Attached files
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EXCEL - IDEA: XBRL DOCUMENT - Linkwell CORP | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - Linkwell CORP | v231353_ex32-1.htm |
EX-31.1 - EXHIBIT 31.1 - Linkwell CORP | v231353_ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - Linkwell CORP | v231353_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly
period ended June 30, 2011
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition
period from ________ to __________
Commission
File Number: 000-24977
LINKWELL
CORPORATION
|
(Exact
name of small business issuer as specified in
charter)
|
FLORIDA
|
65-1053546
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
1104
Jiatong Road, Jiading District, Shanghai, China 201807
|
(Address
of principal executive offices)
|
(86)
21-5566-6258
|
(Issuer's
telephone number)
|
not
applicable
|
(Former
name, former address and former fiscal year,
|
if
changed since last report)
|
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for shorter period that the registrant was required
to submit and post such files).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o (Do not
check if a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
As of
[August 15, 2011], there were [94,605,475] shares of our common stock issued and
outstanding.
LINKWELL
CORPORATION AND SUBSIDIARIES
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2011
INDEX
Page
|
|||
PART
I - FINANCIAL INFORMATION
|
|||
Item
1.
|
Financial
Statements.
|
4 | |
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
24 | |
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
35 | |
Item
4.
|
Controls
and Procedures.
|
35 | |
PART
II - OTHER INFORMATION
|
|||
Item
1.
|
Legal
Proceedings.
|
36 | |
Item
6.
|
Exhibits.
|
36 | |
Signature
|
37 |
2
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
Certain
statements in this report contain or may contain forward-looking statements that
are subject to known and unknown risks, uncertainties and other factors which
may cause actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous assumptions and other
factors that could cause our actual results to differ materially from those in
the forward-looking statements. These factors include, but are not limited to,
the risk of doing business in the People's Republic of China, or the PRC, our
ability to implement our strategic initiatives, our access to sufficient
capital, the effective integration of our subsidiaries in the PRC into a U.S.
public company structure, economic, political and market conditions and
fluctuations, government and industry regulation, Chinese and global
competition, and other factors. Most of these factors are difficult to predict
accurately and are generally beyond our control. You should consider the areas
of risk described in connection with any forward-looking statements that may be
made herein. Readers are cautioned not to place undue reliance on these
forward-looking statements and readers should carefully review this report in
its entirety. Except for our ongoing obligations to disclose material
information under the Federal securities laws, we undertake no obligation to
release publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated events. These
forward-looking statements speak only as of the date of this report and you
should not rely on these statements without also considering the risks and
uncertainties associated with these statements and our business.
OTHER
PERTINENT INFORMATION
As used
herein, unless the context indicates otherwise, the terms:
“Linkwell”,
the “Company”, “we” and “us” refers to Linkwell Corporation,
a Florida
corporation;
“Linkwell
Tech” refers to our 90% owned subsidiary Linkwell Tech Group, Inc.,
a Florida
corporation;
“LiKang
Disinfectant” refers to Shanghai LiKang Disinfectant High-Tech Company,
Limited,
a
wholly-owned subsidiary of Linkwell Tech;
“LiKang
Biological” refers to Shanghai LiKang Biological High-Tech Co.,
Ltd.,
a wholly
owned subsidiary of LiKang Disinfectant; and
“LiKang
International” refers to Shanghai LiKang International Trade Co.,
Ltd.,
formerly
a wholly owned subsidiary of LiKang Disinfectant which was sold to Linkwell
International Trading Co., Limited on May 31, 2008.
We also
use the following terms when referring to certain related parties:
“Shanhai”
refers to Shanghai Shanhai Group, a Chinese company which used to be the
minority owner of LiKang Disinfectant;
“Meirui”
refers to Shanghai LiKang Meirui Pharmaceuticals High-Tech Co., Ltd., a
company of which Shanhai is a majority shareholder; and
“ZhongYou”
refers to Shanghai ZhongYou Pharmaceutical High-Tech Co., Ltd., a company
owned by Shanghai Jiuqing Pharmaceuticals Company, Ltd., whose 65% owner is
Shanghai Ajiao Shiye Co. Ltd. Our Chairman and Chief Executive Officer Xuelian
Bian is a 60% shareholder of Shanghai Ajiao Shiye Co. Ltd.
The
People's Republic of China is herein referred to as China or the
PRC.
The
information which appears on our web site at www.linkwell.us is not part of this
report.
