing applications were filed for 4 of these products.
For the fiscal years ended December 31, 2008 and 2007, we spent approximately $137,588 and approximately $61,452, respectively, on research and development.
Marketing and Sales
We were formed in 1988 as a research and development organization by the Second Military Medical University (SMMU) of the Chinese Army. Our CEO, Mr. Xuelian Bian, was a member of the staff of SMMU. We believe that his relationships with alumni and business persons associated with SMMU provide us with certain marketing advantages. The university is a well recognized, prestigious institution in China and many of its graduates work at hospitals, medical suppliers, and distribution companies throughout China in senior positions, which places them in the decision making process for purchasing the kind of products we sell. In addition, the students and faculty at the university provide a pool of talent from which we draw, both as potential employees or summer interns who go on to work at other companies, many of whom are customers or potential customers for our products. In marketing our products, we seek to leverage these relationships.
During the 2007 fiscal year, we expanded our distribution capability in the PRC. We have a national marketing and sales presence throughout all 22 provinces, as well as four autonomous regions, and four municipalities of China. We currently employ 52 full-time sales and marketing people based in Shanghai. ZhongYou Pharmaceutical, an affiliate, also sells our products using 72 independent sales representatives in other provinces of China.
Approximately 26.3% of our sales are achieved by our proprietary sales force, while the remaining 73.7% are outsourced to independent dealers and agents. We compensate our proprietary salesman with a base salary plus commission. The sales representatives are located in each of China’s provinces. The external sales network currently covers hospitals in the following 22 provinces including: Beijing, Guangdong, Tianjin, Fujian, Yunnan, Hainan, Jiangsu, Zhejiang, Anhui, Shandong, Henan, Hebei, Liaoning, Heilongjiang, Shanxi, Gansu, Ningxia, Guizhou, Hunan, Sichuan, Xinjiang, Neimenggu. The independent sales representatives sell directly to the end-users.
Disinfectant Educational Center
On May 25, 2006, we entered into an agreement with China Pest Infestation Control and Sanitation Association, an association governed by the Chinese central government, to establish and operate a disinfectant educational center in Beijing, China. We will be responsible for the establishment and development of the disinfectant educational center, as well as its management and funding. The China Pest Infestation Control and Sanitation Association will be responsible for establishing a job training base in Beijing. We believe we were selected to participate in this program based upon our reputation and experience in the disinfectant industry.
It is anticipated that the disinfectant educational center will offer a job training program to educate and train professionals to work in the disinfectant field. The disinfectant educational center will be a tuition based education program for which graduates will receive a license from the China Pest Infestation Control and Sanitation Association. After completion of the program, it is envisioned that a personnel exchange service center of the Chinese central government's Health Department will function much like a placement office and assist the center's graduates in securing positions with companies seeking to fill positions in the PRC. From time to time we may also recruit graduates from the disinfectant educational center to join our company.
In June 2006, we entered into an oral arrangement with Beijing JinMeiHua Sterilizing Technology Development Company, Limited ("JinMeiHua"), an unrelated party, to act as our agent to operate the disinfectant educational center and to be responsible for the job training program specifics. However, during the 2007 fiscal year, we terminated this contract and now control the operation of the disinfectant educational center and job training program independently of JinMeiHua.
We believe the China Pest Infestation Control and Sanitation Association and LiKang Disinfectant will share the profits of the disinfectant educational center with us; however the precise revenue share has not been determined. It is also expected that the China Pest Infestation Control and Sanitation Association will receive at a maximum 50% of the profits from the disinfectant educational center. JinMeiHua will not receive any profits for operating the disinfectant educational center because our arrangement with JinMeiHua has been terminated. We advanced JinMeiHua $249,797 to begin the development of the disinfectant educational center. The investment made by LiKang Disinfectant of $249,797 in JinMeiHua was returned to LiKang Disinfectant in December 2006 because JinMeiHua was no longer involved in this program.
In 2006, LiKang Disinfectant entered into an agreement with the China Pest Infestation Control Association, the Ministry of Health and the Beijing Olympic Game Committee to establish and operate a disinfectant educational center in Beijing, China. In accordance with the agreement, LiKang Disinfectant is responsible for the establishment of the disinfectant educational center, as well as its management and funding. As of December 31, 2007, we had provided the text books and technical standards for training. In 2008, prior to the Bejing Olympic Games starting, we held the first class for training the 2008 Beijing Olympic Staff. There were 46 staff were qualified among total 51 participants
After the Wenshuan Earthquake occurred, LiKang Disinfectant entered into an agreement with the Ministry of Health, the National Patriot and Sanitation Committee, and the Dujiangyan National Disaster Headquarters to provide service to stricken areas. On June 6, 2008, Likang Disinfectant sent its own teams to Sichuan to provide sanitation technical training for over 270 staff as well as providing a qualification course and examinations to over 100 national disinfectors. On June 27, 2008, 76 national disinfectors had taken professional qualification exams and 67 national disinfectors were qualified. The passage rate was 88%.
In 2008, there were 325 participants that attended the Likang Disinfectant training course, of which 117 became qualified.
Intellectual Property
We have received eleven patents and have one pending patent application with National Property Right Administration of the PRC. The patent approval process can take up to 36 months. The following is a list of LiKang Disinfectant’s patents and pending patent applications:
Patent
Category
Patent name
Patent No
Notes
New invention
Low smell and stimulus contain chlorine disinfectant tablet, powder etc
ZL 200410068135.8
Approved, expires August 2026
New invention
A new skin & mucous membrane disinfectant including preparation methods
Application # 200410025305.4
Pending. Applied on 2004-11-12
Appearance design
Bottle (with the wing stretch)
ZL 00 3 14391.0
Approved, expires April 2010
Appearance design
Packaging bottle
ZL 2003 3 0108274.5
Approved, expires November 2013
Appearance design
Bottle
ZL 200530034239.2
Approved, expires December 2015
Appearance design
Test paper box of chlorine
ZL 2004 3 0022740.2
Approved, expires May 2014
Product Improvement
Improved heavy duty bottle
ZL 03 2 29616.9
Approved, expires March 2013
Product Improvement
High strength water sterilizer with Model H ultraviolet lamp
ZL 03 2 10513.4
Approved, expires September 2013
Product Improvement
Sewage application
ZL 2004 2 0037013.8
Approved, expires June 2014
Product Improvement
Container with the vacuum pump
ZL 200420090682.1
Approved, expires June 2016
Product Improvement
Multifunctional air disinfectant
ZL 200420037010.4
Approved, expires August 2015
Product Improvement
Bracket for heavy duty bottle
ZL 200520039668.3
Approved, expires October 2016
We have nine product trademarks, of which four are registered trademarks with the China State Administration for industry and commerce trademark office. These trademarks cover our four major product lines, An’erdian, Jifro, Dian’erkang and Lvshaxing.
We are not a party to any confidentiality or similar agreement with any of our employees or any third parties regarding our intellectual property. It is possible that a third party could, without authorization, utilize our propriety technologies without our consent. We can give no assurance that our proprietary technologies will not otherwise become known or independently developed by competitors.
Competition
We operate in a fragmented, competitive national market for healthcare disinfectant products. According to a survey conducted in 2004 by the China Federation of Industrial Economics (CFIC), the disinfectant market in the PRC was approximately $6.25 billion (USD). While the disinfectant industry in China is an emerging industry, and the industry is populated with small regional players, we estimate that there are over 1,000 manufacturers and distributors of disinfectant products in China and certain of our major competitors distribute products similar to ours, including those which also prevent the spread of airborne viruses such as avian flu and SARS.
We compete with foreign companies, including 3M, who are marketing a limited line of disinfectant products in China, as well as smaller, domestic manufacturers. Most domestic competitors offer a limited line of products and there are few domestic companies with a nationwide presence. We believe that our national marketing and sales presence throughout all 22 provinces, as well as four autonomous regions, and four municipalities of China gives us a competitive advantage over many other disinfectant companies in China.
In addition, prior to the adoption of industry standards in July 2002 by the central government of China, disinfectant products were generally marketed and sold based on pricing factors. We believe the recent standards implemented by the government and a growing middle income class will shift the customer demand from price to quality.
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 both hardware and software. Hardware would include facilities and machinery. Software would include the technology to monitor the facilities. Furthermore the requirements will encompass the knowledge and capability of both the production staff and quality control procedures.
Furthermore we estimate the new government standards adopted in July 2002 are increasing the barriers to entry in the disinfectant industry. We believe that the new standards may lead to fewer competitors as companies falter in their efforts to adhere to the new standards. The implementation of these improved production standards and licenses have effectively decreased the competitiveness of small and mid-size manufacturers. The new standards are especially difficult for companies with limited product offerings and inferior technical content.
Competitive Advantages
We believe that the following are the principal competitive strengths that differentiate our company from the majority of our competition:
·
Strong sales and distribution network in China - enables us to compete effectively with domestic competitors, as well as larger foreign-owned competitors.
·
Product selection and availability - A number of our competitors are smaller, regional companies with a limited number of product offerings. We offer our customers a wide variety of disinfectant products and ability to ship products to our customers on a timely basis throughout the PRC.
·
Research and development - Our efforts to respond to market demand for new products have resulted in the issuance to us of 28 hygiene licenses by the Ministry of Public Health of the central government of China. Based upon our knowledge of our competitors, we do not believe any of our competitors have received as many licenses since the enactment of the licensing standards in July 2002.
·
Strong product pipeline - We have a history of introducing 3 or 4 new products to the market each year. We have filed applications for 4 new products and have 8 additional products in development.
·
Manufacturing capacity - We are operating at 91% capacity to produce GMP certified products and we have the ability to increase capacity significantly at moderate costs.
·
Customer services - Our sales personnel are thoroughly educated about our products, which enable them to better understand the needs of our customers. Our customer service representatives strive to answer questions immediately and no later than 24 hours after a customer’s inquiry.
·
Reliability and speed of delivery. We believe our products have developed a reputation of good quality and effectiveness and our manufacturing capabilities enable us to produce and ship products to our customers promptly.
·
Customer service - Our customer service representatives participate in ongoing product training programs and we strive to respond to all customer inquiries within 24 hours.
·
Price - We have developed relationships with a number of raw material suppliers which enables us to keep our costs low and thereby offer prices to our customers which are very competitive.
Our primary competitors in the sale of chemical disinfectants are 3M and Ace Disinfection Factory Co., Ltd. The primary competitors for instrument disinfectants are Chengdu Kangaking Instrument Co., Ltd. and Hangzhou Yangchi Medicine Article Co., Ltd. and the primary competitors for chemical indicators are 3M and Shandong Xinhua Medical Instrument Co., Ltd. Domestic competition comes from regional companies which tend to offer products in small geographic areas and do not distribute their product lines throughout China.
Our primary competitors include:
Competitor
Products
3M Company
Hand disinfectant, skin and mucous disinfectant
Ace
Skin and mucous disinfectant
Chengdu Kangaking
Medical equipment and devices
Hangzhou Yangchi
Sterilized Q-tip
Shandong Xinhua
Chemical indicators
Our primary foreign competitor is 3M Company which has had a presence in China for more than 20 years. 3M Company entered the hand disinfection market at the end of 2004 and primarily offers products in the areas of index and control devices and disinfectant machines. At present, 3M Company has five products for use in operating rooms and its products are found in provincial capital cities of China such as Shanghai, Beijing, Guangzhou, Hangzhou, Nanjin, Chengdu and Xi’an. 3M Company’s product line in China is relatively narrow, with few overlapping products between 3M Company and our company.
Another foreign competitor is Johnson & Johnson, established operations in China in 1994. In China, Johnson & Johnson offers a variety of skin, hand, and medical equipment disinfectants. Prior to the recent initiatives by the government, disinfectant products were marketed based on pricing and despite the brand awareness of Johnson & Johnson; its products did not have widespread reception among the community. Furthermore, Johnson & Johnson does not offer a wide variety of disinfectant products in China.
Government Regulations
Our business and operations are located in the PRC. We are subject to local food, drug, environmental laws related to certification of manufacturing and distributing of disinfectants. We are also licensed by the Shanghai City Government to manufacture and distribute disinfectants. We are in substantial compliance with all provisions of those licenses and have no reason to believe that they will not be renewed as required by the applicable rules of Shanghai. In addition, our operations must conform to general governmental regulations and rules for private companies conducting business in China.
Pursuant to the July 2002 Ministry of Public Health 27th Order of Ministry of Health of the People's Republic of China, all disinfectant manufacturers in China must obtain a license to manufacture hygiene disinfectants. Prior to release, all disinfectant instruments must obtain the official hygiene permit document of Ministry of Public Health and the approval of the provincial hygiene administrative department. The implementation of these improved production standards and licenses has effectively decreased the competitiveness of small to mid size manufacturers with single product and inferior technical content. Presently we meet all standards initiated by this ordinance and we have been granted 28 hygiene licenses by the Ministry of Public Health.
We are also subject to various other rules and regulations, including the People’s Republic of China Infectious Disease Prevention and Cure Law, Disinfection Management Regulation, Disinfection Technique Regulation, Disinfection Product Manufacturer Sanitation Regulation, and Endoscope Rinse and Disinfection Technique Manipulation Regulation. We believe we are in material compliance with all of the applicable regulations.
PRC Legal System
Since 1979, many laws and regulations addressing economic matters in general have been promulgated in the PRC. Despite development of its legal system, the PRC does not have a comprehensive system of laws. In addition, enforcement of existing laws may be uncertain and sporadic, and implementation and interpretation thereof inconsistent. The PRC judiciary is relatively inexperienced in enforcing the laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate laws exist in the PRC, it may be difficult to obtain swift and equitable enforcement of such laws, or to obtain enforcement of a judgment by a court of another jurisdiction. The PRC's legal system is based on written statutes and, therefore, decided legal cases are without binding legal effect, although they are often followed by judges as guidance. The interpretation of PRC laws may be subject to policy changes reflecting domestic political changes. As the PRC legal system develops, the promulgation of new laws, changes to existing laws and the preemption of local regulations by national laws may adversely affect foreign investors. The trend of legislation over the past 20 years has, however, significantly enhanced the protection afforded foreign investors in enterprises in the PRC. However, there can be no assurance that changes in such legislation or interpretation thereof will not have an adverse effect upon our business operations or prospects.
Economic Reform Issues
Since 1979, the Chinese government has reformed its economic systems. Many reforms are unprecedented or experimental; therefore they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. We cannot predict if this refining and readjustment process may negatively affect our operations in future periods.
Over the last several years, China's economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have included devaluations of the Chinese currency as the result of inflation. This relative Renminbi (“RMB”) devaluation places some restrictions on the availability of domestic credit, reducing the purchasing capability of customers, and limiting re-centralization of the approval process for some foreign product purchases. These austerity measures alone may not succeed in slowing down the economy's excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets.
To date reforms to China's economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China's economic system will continue or that we will not be adversely affected by changes in China's political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.
Employees
LiKang Disinfectant employs approximately 160 full time employees, including our executive officers, as follows:
Department
Number of Employees
Administrative center
Accounting
Production
Logistics
Sales and Marketing Staff in Shanghai
Training
Research and Development
Total
U.S. Advisors
On January 10, 2006 and effective January 1, 2006, the Company entered into a three year agreement with China Direct Investments, Inc. to provide business development and management services. In connection with this agreement, the Company issued China Direct Investments, Inc. 4,700,000 shares of the Company's common stock. The Company valued the service using the fair value of common shares on grant date at $0.18 per share and recorded deferred consulting expenses of $846,000 to be amortized over the service period. In July 2007, the Company terminated the service contact with China Direct Investments, Inc, and the remaining deferred consulting expenses associated with this agreement amounted to $564,000, which were expensed for the year ended December 31, 2007.
In September 2006, the Company entered into a three-year agreement with a Zhiyan Shi to provide business development and management services. In connection with this agreement, the Company issued Zhiyan Shi 500,000 shares of the Company's common stock. The Company valued these services using the fair value of common shares on grant date at $0.185 per share and recorded deferred consulting expense of $92,500 to be amortized over the service period. For the year ended December 31, 2008, amortization of consulting compensation amounted to $30,833.
On June 6, 2007, the Company entered into a twelve month agreement with FirsTrust Group Inc. to provide business development and management services. In connection with this agreement, on July 12, 2007, the Company issued 450,000 shares of its restricted common stock. The Company valued the service using the fair value of common shares on grant date at $0.17 per share and recorded deferred consulting expense of $76,500 to be amortized over six months of the service period. On December 6, 2007, the Company terminated the service contract with FirsTrust Group Inc. On October 6, 2008, FirsTrust Group Inc. began providing advisory services to the Company again. The Company issued 450,000 shares of its restricted common stock to FirsTrust Group Inc. The Company valued the service using the fair value of common share on grant date at $0.08 per share and recorded deferred consulting expense of $36,000 to be amortized over six months of the service period. For the year ended December 31, 2008, amortization of consulting compensation amounted to $18,000.
History of Our Company
We were incorporated in the State of Colorado on December 11, 1996 as Mizar Energy Company. From our inception through December 28, 1999, we were involved in the business of acquiring, developing and operating oil and gas properties. On December 28, 1999, we sold 60% of our issued and outstanding common stock to HBOA.Com, Inc., a District of Columbia corporation ("HBOA-DC"). Pursuant to this stock sale, there was a change in our business and management team and we began to focus on HBOA's business, which was related to the sale of products and services to the owners of home based businesses through its Internet web site.
On May 31, 2000, HBOA-DC was merged with and into our wholly owned subsidiary, HBOA.Com, Inc., a Florida corporation ("HBOA-FL"). In June 2000, we began to develop our application service provider business, in addition to HBOA's web site. We focused on development of an Internet portal through which home based business owners, as well as commercial private label businesses, obtain the products, services, and information necessary to start, expand and profitably run their businesses. On November 10, 2000, our shareholders approved our proposal to change our name from Mizar Energy Company to HBOA Holdings, Inc. and to change our state of incorporation from Colorado to Florida and recorded a loss of approximately $258,000. On December 28, 2000, we formed a new subsidiary, Aerisys, Incorporated, a Florida corporation, to handle commercial private business. Effective as of July 18, 2003, we changed our name to Kirshner Entertainment & Technologies, Inc.
On May 2, 2005, we closed a share exchange with all of the shareholders of Linkwell Tech in which we 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 our common stock. As a result of the transaction, Linkwell Tech became our wholly owned subsidiary. Linkwell Tech was founded in June 2004. On June 30, 2004, Linkwell Tech acquired 90% of LiKang Disinfectant through a stock exchange with Shanghai LiKang Pharmaceuticals Technology Company, Limited, the then 90% shareholder of LiKang Disinfectant. Shanghai Shanhai Group, an unaffiliated third party, owned the remaining 10% of LiKang Disinfectant. Shanghai Shanhai Group is owned by Shanghai Shanhai Group Employee Share-holding Committee (16.25%) and Shanghai Baoshan District Dachang Town South Village Economic Cooperation Club (83.75%). LiKang Disinfectant's officers and directors, Mr. Xuelian Bian and Wei Guan, own Shanghai LiKang Pharmaceuticals Technology Company, Limited, owning 90% and 10%, respectively, of that company. The transaction in which Linkwell Tech acquired the 90% interest in LiKang Disinfectant resulted in the formation of a U.S. holding company by Mr. Bian and Guan as it did not result in a change in the underlying ownership interests of LiKang Disinfectant.
Our then officers and directors resigned at the closing of the share exchange and Mr. Wei Guan and Xuelian Bian, who were the officers and directors of Linkwell Tech, were appointed our officers and directors. In connection with the share exchange and to satisfy all outstanding obligations and indebtedness owed by our company to our former CEO and certain third parties, Linkwell Tech provided us $175,000 which we provided to our former CEO to be used by him to satisfy these obligations. We also issued our former CEO 1,400,000 shares of our common stock.
In July 2005, we changed our name to Linkwell Corporation.
In February 2006, we sold 100% of the stock of Aerisys to Mr. Gary Verdier, our former CEO, in exchange for the assumption of all liabilities and obligation of Aerisys. Prior to the share exchange agreement with Linkwell Tech in May 2005, Aerisys had represented our sole operations. Aerisys marketed and sold the Aerisys Intelligent Community (TM), a web-based software program and private, browser-based intranet product that allows schools to collaborate with parents and faculty each day on classroom homework, assignments, critical dates, team priorities and school news in a private forum, primarily to K through 12 private schools. We had not been able to improve sales or business opportunities for Aerisys since May 2005.
On February 15, 2008, we entered into a stock purchase agreement (the “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 million dollars.
In connection with and as a condition to closing the Stock Purchase Agreement, on February 29, 2008, LiKang Disinfectant entered into a series of commercial agreements with Ecolab, including a Consulting Agreement (“Consulting Agreement”), two Distributor Agreements, and a Sales Representative Agreement.
Pursuant to the Consulting Agreement, LiKang Disinfectant is providing consulting services to Ecolab Chemicals Ltd., a company of limited liabilities incorporated under the laws of China and a wholly-owned subsidiary of Ecolab (“Ecolab Chemicals”), including identifying all regulatory approvals for manufacture, productions, transport, market, sale distribution and or use for certain of Ecolab Chemicals’ infection control, cleaning and sanitizing products for the period the Disinfectant Distribution Agreement (defined below) is effective. Pursuant to the first Distribution Agreement, LiKang Disinfectant is a distributor for the promotion, sale and distribution of certain of Ecolab Chemicals’ infection control, cleaning and sanitizing products (the “Disinfectant Distribution Agreement”) for the territory of PRC (excluding Hong Kong, Taiwan and Macau) for the period of two years unless extended or terminated early. Pursuant to the second Distribution Agreement, Ecolab Chemicals is the exclusive distributor for the promotion, marketing, sale and distribution of certain of certain of LiKang Disinfectant’s infection control products (the “Ecolab Chemicals Distribution Agreement”) for the territory of Hong Kong, Taiwan and Macau for the period of two years unless extended or terminated early. Pursuant to the Sales Representative Agreement, LiKang Disinfectant is a sales representative for the solicitation of sales of Ecolab Chemicals’ pest elimination services for the territory of the P.R.C. (excluding Hong Kong, Taiwan and Macau) for the period of two years unless extended or terminated early.
On April 6, 2007, our wholly-owned subsidiary Linkwell Tech entered into two material stock purchase agreements. In one agreement, Linkwell Tech was to acquire a 100% equity interest in Shanghai LiKang Biological High-Tech Company, Limited, a Chinese company (“LiKang Biological”) in a related party transaction with Xuelian Bian, an individual, Wei Guan, an individual, and LiKang Pharmaceutical (the “Biological Stock Purchase Agreement”). Mr. Bian is Linkwell Corporation's Chief Executive Officer, President and Chairman of the Board and Wei Guan is Linkwell Corporation's Vice President, Secretary and Director. Mr. Bian and Mr. Guan own 90% and 10% of LiKang Pharmaceutical, respectively. Mr. Bian and LiKang Pharmaceutical owned 60% and 40% of LiKang Biological, respectively. Pursuant to the terms of the Biological Stock Purchase Agreement, Mr. Bian and LiKang Pharmaceutical were to receive 1,000,000 shares of Linkwell Corporation restricted common stock. In the other agreement, Linkwell Tech, which already owned a 90% equity interest in Shanghai LiKang Disinfectant, was to purchase the remaining 10% equity interest of LiKang Disinfectant from Shanghai Shanhai Group, a non-affiliated Chinese entity (“Disinfectant Stock Purchase Agreement”). Pursuant to the terms of the Disinfectant Stock Purchase Agreement, Shanghai Shanhai Group was to receive 3,000,000 shares of Linkwell Corporation restricted common stock.
Due to restrictions under PRC law that prohibited the consideration then contemplated by the Biological Stock Purchase Agreement and Disinfectant Stock Purchase Agreement neither of the respective transactions contemplated by those agreements closed. As a result of this, on March 25, 2008, the parties entered into an amendment to the Biological Stock Purchase Agreement (“Biological Amendment”) and an amendment to the Disinfectant Stock Purchase Agreement (“Disinfectant Amendment”) in an effort to complete the stock purchase transactions under those agreements. Pursuant to the terms of the Biological Amendment, the only material change to the Biological Stock Purchase Agreement relates to the consideration paid by Linkwell Tech to Xuelian Bian and LiKang Pharmaceutical which was changed from 1,000,000 shares of the Company’s common stock to $200,000 and 500,000 shares of common stock. Pursuant to the terms of the Disinfectant Amendment, the only material change to the Disinfectant Stock Purchase Agreement relates to the consideration paid by Linkwell Tech to Shanghai Shanhai Group for the remaining 10% equity interest, which was changed from 3,000,000 shares of common stock, to $380,000 and 1,500,000 shares of common stock. The other terms of the Disinfectant Stock Purchase Agreement remain in full force and effect.
The Biological Amendment also did not receive governmental approval prompting the parties to enter into a second amendment to the Biological Stock Purchase Agreement on March 5, 2009. The second amendment changed the entity purchasing the capital stock of LiKang Biological from Linkwell Tech to LiKang Disinfectant. The consideration paid by LiKang Disinfectant for the capital stock of LiKang Biological was also changed pursuant to the terms of the second amendment from $200,000 and 500,000 shares of the Company’s common stock to RMB 2,000,000 and 500,000 shares of the Company’s common stock. The Company believes that these changes will make obtaining government approval of the transaction more likely.
On May 31, 2008, LiKang Disinfectant entered into a stock purchase agreement under which it sold 100% of the capital stock of its wholly-owned subsidiary, LiKang International to Linkwell International Trading Co., Ltd, a company registered in Hong Kong which is 100% owned by Mr. Wei Guan, the Company’s Vice President, Secretary and Director. Pursuant to the terms of the agreement, LiKang Disinfectant will receive $291,754 (RMB 2,000,000).
ITEM 1A.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a significant degree of risk. You should not invest in our common stock unless you can afford to lose your entire investment. You should consider carefully the following risk factors and other information in this annual report before deciding to invest in our common stock.
RISKS RELATED TO OUR COMPANY
We engage in a number of material transactions with related parties which could result in a conflict of interest involving our management.
We are materially dependent on certain related party transactions in the ongoing conduct of our business. Sales to our affiliates ZhongYou Pharmaceutical and Shanghai LiKang Meirui Pharmaceutical High-Tech Co., Ltd. represented approximately 17% of our total net revenues in the fiscal year of 2007 and approximately 40% of our total net revenues in fiscal 2006. Sales to our affliates ZhongYou Pharmaceutical, Shanghai LiKang Meirui Pharmaceutical High-Tech Co., Ltd. and Shanghai Jiuqing Pharmaceuticals Company Limited represented approximately 21% of our total net revenues in the fiscal year of 2008. This related party represented approximately 50% and approximately 42% of our accounts receivable at December 31, 2008 and 2007, respectively. In addition, we lease our principal executive officers from Shanghai Shanhai Group, the minority shareholder of our LiKang Disinfectant subsidiary, and Shanghai LiKang Meirui Pharmaceutical High-Tech Co., Ltd, an affiliated company of this minority shareholder, both supplies us with raw materials and acts as a contract manufacturer for certain of our products. We have also engaged in a number of other related party transactions including extending working capital loans to Shanghai LiKang Pharmaceuticals Technology Company, Limited and Shanghai LiKang Biological High-Tech Company, Ltd., purchasing real property from Shanghai LiKang Pharmaceuticals Technology Company, Limited and utilizing the services of Shanghai LiKang Biological High-Tech Company, Ltd. to process certain of our products. These affiliated transactions may from time to time result in a conflict of interest for our management. Because these transactions are not subject to the approval of our shareholders, investors in our company are wholly reliant upon the judgment of our management in these related party transactions.
The management of our company is located in the PRC and we are materially dependent upon advisory services of U.S. advisors.
None of the current members of our management have any experience in U.S. public companies and these individuals are not fluent in English.
Until such time as we are able to expand our board of directors to include English-speaking individuals who have experience with the operation and regulatory framework applicable to U.S. public companies, we are materially dependent upon our relationship with our U.S. advisors. If for any reason our Advisors should fail to provide the contracted services at the anticipated levels or fails to extend its services and we have not added members to our board of directors with the requisite experience we may be unable to prepare and file reports as required by the Securities Exchange Act of 1934 on a timely basis which could lead to our common stock being removed from the OTCBB. In this event, your ability to liquidate your investment would be negatively impacted and you could lose your entire investment in our company.
As is customary in the PRC, we extend relatively long payment terms to our customers, including on sales to related parties, which can negatively impact our cash flows. Our terms of sale generally require payment within four to six months, which is considerably longer than customary terms offered in the United States. For fiscal 2008, the average time of payment on accounts receivable from non-related third parties was 121 days and the average time of payment on accounts receivable from related parties as 380 days, compared to 235 days from related parties in fiscal 2007; an increase of 145 days. The Company would like to control the average time of payment on accounts receivable from related parties within 120 days.
We occasionally offer established customers, including related parties, longer payment terms of up to 240 days on new products as an incentive to purchase these products, which has served to further increase the average days outstanding for accounts receivable. We maintain a relatively low reserve for doubtful accounts when compared to a company operating in the U.S. Our payment terms may have the effect of adversely impacting our cash flow and our ability to fund our operations out of our operating cash flow. Our ability to continue to implement our growth strategy could suffer if our cash flows are adversely impacted which will have the effect of limiting our ability to increase our revenues in the future.
Certain agreements to which we are a party and are material to our operations lack various legal protections, which are customarily contained in similar contracts prepared in the United States.
We are a Chinese company and all of our business and operations are conducted in China. We are a party to certain material contracts, including an agreement for the lease for our principal offices and manufacturing facility. While these contracts contain the basic business terms of the agreements between the parties, these contracts do not contain certain provisions which are customarily contained in similar contracts prepared in the U.S., such as representations and warranties of the parties, confidentiality and non-compete clauses, provisions outlining events of defaults, and termination and jurisdictional clauses. Because our material contracts omit these types of clauses, notwithstanding the differences in Chinese and U.S. laws we may not have the same legal protections as we would if the contracts contained these additional provisions. We anticipate that contracts we enter into in the future will likewise omit these types of legal protections. While we have not been subject to any adverse consequences as a result of the omission of these types of clauses, and we consider the contracts to which we are a party to contain all the material terms of our business arrangements with the other party, future events may occur which lead to a dispute under agreements which could have been avoided if the contracts were prepared in conformity with U.S. standards. Contractual disputes which may arise from this lack of legal protections will divert management's time from the operation of our business and require us to expend funds attempting in settling a possible dispute. This possible diversion of management time will limit the time our management would otherwise devote to the operation of our business, and the diversion of capital could limit the funds we have available to pay our ongoing operating expenses.
Each of our product groups operate in highly competitive businesses.
Each of our product groups is subject to competition from other manufacturers of similar products. There are approximately 1,000 manufacturers of similar disinfectant products in China, but only approximately 30 manufacturers, including our company, operate on a continuous basis with the remainder of other companies periodically entering the market in times of increased demand. While we believe we are one of the leading manufacturers of disinfectant products in the PRC, from time to time there is a sporadic oversupply of these products which can adversely impact our market share and competitive position in this product group. As a result, we may not be able to effectively compete in our product segments which could have the effect of limiting our ability to sustain our current level of operations or grow our revenues in future periods.
Because of the specialized, technical nature of the business, we are highly dependent on certain members of management, as well as our marketing, engineering and technical staff.
The loss of the services of our current management and skill employees could have a material and negative effect on our ability to effectively pursue our business strategy. In addition to manufacturing high volumes of our products and developing new products, we must attract, recruit and retain a sizeable workforce of technically competent employees, including additional skilled and experienced managerial, marketing, engineering and technical personnel. If we are unable to do so, our ability to grow our business and increase our revenues could be limited.
If we experience customer concentration, we may be exposed to all of the risks faced by our remaining material customers.
For the fiscal years ended December 31, 2008 and 2007 revenues from one customer, ZhongYou Pharmaceutical an affiliate, represented approximately 21% and approximately 27%, respectively, of our total net revenues. Unless we maintain multiple customer relationships, it is likely that we will experience periods during which we will be highly dependent on a limited number of customers. Dependence on a few customers could make it difficult to negotiate attractive prices for our products and could expose us to the risk of substantial losses if a single dominant customer stops conducting business with us. Moreover, to the extent that we are dependent on any single customer, we are subject to the risks faced by that customer to the extent that such risks impede the customer's ability to stay in business and make timely payments to us.