3
LINKWELL
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
||||||||
June
30, 2011
(Unaudited)
|
December
31, 2010
(Audited)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalent
|
$ | 1,095,952 | $ | 3,170,529 | ||||
Accounts
receivable, net
|
2,389,960 | 2,949,855 | ||||||
Accounts
receivable - related parties, net
|
8,024,456 | 7,376,366 | ||||||
Due
from related party
|
1,102,131
|
2,100,204 | ||||||
Other
receivables
|
4,913,455
|
152,337 | ||||||
Inventories,
net
|
2,811,824 | 2,072,976 | ||||||
Prepaid
expenses and other current assets
|
979,993 | 957,633 | ||||||
Total
current assets
|
21,317,771 | 18,779,900 | ||||||
NON-CURRENT
ASSETS
|
||||||||
Property,
plant and equipment, net
|
2,056,451 | 2,192,295 | ||||||
Deposit
|
554,000 | 554,000 | ||||||
Construction
in progress
|
150,778 | - | ||||||
Intangible
assets
|
359,554 | 410,918 | ||||||
Total
non-current assets
|
3,120,783 | 3,157,213 | ||||||
TOTAL
ASSETS
|
$ | 24,438,554 | $ | 21,937,113 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Loans
payable
|
$ | 1,545,213 | $ | 1,132,469 | ||||
Accounts
payable and accrued expenses
|
3,574,386 | 2,338,609 | ||||||
Advances
from customers
|
293,613 | 286,914 | ||||||
Taxes
payable
|
209,930 | 365,375 | ||||||
Other
payables
|
2,305 | 61,247 | ||||||
Due
to related parties
|
1,001,046 | 1,380,628 | ||||||
Total
current liabilities
|
6,626,493 | 5,565,242 | ||||||
Put
option liability
|
2,400,000 | 2,400,000 | ||||||
Total
liability
|
9,026,493 | 7,965,242 | ||||||
COMMITMENT
AND CONTINGENCY
|
||||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Preferred
Stock, No par value; 10,000,000
authorized,
no shares issued and outstanding at
June
30, 2011 and December 31, 2010, respectively
|
- | - | ||||||
Common
Stock, $.0005 par value, 150,000,000
authorized,
94,605,475 and 86,605,475 shares issued and
outstanding
at June 30, 2011 and December 31, 2010,
respectively
|
47,302 | 43,303 | ||||||
Additional
paid-in capital
|
7,870,021 | 7,474,021 | ||||||
Statutory
surplus reserve
|
802,749 | 802,749 | ||||||
Deferred
compensation
|
(9,792 | ) | (109,042 | ) | ||||
Retained
earnings
|
4,638,991 | 4,188,519 | ||||||
Accumulated
other comprehensive income
|
1,438,233 | 1,066,622 | ||||||
Total
Linkwell Corporation stockholder's equity
|
14,787,504 | 13,466,172 | ||||||
NONCONTROLLING
INTEREST
|
624,557 | 505,699 | ||||||
TOTAL
STOCKHOLDERS' EQUITY
|
15,412,061 | 13,971,871 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDER'S EQUITY
|
$ | 24,438,554 | $ | 21,937,113 |
See
accompanying notes to these consolidated financial
statements.