We depend on factories to manufacture our products, which may be insufficiently insured against damage or loss.
We have no direct business operation, other than our ownership of our subsidiaries located in China, and the results of operations and our financial condition are solely dependent on our subsidiaries' factories in China. We do not currently maintain insurance to protect against damage and loss to our facilities and other leasehold improvements. Therefore, any material damage to, or the loss of, any of our facilities due to fire, severe weather, flooding or other cause, would not be shared with an insurance company, and if large enough, would have a material and negative effect on our financial condition. If the damage was significant, we could be forced to stop operations until such time as the faculties could be repaired.
Our operations are subject to government regulation. If we fail to comply with the applicable regulations, our ability to operate in future periods could be in jeopardy.
We are subject to various state and local environmental laws related to our business. We are subject to local food, drug, environmental laws related to certification of manufacturing and distributing of any disinfectant. We are also licensed by the Shanghai City Government to manufacture and distribute disinfectants. While we are in substantial compliance with all provisions of those registrations, inspections and licenses and have no reason to believe that they will not be renewed as required by the applicable rules of the Central Government and the Shandong Province, any non-renewal of these authorities could result in the cessation of our business activities.
Due to recent incidents of pollution to milk powder by Melamine and increased medical accidents and disputes, the government will impose more stringent restrictions over the quality of products and distributions in markets, given tighter control over food, drug and disinfectant industries, which would add costs to our operations from compliance of all provisions of restrictions. Any incompliance with provisions of these restrictions would jeopardize our ability to operate in future.
We may not have sufficient protection of certain of our intellectual property.
We utilize certain technologies in the purification of raw material used in our products which are proprietary in nature. We are not a party to any confidentiality or similar agreements with employees and third parties including consultants, vendors and customers and it not likely that we will enter into these types of agreements in the future. It is possible that our employees or a third party could, without authorization, utilize our propriety technologies without our consent. The unauthorized use of this proprietary information by third parties could adversely affect our business and operations as well as any competitive advantage we may have in our market segment. We may not have adequate remedies for the protection of our proprietary technologies and these proprietary technologies could become known or independently developed by competitors, in which event our ability to effectively compete could be in jeopardy.
We have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have reduced protections against interested director transactions, conflicts of interest and other matters.
We are not subject to any law, rule or regulation requiring that we adopt any of the corporate governance measures that are required by the rules of national securities exchanges such as independent directors and audit committees. It is possible that if we were to adopt some or all of the corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. Prospective investors should bear consider our current lack of corporate governance measures in formulating their investment decisions.
RISKS RELATED TO DOING BUSINESS IN CHINA
All of our assets and operations are located in the PRC and are subject to changes resulting from the political and economic policies of the Chinese government.
Our business operations could be restricted by the political environment in the PRC. The PRC has operated as a socialist state since 1949 and is controlled by the Communist Party of China. In recent years, however, the government has introduced reforms aimed at creating a "socialist market economy" and policies have been implemented to allow business enterprises greater autonomy in their operations. Changes in the political leadership of the PRC may have a significant effect on laws and policies related to the current economic reform programs, other policies affecting business and the general political, economic and social environment in the PRC, including the introduction of measures to control inflation, changes in the rate or method of taxation, the imposition of additional restrictions on currency conversion and remittances abroad, and foreign investment. Moreover, economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increases of such disparities could affect the political or social stability of the PRC.
Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development of China, the future direction of these economic reforms is uncertain and the uncertainty may decrease the attractiveness of our company as an investment, which may in turn result in a decline in the trading price of our common stock.
The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC only recently has permitted provincial and local economic autonomy and private economic activities. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in the PRC or particular regions thereof. In such an event, we could be forced to cease operations.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
Because all of revenues are in the form of Renminbi, any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies, after providing valid commercial documents, at those banks authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to government approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect to foreign exchange transactions.
We may be unable to enforce our rights due to policies regarding the regulation of foreign investments in China.
The PRC's legal system is a civil law system based on written statutes in which decided legal cases have little value as precedents, unlike the common law system prevalent in the United States. The PRC does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion and variation, and may be subject to influence by external forces unrelated to the legal merits of a particular matter. China's regulations and policies with respect to foreign investments are evolving. Definitive regulations and policies with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published. Statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad interpretation and discretion and to be modified, perhaps on a case-by-case basis. The uncertainties regarding such regulations and policies present risks which may affect our ability to achieve our stated business objectives. If we are unable to enforce any legal rights we may have under our contracts or otherwise, our ability to compete with other companies in our industry could be limited which could result in a loss of revenue in future periods which could impact our ability to continue as a going concern.
Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate, including our ability to pay dividends.
The PRC State Administration of Foreign Exchange, or SAFE, issued a public notice in January 2005 concerning foreign exchange regulations on mergers and acquisitions in China. The public notice states that if an offshore company controlled by PRC residents intends to acquire a PRC company, such acquisition will be subject to strict examination by the relevant foreign exchange authorities. The public notice also states that the approval of the relevant foreign exchange authorities is required for any sale or transfer by the PRC residents of a PRC company’s assets or equity interests to foreign entities for equity interests or assets of the foreign entities.
In April 2005, SAFE issued another public notice further explaining the January notice. In accordance with the April 2005 notice, if an acquisition of a PRC company by an offshore company controlled by PRC residents has been confirmed by a Foreign Investment Enterprise Certificate prior to the promulgation of the January 2005 notice, the PRC residents must each submit a registration form to the local SAFE branch with respect to their respective ownership interests in the offshore company, and must also file an amendment to such registration if the offshore company experiences material events, such as changes in the share capital, share transfer, mergers and acquisitions, spin-off transaction or use of assets in China to guarantee offshore obligations. The April 2005 notice also provides that failure to comply with the registration procedures set forth therein may result in restrictions on our PRC resident shareholders and our subsidiaries. Pending the promulgation of detailed implementation rules, the relevant government authorities are reluctant to commence processing any registration or application for approval required under the SAFE notices.
In addition, on August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the State-Owned Assets Supervision and Administration Commission of the State Council, State Administration of Taxation, State Administration for Industry and Commerce, China Securities Regulatory Commission and SAFE, amended and released the Provisions for Foreign Investors to Merge and Acquire Domestic Enterprises, new foreign-investment rules which took effect September 8, 2006, superseding much, but not all, of the guidance in the prior SAFE circulars. These new rules significantly revise China’s regulatory framework governing onshore-offshore restructurings and how foreign investors can acquire domestic enterprises. These new rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions. Further, the new rules establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions in key industries.
These new rules may significantly affect the means by which offshore-onshore restructurings are undertaken in China in connection with offshore private equity and venture capital financings, mergers and acquisitions. It is expected that such transactional activity in China in the near future will require significant case-by-case guidance from MOFCOM and other government authorities as appropriate. It is anticipated that application of the new rules will be subject to significant administrative interpretation, and we will need to closely monitor how MOFCOM and other ministries apply the rules to ensure its domestic and offshore activities continue to comply with PRC law. Given the uncertainties regarding interpretation and application of the new rules, we may need to expend significant time and resources to maintain compliance.
It is uncertain how our business operations or future strategy will be affected by the interpretations and implementation of the SAFE notices and new rules. Our business operations or future strategy could be adversely affected by the SAFE notices and the new rules. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities.
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
We may have difficulty establishing adequate management, legal and financial controls in the PRC.
PRC companies have historically not adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and, computer, financial and other control systems. In addition, we may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business.
RISKS RELATED TO OUR COMMON STOCK
We have not voluntarily implemented various corporate governance measures, in the absence of which, stockholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors' independence, audit committee oversight, and the adoption of a code of ethics. Although we have adopted a Code of Ethics, we have not yet adopted any of these other corporate governance measures and, since our securities are not yet listed on a national securities exchange, we are not required to do so. We have not adopted corporate governance measures such as an audit or other independent committees of our board of directors as we presently do not have any independent directors. If we expand our board membership in future periods to include additional independent directors, we may seek to establish an audit and other committees of our board of directors. It is possible that if we were to adopt some or all of these corporate governance measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.
Provisions of our Certificate of Incorporation and bylaws may delay or prevent a takeover which may not be in the best interests of our stockholders.
Provisions of our articles of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our shareholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the Nevada Revised Statutes also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation's disinterested shareholders.
In addition, our articles of incorporation authorize the issuance of up to 10,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our Board of Directors, of which no shares are currently outstanding. Our Board of Directors may, without shareholder approval, issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock.
Our stock price will fluctuate and could subject our company to litigation.
The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond its control. These factors include:
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Quarterly variations in operating results;
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Changes in accounting treatments or principles;
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Additions or departures of key personnel;
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Stock market price and volume fluctuations of publicly-traded companies in general and Chinese-based companies in particular; and
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General political, economic and market conditions.
Because our stock currently trades below $5.00 per share, and is quoted on the OTC Bulletin Board, our stock is considered a "penny stock" which can adversely affect its liquidity.
As the trading price of our common stock is less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction.
SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2. PROPERTIES.
Our facilities include our principal executive offices, located at 1104 Jiatang Road Jiading District, Shanghai China 201807. We lease our principal executive office building and warehouse space, which consists of approximately 1,860 square feet, from Shanghai Shanhai Group, an unaffiliated third party, under leases expiring in December 2010 for an annual rental of approximately $32,000, increasing during the lease years beginning in 2008 in amounts ranging from 8% to 10% annually.
Our other executive office is located at Room 701-704, No 11 Guotai Road, under leases entered into on July 16, 2008 for an annual rental of approximately $111,462. The lease agreement will expire on July 15, 2010.
Until August 2005 we leased approximately 21,500 square feet of manufacturing space from Shanghai LiKang Pharmaceutical Technology Company, Limited, an affiliate, under a lease originally expiring December 2006 for an annual rent of approximately $11,500. In August 2005 we purchased this building, which includes an assignment of the land use permit, for $333,675. See Part II, Item 12. Certain Relationships and Related Transactions, and Director Independence appearing later in this annual report.
We also lease an additional approximate 2005 square feet of warehouse space from Shanghai Henglian Industrial Co. Limited, an unaffiliated third party, under a lease that we entered into on November 1, 2008 for an annual rental of approximately $41,366. The lease agreement will expire on October 31, 2009.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is quoted on the Over The Counter Bulletin Board (“OTCBB”). On March 24, 2005, our symbol was changed from KSHR to LWLL in connection with a 1:10 reverse split of our common stock effective on that date. The reported high and low closing prices for the common stock as reported on the OTCBB are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
On March 31, 2009, the last sale price of our common stock as reported on the OTCBB was $0.06. As of December 31, 2008, there were approximately 128 record owners of our common stock.
Dividend Policy
We have never paid cash dividends on our common stock. Payment of dividends will be within the sole discretion of our Board of Directors and will depend, among other factors, upon our earnings, capital requirements and our operating and financial condition. At the present time, our anticipated financial capital requirements are such that we intend to follow a policy of retaining earnings in order to finance the development of our business.
While we have no current intention of paying dividends on our common stock, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions.
Recent Sales of Unregistered Securities
In March 2008, the Company entered into a two month agreement with SmallCapVoice.Com, Inc. to provide the Company with financial public relations services. In connection with this agreement, the Company will pay $3,500 per month and issues a total of 35,000 shares of the Company’s common stock. On March 11, 2008, the Company issued 35,000 shares to SmallCapVoice.Com, Inc. The Company valued these services using the fair value of common shares on the grant date at $0.19 per share and recorded consulting expense of $6,650.
On May 1, 2008, the Company entered into a two year agreement with China Health Capital Group, Inc. (“CHC”) to provide the Company with financial and investment services. In connection with this agreement, on June 24, 2008, the Company issued 2,000,000 shares of Common Stock valued at $0.21 per share to CHC and recorded $420,000 as deferred compensation. For the fiscal year ended December 31, 2008, amortization of consulting compensation amount to $140,000.
On June 27, 2008, Monarch Capital Fund, Ltd. exercised a warrant to purchase 100,000 shares of common stock with price of $0.20 per share. The Company received proceeds from this warrant exercise of $20,000 on June 24, 2008.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
N/A.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion contains forward-looking statements. Forward looking statements are identified by words and phrases such as “anticipate”, “intend”, “expect” and words and phrases of similar import. We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements due to risks, uncertainties and assumptions that are difficult to predict, including those set forth in Item 1A below. We encourage you to read those risk factors carefully along with the other information provided in this report and in our other filings with the SEC before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law.
You should read this MD&A in conjunction with the Consolidated Financial Statements and related Notes in Item 1.
In August 2006, the Company incorporated a new subsidiary, Shanghai LiKang International Trade Co., Ltd. (“LiKang International”). Since its inception, LiKang International has primarily served as an agent for third parties who desire to export goods from China, including computers, computer components, small medical equipment and instruments, meters and electromechanical devices. In October 2006, LiKang International expanded its business to include light weight construction materials, textile crafts, furniture, and raw chemical materials.
On May 31, 2008, LiKang Disinfectant entered into a stock purchase agreement under which it sold 100% of the capital stock of its wholly-owned subsidiary, LiKang International to Linkwell International Trading Co., Ltd, a company registered in Hong Kong. Pursuant to the terms of the agreement, LiKang Disinfectant will receive RMB 2,000,000 once the agreement is approved by the Ministry of Commerce, the People’s Republic of China and such approval was obtained on March 27, 2008. The amount due from Linkwell International Trading is expected to be paid to us in July, 2009.
OVERVIEW
Since 1988 we have developed, manufactured and distributed disinfectant health care products primarily to the medical industry in China. In recent years, China has witnessed a variety of public health crises, such as the outbreak of SARS, which demonstrated the need for increased health standards in China. In response, 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 (including facilities and machinery), software (including the technology to monitor the facilities), and for the knowledge and capability of both the production staff and quality control procedures. Following the adoption of the industry standards in 2002, we have been granted 31 hygiene licenses by the Ministry of Public Health.
We believe that the government standards adopted in July 2002 have increased the barriers to entry for competitors in the disinfectant industry in China. The implementation of these higher production standards and license requirements has effectively decreased the competitiveness of small to mid 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 these new industry standards, the marketplace has become focused on product quality, which we believe has enabled us to increase our commercial customer base and subsequently, 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. Recently we have made efforts to expand our distribution to reach to the retail market. We have repackaged select commercial disinfectant products for sale to the mass consumer market and have begun to expand our customer base to include hotels, schools, supermarkets, and drugstores. By virtue of the Chinese government's continuing focus on educating the Chinese population about the benefits of proper sanitation procedures, we believe that one key to increasing our revenues is the continued expansion of the retail distribution of our products.
The disinfectant industry in China is an emerging industry that is populated with small, regional companies. We estimate that there are in excess of 1,000 manufacturers and distributors of disinfectant products in China; however, most domestic competitors offer a limited line of products and there are few domestic companies with a nationwide presence. We believe that our national marketing and sales presence throughout all 22 provinces, four autonomous regions, and four major municipalities of China gives us a competitive advantage over other disinfectant companies in China and enables us to leverage our brand awareness for 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 necessary assets and capital available to us to enable us to increase our revenues in future periods as the overall market for disinfectant products in China continues to increase. For the coming future, we will continue to focus our efforts on developing a retail market for our products, as well as expanding our traditional base of commercial customers. In addition, we may also consider the possible acquisition of independent sales networks which could be used to increase our product distribution as well as smaller, regional companies in our industry.
Results of Operations
The table below sets forth the results of operations for fiscal year ended December 31, 2008 as compared to fiscal year ended December 31, 2007 accompanied by the change amount and percentage of changes. We recasted numbers for the fiscal year ended December 31, 2007 by subtracting the results of operations of LiKang International from the Company’s fiscal year ended December 31, 2007 consolidated statement of operation to give a more accurate presentation of comparative figures in the consolidated financial statements in 2008.
Fiscal year ended December 31, 2008 as compared to the fiscal year ended December 31,
Other key indicators
Net revenues
Net revenues for the fiscal year ended December 31, 2008 increased $3,858,207, or approximately 47%, to $11,985,924, compared with $8,127,717 for the fiscal year ended December 31, 2007.We believe this increase in demand was due to an increase in our sales staff and customer recognition of our high-quality, competitively priced disinfectant products.
Approximately 78% of our total net revenues were attributable to sales to non-related parties and approximately 22% were attributable to sales to related parties for the fiscal year ended December 31, 2008, as compared to approximately 67% and 33%, respectively, for the fiscal year ended December 31, 2007. While sales to unrelated parties increased by $3,876,338 approximately 71% for the fiscal year ended December 31, 2008 from the comparable period in fiscal year 2007, sales to related parties decreased $18,131, or approximately 1%. This change in sales distribution reflects management’s desire to diversify and grow its customer base through own distribution channel and to obtain greater independence and market shares.
Our net revenues for the fiscal year ended December 31, 2008, included revenues from ZhongYou Pharmaceutical, an affiliated entity, of $2,553,602 compared to $2,354,010 from sales during the same period in 2007. This represents an increase of $199,592 or approximately 8%. Included in our net revenues for the fiscal year ended December 31, 2008 were revenues of $51,702 from sales of our products to Shanghai LiKang Meirui Pharmaceuticals High-Tech Co., Ltd., an affiliate, for an increase of $16,995 or approximately 49%, from $34,707 for the fiscal year ended December 31, 2007. Also for the fiscal year ended December 31,2008 there were revenues of $18,255 from sales of our products to Shanghai Jiuqing Pharmaceuticals Company, Limited, an affiliate entity, for an increase of $4,867 or approximately 36%, from the fiscal year ended December 31, 2007.
Cost of revenues
Cost of revenues includes raw materials and manufacturing costs, such as labor, rent and an allocated portion of overhead expenses including utilities directly related to the production activities. For the fiscal year ended December 31, 2008, cost of revenues amounted to $5,963,830 or approximately 50% of net revenues as compared to cost of revenues of $4,259,128, or approximately 52% of net revenues for the fiscal year ended December 31, 2007. Historically, our cost of revenues has been comprised as follows: approximately 65% to raw material costs and 35% to manufacturing costs. The decrease in cost of revenues as a percentage of net revenues for the fiscal year ended December 31, 2008 as compared to the fiscal year ended December 31, 2007 is attributable, primarily, to price decreases of raw materials during our 2008 fiscal year. We also experienced a decrease in overhead costs, including utilities and transportation during the fiscal year ended December 31, 2008 as compared to the fiscal year ended December 31, 2007 because we outsourced part of our production to a third party which represented 16% and 14% of total cost of sales for the fiscal years ended December 31, 2008 and 2007, respectively. We have gained the benefits of the majority of these decreased costs in order to increase our market share in the disinfectant industry.
We purchase raw materials from six primary suppliers and we have purchase contracts with these suppliers in an effort to ensure a steady supply of raw materials. We purchase raw materials and finished products from Shanghai LiKang Meirui Pharmaceutical High-Tech Co. Ltd., an affiliate. These purchases totaled $0 and $8,544 for the fiscal years ended December 31, 2008 and 2007, respectively. We made purchases from ZhongYou Pharmaceutical, an affiliate entity, in the amount of $84,833 and $233,478 for the fiscal years ended December 31, 2008 and 2007, respectively. We also purchased from Shanghai LiKang Biological High-Tech Company, Ltd., an affiliate, raw materials totaling $160,395 and $57,032 for the fiscal years ended December 31, 2008 and 2007, respectively.
Gross profit
Gross profit for the fiscal year ended December 31, 2008 was $6,022,094 or approximately 50% of net revenues, as compared to $3,868,589 or approximately 48% of net revenues for the fiscal year ended December 31, 2007. The increase in gross margin reflects an overall decrease in the price of raw materials and overhead, the proportionally larger increase in revenues from sales of new products, and overall increase in sales volume and selling price for some products. Sales of new products increased gross profit for the fiscal year ended December 31, 2008 by 14% as compared to fiscal year 2007. An increase in both sales volume and selling price of certain existing products increased gross profit for the fiscal year ended December 31, 2008 by 70% as compared to fiscal year 2007. Sales of products which increase in sales volume but had a decreased selling price contributed an increase in gross profit of 16%.
Operating expenses
Total operating expenses for the fiscal year ended December 31, 2008 were $3,515,758, an increase of $38,264, or approximately 2%, from total operating expenses in the fiscal year ended December 31, 2007 of $3,477,494. For the fiscal year ended December 31, 2008, this increase included the following:
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Selling expenses in 2008amounted to $1,083,431 as compared to $848,488 for the fiscal year ended December 31, 2007, an increase of $234,943 or approximately 28%. This increase is primarily attributable to increase in sales and marketing staff in order to building out our sales and service division to improve future growth;
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Shipping costs amounted to $269,518 compared to $274,086 for the fiscal year ended December 31, 2007 ,a decrease of $4,568 or 2%;
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Advertising costs amounted to $2,943 compared to $5,069 for the fiscal year ended December 31, 2007, a decrease of $2,126 or 42%;
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Repair and maintenance costs amounted to $23,006 as compared to $11,733 for the fiscal year ended December 31, 2007, an increase of $11,273 or 96%; and
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General and administrative expenses were $2,432,327 as compared to $2,629,006 for the fiscal year ended December 31, 2007, a decrease of $196,679, or approximately 8%. These expenses included the following:
o
We incurred consulting fees during the fiscal years ended December 31, 2008 and 2007 of $418,688 and $764,050, respectively. These fees were substantially related to the issuance of common stock for business development and management services related to our administrative operations in the United States; and
o
For the fiscal year ended December 31, 2008, salaries and wages and related benefits decreased to $545,718 as compared to $696,693 for the fiscal year ended December 31, 2007, a decrease of approximately $150,970 or approximately 22%.
Income from operations
We reported income from operations of $2,506,336 for the fiscal year ended December 31, 2008 as compared to income from operations of $391,095 for the fiscal year ended December 31, 2007, an increase of $2,115,241 or approximately 541%. This increase in income from operations is due primarily to an increase in sales revenue and better control over the cost of sales, selling expenses and general and administrative expenses, thus resulting in better efficiency and profitability of the operation.
Other income (expenses)
For the fiscal year ended December 31, 2008, the total other expenses amounted to $(405,320) as compared to total income amount to $80,827 for the fiscal year ended December 31, 2007, a decrease of $486,147. This change is primarily attributable to:
§
Put option expenses of $281,030 compare to $0 for fiscal year ended December 31, 2007. This put option expenses results from the Stockholders Agreement with Ecolab (“Stockholders Agreement”). Ecolab also 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 Corp., cash in the amount of $2,400,000, or the lesser of (a) 10,000,000 shares of our common stock, or (b) such number of shares of Linkwell Corp. common stock as is determined by dividing (i) 3,500,000 by (ii) the average daily closing price of the Company’s common stock for the twenty days on which our shares of common stock were traded on the OTC Bulletin Board prior to the date the Put Option is exercised. The Company recognized the maximum expenses of the Put Option and a call option also provided for in the Stockholders Agreement as $400,000. Deducting the minority interest in December 2008 of $118,970, total put option expenses shown in the Statement of Operation is $281,030.
§
A decrease in other income/(expenses) of $211,449 resulting in other expenses of $(66,554) for the fiscal year ended December 31, 2008 as compared to other income to $144,895 for the fiscal year ended December 31, 2007. This decrease was attributable to the increased expenses in donation and penalty in the fiscal year ended December 31, 2008.
Income before discontinued operations, income taxes and minority interest
For the fiscal year ended December 31, 2008 our income before discontinued operations, income taxes and minority interest was $2,101,016 as compared to $471,922 for the fiscal year ended December 31, 2007, an increase of $1,629,094 or approximately 345%.
Discontinued operations
In March 2008, we sold 100% of the capital stock of our fully owned subsidiary LiKang International Trading to Linkwell International Trading Co., Ltd (“Linkwell Trading”), a company registered in Hong Kong and 100% owned by our Vice President, Secretary and Director, Wei Guan. The total gain from discontinued operations of $65,083 includes gain from the sale of LiKang International amount of $25,322 in the fiscal year ended December 31, 2008. For the fiscal year ended December 31, 2007, the operating income from discontinued operations was $21,137.
Minority interest
For the fiscal year ended December 31, 2008, we reported a minority interest expense of $149,505 as compared to $132,924 for the fiscal year ended December 31, 2007. The minority interest is attributable to Linkwell Tech's 10% minority shareholder, Ecolab after March 31, 2008 and Shanghai Shanhai prior March 25, 2008.
Net income
We reported net income of $1,629,270 for the fiscal year ended December 31, 2008, as compared to net income of $360,135 for the fiscal year ended December 31, 2007. Net income for Linkwell’s subsidiary, LiKang Disinfectant, increased approximately 102%, with net income of $2,456,427 for the year end December 31, 2008 compared to $1,217,455 in 2007.
The primary causes for the increase in net income for the year ended 2008 was attributable to three key factors; (1) the increase in sales revenue; (2) the decrease in cost of sales and selling expenses as percentage to sales revenue; (3) the decrease in general and administrative expenses.
As described in the “Gross profit” paragraph above, we experienced a decrease in the price of raw materials. Our management had worked with raw material suppliers to minimize any additional price increases during 2008.
Liquidity and Capital Resources
As shown in the accompanying financial statements, our working capital increased $4,386,121, or approximately 79%, from $5,565,804 on December 31, 2007 to $9,951,925 on December 31, 2008. With the expansion of our businesses, we anticipate a strong demand on our capital resources in the near future. In addition to our working capital on hand, we intend to obtain required capital through a combination of bank loans and the sale of our equity securities. Although there are no commitments or agreements on the part of anyone at this time to provide us with additional bank financing or to purchase securities, we are optimistic we will be able to obtain additional capital resources to fund our business expansions.
We currently have no material commitments for capital expenditures. At December 31, 2008, we had approximately $744,069 in short term loans. 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 producing capacity and improve the quality of our products. Based on our preliminary estimates, it will require additional capital of approximately $1 million.
We need to raise additional capital resources to meet the demands described above. We may seek to 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.
NET CASH FROM OPERATING ACTIVITES
Net cash provided by operating activities for the year ended December 31, 2008 was $204,377 as compared to net cash used in operating activities of $633,394 for the year ended December 31, 2007, an increase of $837,771 or 132%. For the year ended December 31, 2008, we used cash to fund a net increase in accounts receivable of $1,108,415, increase of $1,633,398 in accounts receivable - related parties, an increase of $391,443 in inventories, and an increase of $46,645 in other receivables, and an increase of $339,378 in prepaid and other current assets. These decreases were offset by our net income, an increase in advances from customers of $66,682, an increase of $127,170 in tax payable, and an increase of $493,029 in accounts payable, accrued expenses and other payables.
NET CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities for the year ended December 31, 2008 was $508,045 as compared to net cash used in investing activities of $99,349 for the same period in 2007, an increase of $408,696 or 441%. This change is attributable to an increase of $399,057 cash paid in acquisition, and a purchase of $108,988 in property, plant and equipment.
NET CASH FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $1,153,088 for the year ended December 31, 2008, as compared to net cash used in financing activities of $388,855 for the year ended December 31, 2007, a increase of $1,541,943 or 397%. The increased cash flow from financing activities is chiefly a result of an increase of proceeds from warrants exercised of $20,000, an increase of $2,000,000 from issuance of shares of our common stock, and an increase of $52,782 in proceeds from a related party. The increases were offset by an increase of $919,694 due from related parties.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: allowance for doubtful accounts; income taxes; stock-based compensation; and asset impairment.
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 experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider: (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, among other factors.
INCOME TAXES
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS 109 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 the Company's ownership, the Company's future use of its existing net operating losses may be limited.
The Company currently operates 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 reflected net of realized tax loss carry forwards. We adjust these reserves upon specific events; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the contingency has been resolved and the liabilities are no longer necessary.
Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year.
STOCK-BASED COMPENSATION
We account for share-based payments in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating expected volatility. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.
ASSET IMPAIRMENT
We periodically evaluate the carrying value of other long-lived assets, including, but not limited to, property and equipment and intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Significant estimates are utilized to calculate expected future cash flows utilized in impairment analyses. We also utilize judgment to determine other factors within fair value analyses, including the applicable discount rate
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that are material to investors.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements are contained in pages through which appear at the end of this annual report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2008, our principal executive officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level.
Internal Control Over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
The management of the company is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals and includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The company’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2008. In making this assessment, the company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, management concluded that, as of December 31, 2008, our internal control over financial reporting is not effective due to a material weakness. This material weakness is that all of our employees and accounting staff are located in the PRC and we do not presently have a chief financial officer, comptroller or similarly titled senior financial officer who is bilingual and experienced in the application of U.S. GAAP. We have taken the steps to eliminate this material weakness including the hiring of additional accounting consulting staff to review and oversee our application of generally accepted accounting principles in the United States to bring additional financial expertise to our organization and to facilitate the flow of information to our independent accountants. This accounting consulting staff has assisted us in implementing additional practices to ensure that we (i) properly accrue undeclared and unpaid dividends, (ii) properly record related party transactions, and (iii) properly account for changes in loans payable. However, until we expand our full time staff to include a bilingual senior financial officer who has the requisite experience necessary, as well as supplement the accounting knowledge of our staff, notwithstanding the guidance provided to us by the accounting consulting staff we could continue to have material weaknesses in our disclosure controls that may lead to restatements of our financial statements.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVRNANCE.
Directors and Executive Officers
Name
Age
Positions
Xuelian Bian
Chief Executive Officer, President and Chairman of the Board
Wei Guan
Vice President and Director
Mr. Xuelian Bian - has served as our Chairman of the Board, Chief Executive Officer and President since May 2, 2005. Simultaneously, he has served as Chief Executive Officer, President and a Director of Linkwell Tech since its inception in June 2004 and as General Manager of LiKang Disinfectant since 1993. From 1990 to 1993, he was a project assistant in charge of science and technology achievement application in the Second Military Medical University, Shanghai, China. From 1986 to 1990, Mr. Bian was a member of the technical staff in the Epidemiological Institute in the Second Military Medical University. Mr. Bian contributed to the compilation of "Disinfection - Antiseptic - Anticorrosion - Preservation" and "Modern Disinfection Study" of which the first book laid the foundation for Chinese disinfectant study. Mr. Bian started related research with his colleagues on the microbiology sterilization effect examination, high strength ultraviolet lamp tube and decontaminating apparatus prior to the inception of LiKang Disinfectant. Mr. Bian graduated from the China Army Second Military Medical University in 1990 with a bachelor degree in public health.
Mr. Wei Guan - has served as our Vice President and a member of our Board of Directors since May 2, 2005. He has served as Vice President of Linkwell Tech since its inception in June 2004 and vice General Manager of Shanghai LiKang Disinfectant Company, Limited since 2002. From 1987 to 1990, Mr. Guan worked at Hunan Machinery Importing & Exporting Corporation as a member of management. From 1990 to 2002, he worked for the Division of Importing and Export at Worldbest Group as a general manager. Mr. Guan graduated from Hunan University in Changsha, Hunan Province with a bachelor degree in Industry Foreign Trading in 1987.
There are no family relationships between any of the executive officers and directors. Each director is elected at our annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified.
Key Employees
Mr. Chun Ming Huang, age 40, has served as COO of Linkwell Corporation since 2005. From 2001 until joining Linkwell in 2005, Mr. Huang served as the Associate Director of the Analytical Department of WuXi Pharma Tech. Mr Huang received his master degree in pharmaceuticals from the Second Military Medical University in 1992.
Ms. Gendi Li, age 56, has served as LiKang Disinfectant's Controller since 2003. From 1996 to 2003, Ms. Li was employed as an Executive Accountant and Financial Manager for QiaoFu Construction Holding Company (Shanghai). From 1993 to 1996, Ms. Li was employed as an Executive Accountant and Head of the Finance Department at Shanghai Yuxin Machinery Co., Ltd. From 1968 to 1993, Ms. Li was employed in various financial positions, including Executive Accountant, and Head of the Finance Department at First Plastic Machinery Factory. Ms. Li graduated from the Shanghai Finance and Economics Institute.
Mr. Wensheng Sun, age 40, has been LiKang Disinfectant's Vice-General Manager for Production since 1995 and has held the same position at LiKang Disinfectant since 1995 following completion of his Masters degree in Medicine at the Second Military Medical University School of Pharmacy.
Mr. Rick Wang, age 33, currently serves as Linkwell Corporation's Secretary. Mr. Wang joined LiKang Disinfectant in 1999 and received his bachelor degree from the Public Health Department of Xinjiang Medical College in 1997.