4
LINKWELL
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
SIX
MONTHS ENDED
JUNE
30,
|
THREE
MONTHS ENDED
JUNE
30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
NET
SALES
|
||||||||||||||||
Non-related
companies
|
$ | 3,454,099 | $ | 4,423,073 | $ | 1,839,839 | $ | 2,574,186 | ||||||||
Related
companies
|
3,566,996 | 1,441,775 | 1,958,047 | 266,773 | ||||||||||||
Total
Net Sales
|
7,021,095 | 5,864,848 | 3,797,886 | 2,840,959 | ||||||||||||
COST
OF SALES
|
3,781,224 | 2,993,896 | 2,101,993 | 1,442,850 | ||||||||||||
GROSS
PROFIT
|
3,239,871 | 2,870,952 | 1,695,893 | 1,398,109 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Selling
expenses
|
521,059 | 690,883 | 317,894 | 334,913 | ||||||||||||
General
and administrative
|
1,860,681 | 1,582,126 | 1,079,103 | 713,955 | ||||||||||||
Total
Operating Expenses
|
2,381,739 | 2,273,009 | 1,396,996 | 1,048,868 | ||||||||||||
INCOME
FROM OPERATIONS
|
858,132 | 597,943 | 298,897 | 349,241 | ||||||||||||
OTHER
INCOME (EXPENSES)
|
||||||||||||||||
Other
income (expenses)
|
(19,781 | ) | 26,753 | 25,924 | 18,606 | |||||||||||
Interest
expense
|
(33,907 | ) | (36,867 | ) | (22,246 | ) | (15,127 | ) | ||||||||
Total
Other Expenses, net
|
(53,688 | ) | (10,114 | ) | 3,678 | 3,479 | ||||||||||
INCOME
BEFORE INCOME TAX
|
804,444 | 587,829 | 302,575 | 352,720 | ||||||||||||
INCOME
TAX EXPENSE
|
(235,115 | ) | (142,885 | ) | (134,962 | ) | (74,253 | ) | ||||||||
NET
INCOME INCLUDING NONCONTROLLING INTEREST
|
569,329 | 444,944 | 167,613 | 278,467 | ||||||||||||
LESS:
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
|
(118,858 | ) | (60,178 | ) | (76,189 | ) | (32,818 | ) | ||||||||
NET
INCOME ATTRIBUTABLE TO LINKWELL CORP
|
450,471 | 384,766 | 91,424 | 245,649 | ||||||||||||
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||
Foreign
currency translation
|
371,611 | 71,298 | 205,325 | 67,845 | ||||||||||||
COMPREHENSIVE
INCOME
|
$ | 822,082 | $ | 456,064 | $ | 296,749 | $ | 313,494 | ||||||||
BASIC
AND DILUTED INCOME PER COMMON SHARE:
|
||||||||||||||||
Basic
earnings per shares
|
$ | 0.01 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Diluted
earnings per shares
|
$ | 0.01 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
WEIGHTED
AVERAGE SHARES OUTSTANDING:
|
||||||||||||||||
Basic
|
88,240,834 | 86,605,475 | 89,858,222 | 86,605,475 | ||||||||||||
Diluted
|
88,240,834 | 86,605,475 | 89,858,222 | 86,605,475 |
See
accompanying notes to these consolidated financial
statements.
5
LINKWELL
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX
MONTHS ENDED JUNE 30,
|
||||||||
2011
|
2010
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Income
including noncontrolling interest
|
$ | 569,329 | $ | 444,944 | ||||
Adjustments
to reconcile income including noncontrolling
|
||||||||
Interest
to net cash provided by (used in) operating activities:
|
||||||||
Stock
compensation expense
|
400,000 | - | ||||||
Deferred
compensation
|
99,250 | 99,250 | ||||||
Depreciation
and amortization
|
224,006 | 176,492 | ||||||
Loss
from disposal of property
|
42,155 | 973 | ||||||
Increase(decrease)
in current assets
|
||||||||
Accounts
receivable
|
622,088 | 7,509 | ||||||
Accounts
receivable - related party
|
(440,835 | ) | (328,579 | ) | ||||
Other
receivables
|
(4,005,829 | ) | (134,672 | ) | ||||
Inventories
|
(683,112 | ) | (547,537 | ) | ||||
Deposits,
prepaid expenses and other current assets
|
(85,613 | ) | (42,187 | ) | ||||
Increase(decrease)
in current liabilities
|
||||||||
Accounts
payable and accrued expenses
|
1,111,259 | 642,484 | ||||||
Other
payables
|
- | (78,544 | ) | |||||
Taxes
payable
|
(162,234 | ) | (108,642 | ) | ||||
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
(2,309,537 | ) | 131,491 | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Construction
in progress
|
(149,176 | ) | (42,636 | ) | ||||
Purchase
of property, plant and equipment
|
(29,754 | ) | (117,575 | ) | ||||
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
(178,930 | ) | (160,211 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Change
in due to related parties
|
(405,498 | ) | (255,761 | ) | ||||
Change
in due from related parties
|
376,839 | - | ||||||
Proceeds
from loans payable
|
382,199 | 703,276 | ||||||
NET
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
353,540 | 447,515 | ||||||
EFFECT
OF EXCHANGE RATE ON CASH
|
60,349 | 13,792 | ||||||
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(2,074,577 | ) | 432,587 | |||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
3,170,529 | 2,144,360 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 1,095,952 | $ | 2,576,947 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid for:
|
||||||||
Interest
|
$ | 27,680 | $ | 11,636 | ||||
Income
taxes
|
$ | 306,374 | $ | 126,455 |
See
accompanying notes to these consolidated financial
statements.