Code of Business Conduct and Ethics
In December 2005, we adopted a Code of Business Conduct and Ethics applicable to our Chief Executive Officer, principal financial and accounting officers and persons performing similar functions. A Code of Business Conduct and Ethics is a written standard designed to deter wrongdoing and to promote:
·
Honest and ethical conduct,
·
Full, fair, accurate, timely and understandable disclosure in regulatory filings and public statements, compliance with applicable laws, rules and regulations,
·
The prompt reporting violation of the code, and
·
Accountability for adherence to the Code.
We will provide a copy, without charge, to any person desiring a copy of the Code of Business Conduct and Ethics, by written request to, 1104 Jiatang Road Jiading District, Shanghai China 201807, Attention: Corporate Secretary.
Committees of the Board of Directors
Our Board of Directors has not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee or any committees performing a similar function. The functions of those committees are being undertaken by the entire board as a whole. Because we do not have any independent directors, our Board of Directors believes that the establishment of committees of the Board would not provide any benefits to our company and could be considered more form than substance.
We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given that all of our operations are located in the PRC and our lack of directors and officers insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees.
None of our directors is an “audit committee financial expert” within the meaning of Item 401(e) of Regulation S-B. In general, an “audit committee financial expert” is an individual member of the audit committee or Board of Directors who:
·
Understands generally accepted accounting principles and financial statements,
·
Is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
·
Has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,
·
Understands internal controls over financial reporting, and
·
Understands audit committee functions.
Our Board of Directors is comprised of individuals who were integral to our formation and who are involved in our day to day operations. While we would prefer that one or more of our directors be an audit committee financial expert, none of these individuals who have been key to our development have professional backgrounds in finance or accounting. When we are able to expand our Board of Directors to include one or more independent directors, we intend to establish an Audit Committee. It is our intention that one or more of these independent directors will also qualify as an audit committee financial expert. Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor is our Board of Directors required to establish or maintain an Audit Committee or other committee.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table summarizes all compensation recorded by us in each of the last two completed fiscal years for our principal executive officer. Our principal executive officer also serves as our principal financial officer. No other executive officer received total annual compensation exceeding $100,000.
SUMMARY COMPENSATION TABLE
1 Mr. Bian has served as our Chief Executive Officer, Chief Financial Officer, President and director since May 2, 2005.
Employment Agreements
We are not a party to any employment agreements.
Compensation of Directors
Our Board of Directors is presently comprised of our executive officers who do not receive compensation for their services as directors. At such time as we expand our Board of Directors to include independent members we will establish a policy for the compensation of those members.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Securities Authorized For Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under equity compensation plans, including individual compensation arrangements, by us under our Stock Option Plan and any compensation plans not previously approved by our stockholders as of December 31, 2008.
Stock Option Plans
Year 2000 Equity Compensation Plan
On October 10, 2000, our Board of Directors adopted our Year 2000 Equity Compensation Plan under which a total of 540,000 shares of common stock are made available for the granting of awards, a portion or all of which may qualify as incentive stock options, non-incentive stock options and restricted stock grants. The purpose of the plan, which was approved by our shareholders on November 10, 2000, is to encourage stock ownership by our officers, directors, key employees and consultants, and to give such persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. If any option or restricted stock grant expires or terminates before it has been exercised in full, the shares of common stock allocable to the unexercised portion of such option or restricted stock grant may again be subject to an option or restricted stock grant under the 2000 Equity Compensation Plan. The number of shares available and subject to options, option prices and, to the extent applicable, the number of shares subject to any restricted stock grant will be adjusted upward or downward, as the case may be, in the event of any subdivision or consolidation of shares or other capital readjustment, stock dividend, merger, consolidation or similar transaction affecting the shares. At December 31, 2008 we did not have any options to purchase shares of our common stock outstanding under the plan.
The 2000 Equity Compensation Plan is administered by our Board of Directors which has the sole authority to determine which eligible employees of our company receive options and restricted stock grants under the plan, the times when options and restricted stock grants are granted, the number of shares covered by the option and restricted stock grant, the provisions of any agreement and when options may be exercised or when restricted stock grants become vested. In addition, the Board has the power and authority to construe and interpret the Plan.
Stock options may be granted by the Board at prices determined in the discretion of the Board, provided that the option price must be at least equal to the fair market value of the common stock on the date of the grant. The option price is payable in cash, common stock or such other form of payment as may be determined by the Board. The exercise price of an incentive stock option must be at least equal to the fair market value of our common stock on the date of grant or 110% of such value in the case of options granted to an individual who is a 10% or greater shareholder of our company.
An optionee generally may exercise an option only while an employee of our company. If an optionee becomes disabled or dies while in the employ of our company, the option may be exercised within one year of the optionee's death or termination due to disability. The expiration date of an option will be determined by the Board at the time of the grant, but in no event will an incentive stock option be exercisable after the expiration of 10 years from the date of grant or five years in the case of incentive options granted to a 10% or greater shareholder. The Board may grant to an eligible individual shares of our common stock subject to specified restrictions on transferability and vesting as provided in a written grant agreement or resolutions in which the restricted stock grant is adopted and approved by the Board. Restricted stock grants may be made in lieu or cash compensation or as additional compensation. The Board may also make restricted stock grants contingent on pre-established performance goals determined by the Board. Except for certain transfers that may be permitted by the Board, no option or restricted stock grant may be transferred by an eligible individual other than by will or the laws of descent or distribution.
The 2000 Equity Compensation Plan terminates on December 21, 2010. The Board of Directors may at any time amend, suspend or discontinue the plan, except that no amendment may be made without the approval of the shareholders which would increase the number of shares subject to the plan, materially change the designation of the class of employees eligible to receive options, remove the administration of the plan from the Board or a committee of the Board or materially increase the benefits accruing to participants under the plan.
Non-Qualified Stock Option Plan
On December 21, 2000 our Board of Directors adopted our Non-Qualified Stock Option Plan under which a total of 200,000 shares of common stock are made available for granting of non-qualified stock options to officers, directors, employees and key advisors or consultants. The purpose of the plan is to encourage the participants to contribute materially to our growth. If any option expires or terminates before it has been exercised in full, the shares of common stock allocable to the unexercised portion of such option may again be subject to an option under the Non Qualified Stock Option Plan. The number of shares available and subject to options and option prices will be adjusted upward or downward, as the case may be, in the event of any subdivision or consolidation of shares or other capital readjustment, stock dividend, merger, consolidation or similar transaction affecting the shares. At December 31, 2008 we did not have any options to purchase shares of our common stock outstanding under the plan.
The Non-Qualified Stock Option Plan is administered by our Board of Directors which has the sole authority to determine which who is eligible to receive grants of non-qualified options under the plan, the times when options are granted, the number of shares covered by the option, the provisions of any agreement and when options may be exercised. In addition, the Board has the power and authority to construe and interpret the Plan.
Stock options may be granted by the Board at prices determined in the discretion of the Board and the exercise price of the option may be greater than, or less than, the fair market value of our common stock. The option price is payable in cash, common stock or such other form of payment as may be determined by the Board. An optionee generally may exercise an option only while the grantee is employed by us or otherwise providing our company services. If an optionee becomes disabled or dies while in the employ of our company or while otherwise providing services to us, the option may be exercised within 90 days after optionee's death or termination due to disability. The expiration date of an option will be determined by the Board at the time of the grant, but in no event will a stock option be exercisable after the expiration of 10 years from the date of grant. Except for certain transfers that may be permitted by the Board, no option may be transferred by an eligible individual other than by will or the laws of descent or distribution.
The 2000 Equity Compensation Plan terminates on December 21, 2010. The Board of Directors may at any time amend, suspend or discontinue the plan, except that no amendment may be made without the approval of the shareholders which would increase the number of shares subject to the plan, materially change the designation of the class of employees eligible to receive options, remove the administration of the plan from the Board or a committee of the Board or materially increase the benefits accruing to participants under the plan.
Equity Compensation Plan
On June 28, 2005, our Board of Directors adopted our 2005 Equity Compensation Plan under which 5,000,000 shares of our common stock have been reserved for issuance upon the exercise of options or stock grants under the plan. Our officers, directors, key employees and consultants are eligible to receive stock grants and non-qualified options under the Plan. Only our employees are eligible to receive incentive options. The purpose of the 2005 Equity Compensation Plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give such persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by us, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by us for other purposes. As of December 31, 2008 we had no outstanding options or stock grants under the plan and no shares available for issuance under the 2005 Equity Compensation Plan.
Our Board of Directors, or a committee of the Board, administers the 2005 Equity Compensation Plan including, without limitation, the selection of the persons who will be awarded stock grants and granted options, the type of options to be granted, the number of shares subject to each option and the exercise price. Plan options may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified options. In addition, the plan allows for the inclusion of a reload option provision, which permits an eligible person to pay the exercise price of the option with shares of common stock owned by the eligible person and receive a new option to purchase shares of common stock equal in number to the tendered shares. Any incentive option granted under the Plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any incentive option granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The exercise price of non-qualified options shall be determined by the Board of Directors, but shall not be less than the par value of our common stock on the date the option is granted.
The term of each plan option and the manner in which it may be exercised is determined by the Board of Directors or the committee, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant. The plan provides that, with respect to incentive stock options, the aggregate fair market value (determined as of the time the option is granted) of the shares of common stock, with respect to which incentive stock options are first exercisable by any option holder during any calendar year shall not exceed $1,000,000. Unless the plan is approved by our shareholders within one year of the effective date, no incentive stock options may be granted and all incentive stock options that may have been previously granted shall automatically be converted into non-qualified stock options. As of the date of this annual report, we have not submitted the 2005 Equity Compensation Plan to our shareholders for approval.
The plan provides that, if our outstanding shares are increased, decreased, exchanged or otherwise adjusted due to a share dividend, forward or reverse share split, recapitalization, reorganization, merger, consolidation, combination or exchange of shares, an appropriate and proportionate adjustment shall be made in the number or kind of shares subject to the plan or subject to unexercised options and in the purchase price per share under such options. Any adjustment, however, does not change the total purchase price payable for the shares subject to outstanding options. In the event of our proposed dissolution or liquidation, a proposed sale of all or substantially all of our assets, a merger or tender offer for our shares of common stock, the Board of Directors may declare that each option granted under the plan shall terminate as of a date to be fixed by the Board of Directors; provided that not less than 30 days written notice of the date so fixed shall be given to each participant holding an option, and each such participant shall have the right, during the period of 30 days preceding such termination, to exercise the participant's option, in whole or in part, including as to options not otherwise exercisable.
Plan options are exercisable by delivery of written notice to us stating the number of shares with respect to which the option is being exercised, together with full payment of the purchase price therefore. Payment is to be in the form of cash, checks, certified or bank cashier's checks, promissory notes secured by the shares issued through exercise of the related options, shares of common stock or in such other form or combination of forms which may be acceptable to the Board of Directors, provided that any loan or guarantee by us of the purchase price may only be made upon resolution of the Board that such loan or guarantee is reasonably expected to benefit us.
All plan options are nonassignable and nontransferable, except by will or by the laws of descent and distribution, and during the lifetime of the optionee, may be exercised only by such optionee. If an optionee shall die while our employee or within three months after termination of employment by us because of disability, or retirement or otherwise, such options may be exercised, to the extent that the optionee shall have been entitled to do so on the date of death or termination of employment, by the person or persons to whom the optionee's right under the option pass by will or applicable law, or if no such person has such right, by his executors or administrators.
In the event of termination of employment because of death while an employee or because of disability, the optionee's options may be exercised not later than the expiration date specified in the option or one year after the optionee's death, whichever date is earlier, or in the event of termination of employment because of retirement or otherwise, not later than the expiration date specified in the option or one year after the optionee's death, whichever date is earlier. If an optionee's employment by us terminates because of disability and such optionee has not died within the following three months, the options may be exercised, to the extent that the optionee shall have been entitled to do so at the date of the termination of employment, at any time, or from time to time, but not later than the expiration date specified in the option or one year after termination of employment, whichever date is earlier.
If an optionee's employment terminates for any reason other than death or disability, optionee may exercise the options to the same extent that the options were exercisable on the date of termination, for up to three months following such termination, or on or before the expiration date of the options, whichever occurs first. In the event that the optionee was not entitled to exercise the options at the date of termination or if the optionee does not exercise such options (which were then exercisable) within the time specified herein, the options will terminate. If an optionee's employment terminates for any reason other than death, disability or retirement, all right to exercise the option terminate not later than 90 days following the date of such termination of employment.
The Board of Directors may amend, suspend or terminate the plan at any time. Unless the plan shall have been earlier suspended or terminated by the Board of Directors, the 2005 Equity Compensation Plan terminates on June 28, 2015.
As of January 22, 2008, 5,000,000 shares of our restricted common stock had been granted under the Equity Compensation Plan. No shares of common stock (plus any shares that might in the future be returned to the Equity Compensation Plan as a result of the termination, expiration, or forfeiture of options) remain available for future grant under the Equity Compensation Plan as of such date. Management believes that the number of shares of common stock currently available for issuance under the Equity Compensation Plan is insufficient to meet its needs to provide for awards to the plan participants for the next twelve months.
On January 22, 2008, our Board of Directors approved and adopted an amendment to our Equity Compensation Plan, subject to shareholder approval. On January 22, 2008, stockholders owning approximately 53.9% of the outstanding shares of our common stock approved the amendment to the Equity Compensation Plan by action taken by written consent without a meeting in accordance with the Florida Business Corporation Act. No further vote of our stockholders is required to approve the amendment to the Equity Compensation Plan. Such approval by our stockholders will be effective 20 calendar days after the date this Information Statement is first mailed to our stockholders.
The amendment to our Equity Compensation Plan will increase the number of shares of common stock with respect to which awards may be granted under the Equity Compensation Plan from 5,000,000 to 15,000,000. On May 1, 2008, the Company entered into a two year agreement with China Health Capital Group, Inc. (“CHC”) to provide the Company with financial and investment services. In connection with this agreement, on June 24, 2008, the Company issued 2,000,000 shares of Common Stock under the Equity Compensation Plan valued at $0.21 per share to CHC and recorded $420,000 as deferred compensation. For the fiscal year ended December 31, 2008, amortization of consulting compensation amount to $140,000. At December 31, 2008 we had 77,955,475 shares of our common stock issued and outstanding. The following table sets forth information regarding the beneficial ownership of our common stock as of December, 2008 by:
·
Each person known by us to be the beneficial owner of more than 5% of our common stock;
·
Each of our directors;
·
Each of our executive officers; and
·
Our executive officers, directors and director nominees as a group.
Security Ownership of Certain Beneficial Owners and Management
Unless otherwise indicated, the business address of each person listed is in care of 1104 Jiatang Road Jiading District, Shanghai China 201807. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except to the extent that power may be shared with a spouse.
Calculated based on 77,955,475 shares outstanding as December 31, 2008.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
LiKang Disinfectant is engaged in business activities with four related parties. These companies are referred to throughout this report and financial documents as “related parties” or “affiliated entities”:
Shanghai LiKang Meirui Pharmaceutical High-Tech Co., Limited
Shanghai LiKang Meirui Pharmaceutical High-Tech Co., Ltd. was previously a supplier of both raw materials and finished products to LiKang Disinfectant. Currently, however, Shanghai LiKang Meirui Pharmaceutical High-Tech Co., Ltd only purchases products from us which it resells to the retail/consumer market in the PRC. Shanghai Shanhai Group is the majority owner of Shanghai LiKang Meirui Pharmaceutical High-Tech Co., Ltd., owning a 68% interest.
At December 31, 2008, we do not owe Shanghai LiKang Meirui Pharmaceutical High-Tech Co., Ltd. any amount for products purchased.
In January 2005 LiKang Disinfectant signed a two year agreement with Shanghai LiKang Meirui Pharmaceutical High-Tech Co., Ltd. to market its products to the retail/consumer market using Shanghai LiKang Meirui Pharmaceutical High-Tech Co. Ltd.'s proprietary sales network which caters to the retail/consumer market in China. For the fiscal year ended December 31, 2008 we recorded net revenues on sales to this affiliate of $51,702. At December 31, 2008, Shanghai LiKang Meirui Pharmaceuticals High-Tech Company owed us $169,545.
Shanghai ZhongYou Pharmaceutical High-Tech Co., Limited.