6
LINKWELL
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2011 AND DECEMBER 31, 2010
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Linkwell
Corporation (formerly Kirshner Entertainment & Technologies, Inc.) (the
“Company”) was incorporated in the State of Colorado on December 11, 1996. On
May 31, 2000, the Company acquired 100% of HBOA.com, Inc. On December 28, 2000,
the Company formed a new subsidiary, Aerisys Incorporated (“Aerisys”), a Florida
corporation, to handle commercial private business. In June 2003, the Company
formed its entertainment division and changed its name to reflect this new
division. Effective as of March 31, 2003, the Company discontinued its
entertainment division and its technology division, except for the Aerisys
operations that continue on a limited basis.
On May 2,
2005, the Company entered into and consummated a share exchange with all of the
shareholders of Linkwell Tech Group, Inc. (“Linkwell Tech”). Pursuant to the
share exchange, the Company acquired 100% of the issued and outstanding shares
of Linkwell Tech's common stock, in exchange for 36,273,470 shares of our common
stock, which at closing represented approximately 87.5% of the issued and
outstanding shares of the Company’s common stock. As a result of the
transaction, Linkwell Tech became our wholly-owned subsidiary. For financial
accounting purposes, the exchange of stock was treated as a recapitalization of
Kirshner with the former shareholders of the Company retaining 7,030,669 or
approximately 12.5% of the outstanding stock. The consolidated financial
statements reflect the change in the capital structure of the Company due to the
recapitalization and in the operations of the Company and its subsidiaries for
the periods presented.
Linkwell
Tech was founded on June 22, 2004, as a Florida corporation. On June 30, 2004,
Linkwell Tech acquired 90% of Shanghai LiKang Disinfectant High-Tech Company,
Ltd. (“LiKang Disinfectant”), a PRC company, through a stock exchange. This
transaction resulted in the formation of a U.S. holding company by the
shareholders of LiKang Disinfectant as it did not result in a change in the
underlying ownership interest of LiKang Disinfectant. LiKang Disinfectant is a
science and technology enterprise founded in 1988. LiKang Disinfectant is
involved in the development, production, marketing and sale, and distribution of
disinfectant health care products.
LiKang
Disinfectant has developed a line of disinfectant product offerings which are
utilized by the hospital and medical industry in China. LiKang Disinfectant has
developed a line of disinfectant product offerings. LiKang Disinfectant regards
hospital disinfectant products as the primary segment of its business and has
developed and manufactured several series of products in the field of skin
mucous disinfection, hand disinfection, surrounding articles disinfection,
medical instruments disinfection and air disinfection.
On June
30, 2005, the Company's Board of Directors approved an amendment of its Articles
of Incorporation to change the name of the Company to Linkwell Corporation. The
effective date of the name change was after close of business on August 16,
2005.
On March
5, 2009, the Company’s subsidiary, Likang Disinfectant acquired 100% of Likang
Biological, a company owned by related parties.
7
On March
25, 2008, the Company’s subsidiary, Linkwell Tech acquired the remaining 10% of
Likang Disinfectant that it did not own. The purchase price for
the remaining 10% interest in Likang Disinfectant was $684,057, consisting of
$399,057 in cash and 1,500,000 shares of the Company’s common stock valued at
$285,000. The 10% interest in Likang Disinfectant had a value of $577,779 prior
to the Company’s purchase. The $126,278 difference between purchase price
and its value was deemed a dividend and deducted from retained earnings upon
closing of the acquisition.
On
February 15, 2008, the Company entered into a stock purchase agreement with
Ecolab Inc., a Delaware corporation (“Ecolab”), pursuant to which Ecolab agreed
to purchase 888,889 of shares of Linkwell Tech, or 10% of the issued and
outstanding capital stock of Linkwell Tech, for $2,000,000. On March 28, 2008
and June 4, 2008, Linkwell Tech received $200,000 and $1,388,559,
respectively from Ecolab. Including a $400,000 loan that Linkwell Tech received
from Ecolab and accrued interest thereon of $11,441, Linkwell Tech received a
total investment of $2,000,000 from Ecolab. On May 31, 2008, the Company,
Linkwell Tech and Ecolab entered into a Linkwell Tech Group Inc. Stockholders
Agreement, whereby both the Company and Ecolab are subject to, and beneficiaries
of, certain pre-emptive rights, transfer restrictions and take along rights
relating to the shares of Linkwell Tech that the Company and Ecolab each hold.