Mr. Xuelian Bian and Wei Guan; our officers, directors and principal shareholders, are the shareholders of ZhongYou Pharmaceutical owning 90% and 10%, respectively. During the fiscal year ended 2007, Mr. Xuelian Bian and Wei Guan sold all of their shares of ZhongYou Pharmaceutical to Shanghai Jiuqing Pharmaceuticals Company, Limited., which is 100% owned by Shanghai Ajiao Shiye Co. Ltd. Mr. Bian is a 60% shareholder of Shanghai Ajiao Shiye Co. Limited. ZhongYou Pharmaceutical distributes our products to the commercial medical industry. For the fiscal year ended December 31, 2008 we recorded net revenues of $2,553,602 from sales to ZhongYou Pharmaceutical. At December 31, 2008 ZhongYou Pharmaceutical owed us $3,596,333 as a related party receivable for products purchased from us.
In December 2005, we loaned ZhongYou Pharmaceutical $100,000 for working capital purposes. The loan accrues interest at the rate of 3% per annum. The principal and interest were paid in April 2006.
Shanghai Jiuqing Pharmaceuticals Company, Limited
Shanghai Ajiao Shiye Co. Ltd. owns 100% of Shanghai Jiuqing Pharmaceuticals Company, Limited. Xuelian Bian is a 60% shareholder of Shanghai Ajiao Shiye Co. Ltd. Shanghai Jiuqing Pharmaceuticals Company, Limited distributes our products to the commercial medical industry. For the fiscal year ended December 31, 2008 we recorded net revenues of $18,255 from sales to this related party. At December 31, 2008 Shanghai Jiuqing Pharmaceuticals Company, Limited owed us $81,112 as a related party receivable for products purchased from us.
Shanghai LiKang Biological Hi-Tech Company, Ltd.
Shanghai LiKang Biological High-Tech Company, Ltd is 40% owned by LiKang Pharmaceutical and 60% owned by Mr. Xuelian Bian, an executive officer and director of our company. On March 25, 2008, our wholly-owned subsidiary Linkwell Tech purchased a 100% equity interest in LiKang Biological from LiKang Pharmaceutical and Mr. Xuelian Bian. LiKang Pharmaceuticals is owned by Mr. Bian and Wei Guan, 90% and 10%, respectively. However, due to the time consuming and complicated nature of the approval procedures of the Ministry of Commerce of the People’s Republic of China, the parties agreed to enter into amendment to the Biological Stock Purchase Agreement to change the purchaser of Linkwell Tech to LiKang Disinfectant. Approval from Ministry of Commerce, the People’s Republic of China will not be necessary if LiKang Disinfectant acquires 100% of the equity interest in Shanghai LiKang Biological. Shanghai LiKang Biological manufactures and sells biological products, cosmetic products and develops technology for third parties. For the fiscal year ended December 31, 2008 and 2007, the Company recorded net revenues of $0 and $851 to Biological, respectively and made purchases of $160,395 and $57,032 from Biological respectively. The amount of $831,607 (RMB 5,700,000) was loaned to Biological for working capital purpose during the year of 2007. In addition, the amount of $932,550 was loaned to Bioligical from LiKang Disinfectant for the same purpose in 2008 and are reflected on the accompanying balance sheet as due from a related party. At December 31, 2008, the remaining balance of accounts receivable due from Biological of $1,764,157. The loans were non-interest bearing. At December 31, 2008, the remaining balance of accounts payable due to Biological of $93,707 recorded to LiKang Disinfectant.
Other related party transactions
There were no other related party transactions.
Director Independence
None of the members of our Board of Directors are “independent” as defined by Rule 4200(a)(14) of the Financial Industry Regulatory Authority (FINRA) Rules.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Sherb & Co., LLP served as our independent registered public accounting firm for fiscal 2008 and 2007. The following table shows the fees that were billed for the audit and other services provided by the firm for fiscal 2008 and 2007.
Audit Fees - This category includes the audit of our annual financial statements, review of financial statements included in our Form 10-Q Quarterly Reports and services that are normally provided by the independent auditors in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees - This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.
Tax Fees - This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees - This category consists of fees for other miscellaneous items.
Our Board of Directors has adopted a procedure for pre-approval of all fees charged by the our independent auditors. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit and tax fees paid to the auditors with respect to fiscal year 2008 were pre-approved by the entire Board of Directors.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
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
2.1
Stock Purchase Agreement between HBOA.Com, Inc., Philip J. Davis and John C. Lee dated November 17, 1999 (1)
2.2
Amendment No. 1 to the Stock Purchase Agreement between HBOA.Com, Inc., Phillip J. Davis and John C. Lee dated December 28, 1999 (1)
2.3
Stock Exchange Agreement dated May 2, 2005 by and among Kirshner Entertainment & Technologies, Inc., Gary Verdier, Linkwell Tech Group, Inc. and the shareholders of Linkwell (2)
3.1
Articles of Incorporation (3)
3.2
Articles of Amendment to Articles of Incorporation (4)
3.3
Articles of Amendment to Articles of Incorporation (5)
3.4
Articles of Amendment to Articles of Incorporation (6)
3.5
Articles of Amendment to the Articles of Incorporation (11)
3.6
Bylaws (3)
3.7
Articles of Amendment to the Articles of Incorporation (12)
4.1
Form of common stock purchase warrant (7)
4.2
Form of Class A and Class B Common Stock Purchase Warrants (11)
10.1
HBOA Holdings, Inc. - Year 2000 Equity Compensation Plan (8)
10.2
HBOA Holdings, Inc. - Non Qualified Stock Option Plan (9)
10.3
Linkwell Corporation 2005 Equity Compensation Plan (10)
10.3(a)
Linkwell Corporation 2005 Equity Compensation Plan*
10.4
Consulting and Management Agreement dated August 24, 2005 between Linkwell Corporation and China Direct Investments, Inc. (20)
10.5
Form of Subscription Agreement for $1,500,000 unit offering (11)
10.6
Form of agreement between Shanghai LiKang Disinfectant High-Tech Company, Limited and its customers (12)
10.7
Form of agreement between Shanghai LiKang Disinfectant High-Tech Company, Limited and its suppliers (12)
10.8
Sales Agreement dated as of January 1, 2005 between Shanghai LiKang Disinfectant High-Tech Co., Ltd. and Shanghai LiKang Meirui Pharmaceutical High-Tech Co., Ltd. (20)
10.9
Lease Agreement effective January 1, 2005 between Shanghai LiKang Disinfectant High-Tech Co., Ltd. and Shanghai Shanhai Group for principal executive offices (20)
10.10
Lease Agreement effective January 1, 2002 between Shanghai LiKang Pharmaceuticals Co., Ltd. and Shanghai LiKang Disinfectant High-Tech Co. Ltd. (20)
10.11
Lease Agreement effective January 1, 2005 between Shanghai Jinshan Zhuhang Plastic Lamp Factory, Ltd. and Shanghai LiKang Disinfectant High-Tech Co. Ltd. (20)
10.12
Manufacturing Agreement dated as of January 1, 2005 between Shanghai LiKang Disinfectant High-Tech Co., Ltd. and Shanghai LiKang Meirui Pharmaceutical High-Tech Co., Ltd. (20)
10.13
Stock Purchase Agreement effective February 6, 2006 between Linkwell Corporation, Aerisys Incorporated and Gary Verdier (13)
10.14
Transfer Agreement dated August 5, 2005 between Shanghai LiKang Disinfectant High-Tech Company, Limited, Shanghai LiKang Pharmaceuticals Technology Company and Xuelian Bian (20)
10.15
Contract Management Agreement dated January 1, 2005 between Shanghai Shanhai Group and Shanghai LiKang Disinfectant High-Tech Co., Ltd. (20)
10.16
Lease Agreement dated December 15, 2004 between Shanghai Shanhai Group and Shanghai LiKang Disinfectant High-Tech Co., Ltd. (20)
10.17
Lease Agreement dated August 11, 2005 between Shanghai Henglain Industrial Co., Ltd. and Shanghai LiKang Disinfectant High-Tech Co., Ltd. (20)
10.18
Lease Agreement dated September 16, 2005 between Shanghai Henglain Industrial Co., Ltd. and Shanghai LiKang Disinfectant High-Tech Co., Ltd. (20)
10.19
Disinfection Education Center Agreement dated May 25, 2006 between Shanghai LiKang Disinfectant High-Tech Co., Ltd. and China Pest Infestation Control and Sanitation Association (20)
10.20
Agreement between Linkwell Corporation and China Direct Investments, Inc. (21)
10.21
Stock Purchase Agreement, dated April 6, 2007, by and among the Company, Linkwell Tech, Xuelian Bian and LiKang Pharmaceutical (22)
10.21(a)
Amendment to Stock Purchase Agreement, dated March 25, 2008 by and among the Company, Linkwell Tech, Xuelian Bian and LiKang Pharmaceutical (23)
10.22
Stock Purchase Agreement, dated April 6, 2007, by and among the Company, Linkwell Tech, Xuelian Bian and LiKang Pharmaceutical (22)
10.22(a)
Amendment to Stock Purchase Agreement, dated March 25, 2008, by and among the Company, Linkwell Tech and Shanghai Shanhai (23)
10.23
Loan agreement between LiKang Disinfectant and LiKang Biological, as translated, dated January 2, 2007 (24)
10.24
Consulting agreement dated September 8, 2006 between Linkwell Corp and Zhiyan Shi (24)
10.25
Stock Purchase Agreement dated February 15, 2008, among Linkwell Corporation, Linkwell Tech Group, Inc., and Ecolab Inc. (25)
10.26
Linkwell Tech Group, Inc. Stockholders Agreement, dated May 30, 2008, by and among Linkwell Tech Group, Inc., Linkwell Corp. and Ecolab Inc. (26)
10.27
Registration Rights Agreement, dated May 30, 2008, by and among Ecolab Inc. and Linkwell Corp.
(26)
10.28
Stock Purchase Agreement dated May 29, 2008, by and between Shanghai Likang Disinfectant Hi-Tech Co., Ltd, and Hong Kong Linkwell International Trading Company (27)
10.29
Amended and Restated Stock Purchase Agreement, dated March 5, 2009, by and among the Linkwell Corp., Linkwell Tech Group, Inc., Shanghai Likang Biological High-Tech Co., Ltd., Shanghai Likang Disinfectant Hi-Tech Co., Ltd., Xuelian Bian and Shanghai Likang Pharmaceutical Technology Co., Ltd. (28)
14.1
Code of Business Conduct and Ethics (20)
21.1
Subsidiaries of the small business issuer (20)
23.1
Consent of Sherb & Co., LLP*
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 Form 10-SB as filed on June 17, 1999.
(2)
Incorporated by reference to the Report on Form 8-K as filed on December 3, 1999.
(3)
Incorporated by reference to the Report on Form 8-K as filed on December 8, 1999.
(4)
Incorporated by reference to the Report on Form 8-K as filed on December 27, 2001.
(5)
Incorporated by reference to the annual report on Form 10-KSB for the fiscal year ended December 31, 2002.
(6)
Incorporated by reference to the Report on Form 8-K as filed on March 17, 2005.
(7)
Incorporated by reference to the Report on Form 8-K as filed on April 15, 2005.
(8)
Incorporated by reference to the Report on Form 8-K as filed on January 31, 2002.
(9)
Incorporated by reference to the Report on Form 8-K as filed on February 1, 2005.
(10)
Incorporated by reference to the Report on Form 8-K as filed on August 17, 2006.
(11)
Incorporated by reference to the Report on Form 8-K as filed on August 22, 2006.
(12)
Incorporated by reference to the Report on Form 8-K as filed on September 15, 2006.
(13)
Incorporated by reference to the Report on Form 8-K as filed on October 14, 2006.
(14)
Incorporated by reference to the Report on Form 8-K as filed on October 27, 2006.
(15)
Incorporated by reference to the Report on Form 8-K as filed on October 27, 2006.
(16)
Incorporated by reference to the registration statement on Form S-8, SEC File No. 333-138297 as filed on October 30, 2006.
(17)
Incorporated by reference to the registration statement on Form SB-2, SEC File No. 333-139752, as amended, as initially filed on December 29, 2006.
(18)
Incorporated by reference to the registration statement on Form S-8, SEC File No. 333-125871, as filed on June 16, 2005.
(19)
Incorporated by reference to the registration statement on Form S-8, SEC File No. 333-121963, as filed on January 11, 2005.
(20)
Incorporated by reference to the registration statement on Form SB-2, SEC File No. 333-131666, as amended, as initially filed on February 8, 2006.
(21)
Incorporated by reference to the by reference to the annual report on Form 10-KSB for the fiscal year ended December 31, 2006.
(22)
Incorporated by reference to the Report on Form 8-K as filed on April 14, 2007.
(23)
Incorporated by reference to the Report on Form 8-K as filed on March 28,
(24)
Incorporated by reference to the by reference to the quarterly report on Form 10-QSB for the quarter ended March 31, 2007.
(25)
Incorporated by reference to the annual report on Form 10-KSB as filed on April 15,
(26)
Incorporated by reference to the Report on Form 8-K as filed on June 5, 2008.
(27)
Incorporated by reference to the by reference to the quarterly report on Form 10-QSB for the quarter ended August 26, 2008.
(28)
Incorporated by reference to the Report on Form 8-K as filed on March 10, 2009.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 27, 2009
Linkwell Corporation
By: /s/ Xuelian Bian
Xuelian Bian
CEO, President,
Principal executive officer,
Principal financial and accounting officer
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Xuelian Bian
Xuelian Bian
CEO, President, Chairman, Principal executive officer principal financial and accounting officer
April 27, 2009
/s/ Wei Guan
Wei Guan
Vice President, Secretary and Director
April 27, 2009
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Linkwell Corporation and Subsidiaries
Shanghai, China
We have audited the accompanying consolidated balance sheets of Linkwell Corporation and Subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the year ended December 31, 2008 and 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amount and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Linkwell Corporation and Subsidiaries as of December 31, 2008 and 2007, and the results of their operation and their cash flows for the year ended December 31, 2008 and 2007, in conformity with accounting principles generally accepted in the United States of America.
/s/ Sherb & Co., LLP
Certified Public Accountants
New York, NY
March 31,
LINKWELL CORPORATION AND SUBSIDIARIES
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See notes to audited consolidated financial statements.
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to audited consolidated financial statements.
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
See notes to audited consolidated financial statements.
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to audited consolidated financial statements.
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
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. The Company focused on development of an Internet portal through which home based business owners, as well as commercial private label businesses, could obtain the products, services, and information necessary to start, expand and profitably run their businesses. 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, we discontinued our entertainment division and our 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”). Linkwell Tech was founded on June 22, 2004, as a Florida corporation. 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 our 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 financials statements reflect the change in the capital structure of the Company due to the recapitalization and the consolidated financial statements reflect the operations of the Company and its subsidiaries for the periods presented.
On June 30, 2004, Linkwell Tech acquired 90% of Shanghai LiKang Disinfectant High-Tech Company, Ltd. (“LiKang Disinfectant”), a company incorporated in the People’s Republic of China (the “PRC”) through a stock exchange. The transaction through which Linkwell Tech acquired its 90% interest in LiKang Disinfectant resulted in the formation of a U.S. holding company by the shareholders of LiKang 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, sales, 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 regards the hospital disinfecting products as the primary segment of its business. LiKang Disinfectant has developed and manufactured several series 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.
In August 2006, LiKang Disinfectant incorporated a new subsidiary, Shanghai LiKang International Trade Co., Ltd (“LiKang International”), a PRC company. The primary business of LiKang International involves import and export activities relating to computer, computer components, instruments and meters, electromechanical devices, constructional materials, metallic material, hardware, handiwork, knitting textile, furniture, chemical raw materials, and business consulting service, investment consulting, graphics design, conference services, exhibition services, equipment lease and the import and export of technology.
On April 6, 2007, our subsidiary, Linkwell Tech, entered into two material stock purchase agreements as follows:
-
Linkwell Tech entered into an agreement (the “Biological Stock Purchase Agreement”) to acquire a 100% equity interest in Shanghai LiKang Biological High-Tech Company, Ltd. (“LiKang Biological”), a Chinese company, in a related party transaction with Mr. Xuelian Bian, the Company’s Chief Executive Officer, Mr. Wei Guan, the Company’s Vice-President and Secretary, and Shanghai Likang Pharmaceuticals Technology Co., Ltd. (“LiKang Pharmaceutical”). Before the Biological Stock Purchase Agreement, Mr. Bian and Mr. Guan owned 90% and 10% of LiKang
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pharmaceutical, respectively. Mr. Bian and LiKang Pharmaceutical owned 60% and 40% of LiKang Biological, respectively. Pursuant to the terms of the Biological Stock Purchase Agreement, Mr. Bian and LiKang Pharmaceutical were to receive 1,000,000 shares of Linkwell Corporation restricted common stock.
Due to restrictions under PRC law that prohibited the consideration contemplated by the Biological Stock Purchase Agreement, the agreement did not close. As a result, on March 25, 2008, the parties agreed to enter into an amendment to the Biological Stock Purchase Agreement (“Biological Amendment”) in an effort to complete the stock purchase transaction. Pursuant to the terms of the Biological Amendment, the only material change to the Biological Stock Purchase Agreement related to the consideration paid by Linkwell Tech to Xuelian Bian and LiKang Pharmaceutical, which was changed from 1,000,000 shares of the Company’s common stock to $200,000 and 500,000 shares of common stock. As of December 31, 2008, the Biological Stock Purchase Agreement was pending and required further approval from the PRC Ministry of Commerce. Due to the time consuming and complicated nature of the approval procedure, the parties agreed to enter into a second amendment to the Biological Stock Purchase Agreement in order to complete the purchase transactions timely and properly. Pursuant to the terms of the Biological Amendment, the purchaser was changed from Linkwell Tech to LiKang Disinfectant, in addition, the consideration changed to RMB2,000,000, approximately $291,792 and 500,000 shares of common stock. Approval from Ministry of Commerce, in the People’s Republic of China will not be necessary if LiKang Disinfectant acquires 100% of the equity interest in LiKang Biological, because both companies are companies regiested in PRC. This transaction closed on March 5, 2009.
-
Linkwell Tech, which already owned a 90% equity interest in LiKang Disinfectant, was to purchase the remaining 10% equity interest of LiKang Disinfectant from Shanghai Shanhai Group, a non-affiliated Chinese entity (the “Disinfectant Stock Purchase Agreement”). Pursuant to the terms of the Disinfectant Stock Purchase Agreement, Shanghai Shanhai Group was to receive 3,000,000 shares of Linkwell Corporation restricted common stock.
Due to restrictions under PRC law that prohibited the consideration then contemplated by the Disinfectant Stock Purchase Agreement, the agreement did not close. As a result of this, on March 25, 2008, the parties agreed to enter into an amendment to the Disinfectant Stock Purchase Agreement (“Disinfectant Amendment”) in an effort to complete the stock purchase transaction. Pursuant to the terms of the Disinfectant Amendment, the only material change to the Disinfectant Stock Purchase Agreement related to the consideration paid by Linkwell Tech to the Shanghai Shanhai Group for the remaining 10% equity interest, which was changed from 3,000,000 shares of Common Stock, to $380,000 and 1,500,000 shares of Common Stock. Due to the fluctuation of the applicable exchange rate, the cash consideration was increased to $399,057. The other terms of the Disinfectant Stock Purchase Agreement remained in full force and effective.
Linkwell Tech paid $395,800 to the Shanghai Shanhai Group on February 21, 2008 and paid $3,257 on April 18, 2008. A total of 1,500,000 shares were expected to be issued before the end of May, 2008. The parties agreed to extend the share issuance date until October 20, 2008. The Company valued the acquisition using the fair value of common shares at $0.19 per share and recorded an investment of $285,000. Including the cash payment of $399,057, the total investment for acquiring 10% equity interest in LiKang Disinfectant was $684,057. The cumulative minority interest of 10% equity interest in LiKang Disinfectant at March 25, 2008, was approximately $557,779. The difference between the total investment and the cumulative minority interest of $126,278 was deducted from retained earnings as dividends to the 10% minority shareholder, Shanghai Shanhai Group. As a result of the closing of the Disinfectant Stock Purchase Agreement, as amended, as of March 25, 2008, our wholly-owned subsidiary Linkwell Tech owns 100% of the equity interest in LiKang Disinfectant.
On February 15, 2008, we 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 (“Stockholders
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Agreement”), whereby both the Company and Ecolab are subject to, and beneficiaries of, certain pre-emptive rights, transfer restrictions and take along rights relating to the shares of Linkwell Tech that the Company and Ecolab each hold. As of May 31, 2008, the principal and accrued interest of $11,441 on the short-term $400,000 loan became part of Ecolab’s investment and does not need to be repaid.
On May 31, 2008, LiKang Disinfectant entered into a stock purchase agreement under which it sold 100% of the capital stock of its wholly-owned subsidiary, LiKang International, to Linkwell International Trading Co., Ltd, a company registered in Hong Kong which is 100% owned by Mr. Wei Guan, the Company’s Vice President, Secretary and Director. Pursuant to the terms of the agreement, LiKang Disinfectant received $291,754 (RMB 2,000,000) once the agreement was approved by the PRC Ministry of Commerce with such approval occurring on March 27, 2008.
BASIS OF PRESENTATION
Certain reclassifications have been made to the prior year to conform to current year presentation. The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The audited consolidated financial statements of the Company include the accounts of its 90% owned subsidiary, Linkwell Tech Group, Inc., and its 100%-owned subsidiary, LiKang Disinfectant. 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 year ended December 31, 2008 and 2007 include the allowance for doubtful accounts, stock-based compensation, the useful life of property and equipment, the inventory reserve, and option value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, customer advances, loans and amounts due from or to related parties approximate their fair market value based on the short-term maturity of these instruments.
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.
Substantially all of the Company’s cash is maintained with state-owned banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
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. At December 31, 2008 and 2007, the Company had established, based on a review of its non-related party accounts receivable outstanding balances, allowances for doubtful accounts in the amounts of $801,895 and $460,175, respectively. At December 31, 2008 and 2007, the Company had established, based on a review of its related party accounts receivable outstanding balances, allowances for doubtful accounts in the amounts of $376,437 and $221,359, respectively.
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 December 31, 2008 and 2007, the reserve for obsolete inventory amounted to $145,031 and $136,287, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization are provided using the straight-line method over the estimated economic lives of the assets, which are 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 income in the year of disposition
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charges during the fiscal year ended December 31, 2008 and 2007.
ADVANCES FROM CUSTOMERS
Advances from customers at December 31, 2008 and 2007 was $91,326 and $24,644, respectively, which consist 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 deposits as revenue as customers take delivery of the goods, in compliance with its revenue recognition policy.
DISCONTINUED OPERATIONS
The Company records discontinued operations if both of the following conditions are met: (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the Company as a result of the disposal transaction and (b) the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction. During a period in which a component of the Company either has been disposed of or is classified as held for sale, the income statement of the Company for current and prior periods shall report the results of operations of the component, including any gain or loss recognized in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” in discontinued operations. The results of operations of a component classified as held for sale shall be reported in discontinued operations in the period(s) in which they occur. The results of discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income before extraordinary items and the
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
cumulative effect of accounting changes (if applicable).
On May 31, 2008, LiKang Disinfectant entered into a stock sale agreement under which it sold 100% of the shares of its wholly-owned subsidiary, LiKang International to Linkwell International Trading Co., Ltd., a related party company registered in Hong Kong owned by Mr. Wei Guan, the Company’s Vice President, Secretary and Director. Since May 31, 2008, all financial statements of the Company, reported the results of operations of LiKang International as discontinued operations for all periods presented.
INCOME TAXES
The Company files federal and state income tax returns in the United States for its corporate operations, and files separate foreign tax returns for their Company's Chinese subsidiaries. Income taxes are accounted for under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns.
INCOME (LOSS) PER COMMON SHARE
The Company presents net income (loss) per share (“EPS”) in accordance with SFAS No. 128, “Earnings per Share”. 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 participate in common stock dividends, if declared; If the 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.
The Company’ common stock equivalents at December 31, 2008 and 2007 included the following:
REVENUE RECOGNITION
The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin 104 for revenue recognition. In general, the Company recognizes revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. Revenue is not recognized until title and risk of loss is transferred to the customer, which occurs upon delivery of goods, and objective evidence exists that customer acceptance provisions have been met. Provisions for discounts and returns are provided for at the time the related sales are recorded, and are reflected as a reduction of sales. The Company bases its estimates on historical experience taking into consideration the type of products sold, the type of customer, and the type of specific transaction in each arrangement. Revenues represent the invoiced value of goods, net of value added tax (“VAT”).
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers. Deposits or advance payments from customers prior to delivery of goods and passage of title of goods are recorded as advances from customers.
In general, 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.
RELATED PARTIES
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company shall disclose all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party. The recognition of sales to related parties has no difference to sales to unrelated parties, i.e. revenue is not recognized until title and risk of loss is transferred to ultimate customer which, occurs upon delivery of goods, and objective evidence exists that customer acceptance provisions have been met.
CONCENTRATION OF CREDIT RISK
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The largest related party, ZhongYou Pharmaceutical and its branches (see note 5) purchased $2,553,603 and $2,186,647 of products (about 21% and 27% of net revenue), from the Company during the years ended December 31, 2008 and 2007, respectively. This related party customer accounted for 50% and 42% of accounts receivable-related parties as of December 31, 2008 and 2007, respectively. The largest non-related third party customer, Guangzhou LianJian Disinfectant Co., Ltd., purchased $1,926,432 and $1,752,135 of products (about 16% and 22% of net revenue) from the Company during the years ended December 31, 2008 and 2007 respectively. This non-related customer accounted for 50% and 58% of accounts receivable as of December 31, 2008 and 2007, respectively. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk. The afore-mentioned related party customer and non-related party customer represented the largest customers, in excess of 10%, of total accounts receivable and accounts receivable-related parties and total net revenue, as of December 31, 2008 and 2007, and the related years then ended, respectively.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. At December 31, 2008 and 2007, the Company’s bank deposits by geographic area were as follows:
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
The Company uses Statement of Financial Accounting Standards No.130 (SFAS 130) “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the year ended December 31, 2008 and 2007 comprehensive income included net income and unrealized gain from foreign currency translation adjustments.
SHIPPING COSTS
Shipping costs are included in selling expenses and totaled $269,518 and $274,086 for the fiscal year ended December 31, 2008 and 2007 respectively.
ADVERTISING
Advertising is expensed as incurred. For the fiscal year ended December 31, 2008 and 2007, advertising expenses amounted to $2,943 and $5,069, respectively and were included in selling expenses.
STOCK-BASED COMPENSATION
Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards No.123 (revised 2004), Share Based Payment (“SFAS No. 123R”). SFAS No.123R establishes the financial accounting and reporting standards for stock-based compensation plans. As required by SFAS No. 123R, the Company recognizes the cost resulting from all stock-based payment transactions including shares issued under its stock option plans in the financial statements. There were no options or warrants granted for services during the fiscal years ended December 31, 2008 and 2007.
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 (“EITF”) 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”).
REGISTRATION RIGHTS AGREEMENTS
The Company has adopted View C of EITF 05-4 “Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF 00-19” (“EITF 05-4”). 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. Under View C of EITF 05-4, (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.
FOREIGN CURRENCY TRANSLATION
Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency Translation” and are included in determining net income or loss.
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The functional and reporting currency is the U.S. dollar. The functional currency of the Company's Chinese subsidiaries is the Renminbi, the local currency, or sometimes referred to as the Chinese Yuan (“RMB”). The financial statements of the subsidiary are translated into United States dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. The cumulative translation adjustment was $1,031,021 and $572,650 as of December 31, 2008 and 2007, respectively. On December 31, 2008 and 2007, the exchange rate was 1 USD=6.85 RMB and 1 USD = 7.31 RMB, respectively. The average exchange rate used for the fiscal years ended December 31, 2008 and 2007 was 1 USD=6.96 RMB and 1 USD = 7.59 RMB, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and are included in general and administrative expenses. These costs primarily consist of cost of material used and salaries paid for the development of the Company’s products and fees paid to third parties. Research and development costs for the fiscal year ended December 31, 2008 and 2007 were approximately $137,588 and $61,452, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning October 1, 2009. Management is currently evaluating the effect of this pronouncement on financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations”. This Statement replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company’s fiscal year beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after September 30, 2009.
In March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are currently evaluating the impact of adopting SFAS No.161 on our consolidated financial statements.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company has adopted FSP APB 14-1 beginning January 1, 2009, and this standard must be applied on a retroactive basis. The Company is evaluating the impact the adoption of FSP APB 14-1 will have on its consolidated financial position and results of operations.
In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles. This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect SFAS No. 162 to have a material impact on the preparation of its consolidated financial statements.
On June 16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. The FSP determines that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the requirements of (FSP) No. EITF 03-6-1 as well as the impact of the adoption on its consolidated financial statements.
In June 2008, the FASB ratified Emerging Issues Task Force Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock. Warrants that a company issues that contain a strike price adjustment feature, upon the adoption of EITF 07-5, are no longer being considered indexed to the company’s own stock. Accordingly, adoption of EITF 07-5 will change the current classification (from equity to liability) and the related accounting for such warrants outstanding at that date. EITF 07-5 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of EITF 07-5 will have on its financial statement presentation and disclosures.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures regarding transfers of financial assets and interest in variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual reporting periods ending after December 15, 2008. The adoption of FSP FAS 140-4 and FIN 46(R)-8 did not have an impact on its consolidated financial position and results of operations.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 2 - INVENTORIES
A summary of inventories by major category at December 31, 2008 and 2007 are as follows:
NOTE 3 - PROPERTY AND EQUIPMENT
At December 31, 2008 and 2007, property and equipment consist of the following:
For the fiscal year ended December 31, 2008 and 2007, depreciation expense amounted to $82,583 and $126,295, respectively.
NOTE 4 - LOANS PAYABLE
Loans payable consisted of the following at December 31, 2008 and 2007:
On February 15, 2008, the Company entered into issued a Promissory Note with Ecolab Inc., a Delaware corporation (“Ecolab”), whereby Ecolab agreed to loan the Company $400,000. This short-term loan was due on April 5, 2008 with an interest rate of 8% per annum. On April 14, 2008, the Company and Ecolab Inc. agreed to extend the maturity date of this loan
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 4 - LOANS PAYABLE (CONTINUED)
from April 5, 2008 to June 5, 2008 with the same interest rate. On March 27, 2008, Ecolab loaned the Company an additional $200,000 with an interest rate of 8% per annum. This short-term loan was due on June 5, 2008. These two short-term loans of $600,000 were not repaid to Ecolab but became partial payments of a $2,000,000 investment from Ecolab as described below.
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. As part of this transaction, $400,000 and $200,000 were paid to Linkwell Tech on February 15, 2008 and March 27, 2008, respectively, in the form of a short-term loan payable as described above. On May 31, 2008, the Company, Linkwell Tech and Ecolab signed a “Stockholders Agreement” and the principal and accrued interest on the short-term loans were retained by the Company as partial proceeds of Ecolab’s $2,000,000 investment in Linkwell Tech. Deducting the accrued accumulated interest of $11,441 on the two short-term loans of $600,000 at an interest rate of 8% as of June 30, 2008, Linkwell received the rest of the investment amount of $1,388,559 from Ecolab and the total accrued interest of $11,441, and the notes payable totaling $600,000, were forgiven.
NOTE 5 - RELATED PARTY TRANSACTIONS
Linkwell Tech's 90% owned subsidiary, LiKang Disinfectant, is engaged in business activities with four related parties: Shanghai LiKang Meirui Pharmaceuticals High-Tech Co., Ltd (“Meirui”), Shanghai ZhongYou Pharmaceutical High-Tech Co., Ltd., (“ZhongYou”), Shanghai Jiuqing Pharmaceuticals Company, Ltd (“Shanghai Jiuqing”) and Shanghai LiKang Biological High-Tech Co., Ltd. (“Biological”).
Meirui is a company in which the Shanghai Shanhai Group, the former minority shareholder LiKang Disinfectant, owns a 68% interest. Meirui used to manufacture two products for LiKang Disinfectant. Specifically, Meirui provided LiKang Disinfectant with ozone producing equipment and ultraviolet radiation lamp lights. In January 2005, LiKang Disinfectant signed a two year business corporation agreement with Meirui to market its products to the retail consumer market using Meirui's proprietary sales network which caters to the retail consumer market in China. In addition, under the terms of a two year agreement entered into in January 2005, Meirui produced the Lvshaxing Air Disinfectant Machine and LiKang Surgery hand-washing table for LiKang Disinfectant. The agreement above was mutually terminated in December 2006. Additionally, in the fiscal year of 2008 and 2007, the Company purchased products from Meirui amounting to $0 and $8,871 respectively. At December 31, 2008 and 2007, there was no balance due to Meirui included in due to related parties. The Company now only use Meirui’s sales network without a charge. For the years ended December 31, 2008 and 2007, the Company recorded net revenues on sales to affiliated companies to Meirui of $51,702 of $34,707, such sales are included in net revenues to affiliated companies. As of December 31, 2008 and 2007, Meirui owed us $169,545 and $37,775, respectively, recorded in accounts receivable-related parties. In general, accounts receivable-related parties due from Meirui are payable in cash and are due within 4 to 6 months, which approximate normal business terms with independent third parties.
ZhongYou (or “LiKang Pharmaceuticals”) sells the Company’s products to third parties. LiKang Pharmaceuticals was formerly owned 90% by Mr. Xuelian Bian, the Company’s Chief Executive Officer and 10% Mr. Wei Gu by, the Company’s Vice-President and Secretary. In March 2007, Mr. Wei Guan sold his 10% share to Bing Chen, President of the Company’s LiKang Disinfectant subsidiary. In August 2007, Mr. Xuelian Bian sold his 90% shares to his mother, Xiuyue Xing. In October, 2007, the two new shareholders, Bing Chen (10%) and Xiuyue Xing (90%) sold all of their shares in LiKang Pharmaceuticals to Shanghai Jiuqing, whose 100% owner is Shanghai Ajiao Shiye Co. Ltd. (“Shanghai Ajiao”), of which Mr. Bian is a 60% shareholder. For the fiscal year ended December 31, 2008 and 2007, the Company recorded net revenues from affiliated companies of $2,553,603 and $2,354,010 from LiKang Pharmaceuticals, respectively, and made purchases of $84,833 and $233,478, respectively, from LiKang Pharmaceuticals. At December 31, 2008 and 2007, accounts receivable-related parties from LiKang Pharmaceuticals were $3,596,333 and $2,089,641, respectively, and accounts payable included in due to related party were $876 and $0, respectively. In general, accounts receivable-related parties due from LiKang Pharmaceuticals are payable in cash and are due within 4 to 6 months, which approximate normal business terms with independent third parties.
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)
Shanghai Jiuqing is 100% owned by Shanghai Ajiao, of which Mr. Xuelian Bian owns 60% of shares. For the fiscal years ended December 31, 2008 and 2007, respectively, the Company recorded revenue of $18,255 and $13,388 to Shanghai Jiuqing. At December 31, 2008 and 2007, accounts receivable-related parties from Shanghai Jiuqing were $81,112 and $61,840, respectively. There are no amounts due to Shanghai Jiuqing as of December 31, 2008 and 2007, respectively. In general, accounts receivable-related parties due from Shanghai Jiuqing are payable in cash and are due within 4 to 6 months, which approximate normal business terms with independent third parties.
Biological was 60% owned by Mr. Xuelian Bian, the Company's Chief Executive Officer, and 40% owned by LiKang Pharmaceuticals, which in turn was 90% owned by Mr. Xuelian Bian, the Company’s Chief Executive Officer and 10% owned by Mr. Wei Guan, the Company’s Vice-President and Secretary. The Company sells biological products to LiKang Biological, including cosmetic products, and develops technology for third parties. Additionally, the Company sells certain raw materials to LiKang Biological that are employed in the LiKang Biological’s production process. The Company purchased 100% of LiKang Biological on March 5, 2009. For the fiscal years ended December 31, 2008 and 2007, the Company recorded net revenues of $0 and $851 to LiKang Biological, respectively, and made purchases of $160,395 and $57,032 from LiKang Biological, respectively. The amount of $831,607 (RMB 5,700,000) was loaned to LiKang Biological for working capital purpose during the year ended December 31, 2007. In addition, the Company loaned at various times, a total of $932,550 to LiKang Biological from LiKang Disinfectant for same purpose during the year ended December 31, 2008. All loans advanced are reflected in the accompanying balance sheet as due from a related party as of December 31, 2008 and 2007. At December 31, 2008 and 2007, the remaining balance due from LiKang Biological was $1,764,157 and $831,607. The loan advances from LiKang Disinfectant to LiKang Biological are non-interest bearing. At December 31, 2008 and 2007, the remaining balance of accounts payable due to LiKang Biological, included in due to related parties, was $93,707 and $58,347, respectively. In general, accounts payable to, and accounts receivables from, LiKang Biological are payable in cash and are due within 4 to 6 months, which approximate normal business terms with unrelated parties.
On May 31, 2008, LiKang Disinfectant entered into a stock purchase agreement under which it sold 100% of the capital stock of its wholly-owned subsidiary, LiKang International to Linkwell International Trading Co., Ltd (“Linkwell Trading”), a company registered in Hong Kong and 100% owned by Wei Guan, our Vice President, Secretary and Director,. Pursuant to the terms of the agreement, LiKang Disinfectant will receive $291,792 (RMB 2,000,000) once the agreement was approved by the Ministry of Commerce, the People’s Republic of China, such approval occurred on March 27, 2008. The Company expects to receive the sales proceeds in July, 2009. In addition, LiKang International owed Likang Disinfectant a total of $102,128 (RMB 700,000). Linkwell Trading assumed all the debts of LiKang International after it acquired LiKang International. Therefore, as of December 31, 2008, the total balance due from Linkwell Trading was $393,920. The sale of LiKang International, resulted in a discontinued operation, and is reflected as such in the accompanying financial statements.
NOTE 6 - DERIVATIVE PAYABLE
On February 15, 2008, we 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 (the “Stockholders Agreement”), whereby both the Company and Ecolab are subject to, and the beneficiaries of, certain pre-emptive rights, transfer restrictions and take along rights relating to the shares of Linkwell Tech held by the Company and Ecolab.
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 Corp., cash in the amount of $2,400,000 or the lesser of (a) 10,000,000 shares of Linkwell Corp. common stock, or (b) such number of shares of Linkwell Corp. common stock as is determined by dividing (i) 3,500,000 by (ii) the average daily closing price of Linkwell Corp. common stock for the twenty days on which Linkwell Corp. 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
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 6 - DERIVATIVE PAYABLE (CONTINUED)
May 30, 2008, or upon the occurrence of certain events including material breach by Linkwell Tech or its subsidiaries of the Consulting Agreement, the Distributor Agreements or the 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 Corp. is subject to a change of control transaction, to require Linkwell Corp. to sell to Ecolab all of their equity interests in Linkwell Tech, or any of Linkwell Tech’s subsidiaries, then owned by Linkwell Corp.
The Company recognized the maximum expenses of the put option and the call option, described above, as $400,000. The Company allocated the minority interest of Linkwell Tech of $118,970, as of December 31, 2008, against the maximum expense and recorded a, long term liability of derivative payable of $281,030.
NOTE 7 - DISCONTINUED OPERATION
Due to losses and uncertainty about future profitability, on May 31, 2008, LiKang Disinfectant entered into a stock purchase agreement pursuant to which it sold 100% of the equity interest of its wholly-owned subsidiary, LiKang International to Linkwell Trading, a related party. The agreement was approved on March 27, 2008 by the Ministry of Commerce, the People’s Republic of China.
As of May 31, 2008, the Company has classified the LiKang International business as discontinued operation for all period presented. For the fiscal year ended December 31, 2008, the total gain from discontinued operations was $65,083 including a gain from the disposal of the operation amounting to $39,761. The Company will receive $291,792 (RMB2,000,000) from Linkwell International Trading Co., Ltd.
As of December 31, 2007, the Company has reclassified LiKang International as a discontinued operation for all financial statement periods or dates presented. Identifiable assets and liabilities of LiKang International as of December 31, 2007 are as follows:
The following table is a summary of discontinued operations:
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 8 - SHAREHOLDER’ EQUITY
Common Stock
In July 2007, the Company terminated a business consulting service contact with China Direct Investments, Inc. The contract, originally effective as of January 1, 2006 for a three year term, called for the issuance of 4,700,000 shares of the Company’s common stock valued on the date of grant at $0.18 per share, or $846,000. The Company amortized this contract over the years ended December 31, 2007 and 2006, at an expense of $564,000 and $282,000, respectively.
In September, 2006, the Company entered into a three-year agreement with a consultant to provide business development and management services. In connection with this agreement, the Company issued 500,000 shares of the Company’s common stock. The Company valued these services using the fair value of common shares on the grant date of approximately $0.185 per share and recorded deferred consulting expenses of approximately $92,000 to be amortized over the service period. For the years ended December 31, 2008 and 2007, amortization of consulting compensation amounted to $30,833 and $30,125, respectively.
On December 3, 2007, the Company issued 200,000 shares of its restricted common stock to Mr. Ye Wenhu, an individual and Ms. Xu Xinfang, an individual. They provided business development and management services to the Company. The Company valued the service using the fair value of common shares on grant date at $0.17 per share and recorded consulting expense of $34,000.
On June 6, 2007, the Company entered into a six months agreement with FirsTrust Group Inc. to provide business development and management services. In connection with this agreement, on July 12, 2007, the Company issued 450,000 shares of its restricted common stock. The Company valued the service using the fair value of common shares on the grant date of $0.17 per share and recorded consulting expense of $76,500 in the year ended December 31, 2007. On October 6, 2008, the Company issued another 450,000 shares of its restricted common stock to FirsTrust Group, Inc. for additional services to be provided. The Company valued the service using the fair value of common shares on grant date at $0.08 per share and recorded deferred consulting expenses of $36,000 to be amortized over six months of the service period. For the fiscal year ended December 31, 2008, amortization of consulting compensation amount to $18,000.
On November 20, 2007, the Company entered into an agreement with Segue Ventures LLC to provide various informal advisory and consulting services, including U.S. business methods and compliance with SEC disclosure requirements. In connection with this agreement, Segue Ventures LLC received $4,000 in cash and was to have received 16,000 shares of common stock per month. The Contract was effective from November 20, 2007 to June 30, 2008. On February 27, 2008, a total of 70,000 shares of the Company’s common stock were issued to Segue Ventures LLC. The Company valued these 70,000 shares using the fair value of common shares on the contract date of $0.19 per share and recorded consulting expense of $13,311, of which, $3,938 and $9,373, was amortized for the years ended December 31, 2007 and 2008, respectively. With regards to these 70,000 shares the Company recorded 21,280 as common shares issuable at December 31, 2007. On August 13, 2008, a total of 68,800 shares of the Company’s common stock were issued to Segue Ventures LLC. The Company valued these 68,800 shares using the fair value of common shares on the grant date at $0.19 per share and recorded consulting expenses of $13,072 during the year ended December 31, 2008. As of December 31, 2008, zero shares remained unissued as the Company had terminated its services agreement with Segue Ventures LLC on September 11, 2008.
In March 2008, the Company entered into a two month agreement with SmallCapVoice.Com, Inc. to provide the Company with financial public relations services. In connection with this agreement, the Company will pay $3,500 per month and issue a total of 35,000 shares of the Company’s common stock. On March 11, 2008, the Company issued 35,000 shares to SmallCapVoice.Com, Inc. The Company valued these services using the fair value of common shares on the grant date of $0.19 per share and recorded deferred consulting expenses of $6,650 to be amortized over the service period. For the year ended December 31, 2008, amortization of consulting compensation amount to $6,650.
On May 1, 2008, the Company entered into a two year agreement with China Health Capital Group, Inc. (“CHC”) to provide the Company with financial and investment services. In connection with this agreement, on June 24, 2008, the Company issued
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 8 - SHAREHOLDER’ EQUITY (CONTINUED)
2,000,000 shares of Common Stock valued at $0.21 per share to CHC and recorded $420,000 as deferred compensation. For the year ended December 31, 2008, amortization of consulting compensation amounted to $140,000.
Pursuant to the terms of the Disinfectant Stock Purchase Agreement, on October 20, 2008, the Company issued 1,500,000 shares of common Stock valued at $0.19 per share to Shanghai Shanhai Group to purchase 10% equity interest held by Shanhai in Disinfectant for $380,000 and 1,500,000 shares of Common Stock. The Company recorded $750 in Common Stock and $284,250 in Additional Paid-in Capital.
WARRANTS
In January 2007, warrants to purchase 3,213,320 shares of common stock were exercised at $0.10 per share, for proceeds of $321,332
On June 27, 2008, Monarch Capital Fund, Ltd. exercised a warrant to purchase 100,000 shares of Common Stock with price of $0.20 per share. The Company received proceeds from this warrant exercise of $20,000 on June 24, 2008.
During the year ended December 31, 2008 at total of 351,750 warrants with exercise price ranging from $0.75 to $2.50, expired.
Stock warrant activities for the years ended December 31, 2008 and 2007 are summarized as follows:
The following table summarizes the Company's stock warrants outstanding at December 31, 2008:
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
NOTE 9 - FOREIGN OPERATIONS
For the fiscal year ended December 31, 2008 and 2007, the Company derived all of its revenue from its subsidiaries located in the People's Republic of China. Identifiable assets by geographic areas as of December 31, 2008 and 2007 are as follows:
NOTE 10 - INCOME TAXES
The Company's parent and their US subsidiaries are subject to applicable Federal, State and Local tax statues. The Company's subsidiaries in China are governed by the Income Tax Law of the Peoples Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the "PRC Income Tax Law"). Pursuant to the PRC Income Tax Law, in 2008, wholly-owned foreign enterprises are subject to tax at a statutory rate of approximately 25%.
The components of income (loss) before income tax, inclusive of income apportioned for minority interest and income from discontinued operations, consist of the following:
The components of the (benefit) provision for income taxes are approximately as follows:
The table below approximately summarizes the reconciliation of the Company’s income tax provision (benefit) computed at the statutory U.S. Federal rate and the actual tax provision:
The Company has a U.S net operating loss carryforward of approximately $1,330,000 as of December 31, 2008 which will begin to expire in 2028. Under IRC section 382, certain of these loss carryforward amounts may be limited due to the more than 50% change in ownership which took place during 2004. The deferred tax asset associated with these net operating loss carryforwards was fully reserved as of December 31, 2008.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company rents office and manufacturing space and warehouse under leases that expire in February 2011.
Future minimum rental payments required under these operating leases are as follows:
For the years ended December 31, 2008 and 2007, rent expense amounted to $123,964 and $ 103,090, respectively.
Litigation
The Company is not a party to any pending legal proceeding. No federal, state or local governmental agency is presently contemplating any proceeding against the Company. No director, executive officer or affiliate of the Company or owner of record or beneficially of more than five percent of the Company's common stock is a party adverse to the company or has a material interest adverse to the Company in any proceeding.
NOTE 12 - STATUTORY RESERVES
The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’ registered capital or members’ equity. Appropriations to the statutory public welfare fund are at a minimum of 5% of the after tax net income determined in accordance with PRC GAAP. Commencing on January 1, 2006, the new PRC regulations waived the requirement for appropriating retained earnings to a welfare fund. As of December 31, 2006, the Company accumulatively appropriated the required maximum 50% of its registered capital to statutory reserves, therefore the Company did not appropriate statutory reserve during year 2007. However, as LiKang Disinfectant increased its registered capital during 2008, we appropriated 10% of 2008’s net income of LiKang Disinfectant to the statutory reserve accordingly.
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
Balances of Statutory reserves as of December 31, 2008 and 2007 are as follows:
NOTE 13 - OPERATING RISK
(a)
Country risk
Currently, the Company’s revenues are primarily derived from the sale of a line of disinfectant product offerings 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 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 and because of a fluctuating exchange rate actually post higher or lower profits depending on exchange rate of Renminbi converted to US dollars on that date. 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 PRC. Additionally, the PRC currently allows a Chinese corporation to be owned by a United States corporation. If the laws or regulations relating to ownership of a Chinese corporation are changed by the PRC government, the Company's ability to operate the PRC subsidiaries could be affected.
NOTE 14 - SUBSEQUENT EVENTS
Pursuant to the second amendment to the Biological Stock Purchase Agreement, Likang Disinfectant will pay RMB 2,000,000 and 500,000 shares of the Company’s common stock to acquire 100% of equity interest of LiKang Biological. Such transaction was completed on March 5, 2009.