As of May 31, 2008, the principal and accrued interest of $11,441 on the
short-term $400,000 loan became part of Ecolab’s investment and does not need to
be repaid.
The
unaudited financial statements included herein have been prepared
by the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) that are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally present in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”) have been omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the
audited financial statements and footnotes included in the Company’s
2010 Annual Report on Form 10-K. The results for the six months ended
June 30, 2011 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2011.
BASIS
OF PRESENTATION
The
financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America and are
expressed in US dollars. All material intercompany transactions and
balances have been eliminated in the consolidation.
Certain
reclassifications have been made to the prior year to conform to current year’s
presentation. The consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United States of America
(“U.S. GAAP”). The consolidated financial statements of the Company include the
accounts of its 90% owned subsidiary, Linkwell Tech, and 100% owned
subsidiaries LiKang Disinfectant and Likang Biological. All significant
inter-company balances and transactions have been eliminated.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates. Significant estimates in the six months ended June 30, 2011 and
2010 include the allowance for doubtful accounts, useful life of property
and equipment, and inventory reserve.
8
NON-CONTROLLING
INTEREST
Effective
January 1, 2009, the Company adopted Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,”
which established new standards governing the accounting for and reporting of
noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and
the loss of control of subsidiaries. Certain provisions of this standard
indicate, among other things, that NCIs (previously referred to as minority
interests) be treated as a separate component of equity, not as a liability (as
was previously the case), that increases and decreases in the parent’s ownership
interest that leave control intact be treated as equity transactions rather than
as step acquisitions or dilution gains or losses, and that losses of a partially
owned consolidated subsidiary be allocated to the NCI even when such allocation
might result in a deficit balance. This standard also requires changes to
certain presentation and disclosure requirements. Losses attributable to the NCI
in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The
excess attributable to the NCI is attributed to those interests. The NCI shall
continue to be attributed its share of losses even if that attribution results
in a deficit NCI balance.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
For
certain of the Company’s financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses,
advances from customers, short-term loans payable and amounts due from or to
related parties, the carrying amounts approximate their fair values due to their
short maturities. ASC Topic 820, “Fair Value Measurements and
Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value,
and establishes a three-level valuation hierarchy for disclosures of fair value
measurement that enhances disclosure requirements for fair value measures.
The carrying amounts reported in the consolidated balance sheets for receivables
and current liabilities each qualify as financial instruments and are a
reasonable estimate of their fair values because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels of valuation hierarchy
are defined as follows:
Level 1
inputs to the valuation methodology are quoted prices for identical assets or
liabilities in active markets.
Level 2
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instruments.
Level 3
inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.
As of
June 30, 2011 and December 31, 2010, the Company did not identify any assets and
liabilities that are required to be presented on the balance sheet at fair
value.
CASH
AND CASH EQUIVALENTS
For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less and
money market accounts to be cash equivalents.
9
ACCOUNTS
RECEIVABLE
The
Company has a policy of reserving for uncollectible accounts based on its best
estimate of the amount of probable credit losses in its existing accounts
receivable. The Company periodically reviews its accounts receivable to
determine whether an allowance is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization of an account
may be in doubt. Account balances deemed to be uncollectible are charged to the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. As of June 30, 2011 and December 31, 2010,
the Company established that, based on a review of its third party accounts
receivable outstanding balances, allowances for doubtful accounts in the amounts
of $974,465 and $952,232, respectively. As of June 30, 2011 and December 31,
2010, the Company established that, based on a review of its related party
accounts receivable outstanding balances, allowances for doubtful accounts in
the amounts of $611,996 and $598,033, respectively.
INVENTORIES
Inventories,
consisting of raw materials, work in process and finished goods related to the
Company’s products are stated at the lower of cost or market utilizing the
weighted average method. The valuation of inventory requires the Company
to estimate obsolete or excess inventory based on analysis of future demand for
our products. Due to the nature of the Company’s business and our target market,
levels of inventory in the distribution channel, changes in demand due to price
changes from competitors and introduction of new products are not significant
factors when estimating the Company’s excess or obsolete inventory. If inventory
costs exceed expected market value due to obsolescence or lack of demand,
inventory write-downs may be recorded as deemed necessary by management for the
difference between the cost and the market value in the period that impairment
is first recognized. As of June 30, 2011 and December 31, 2010, the reserve for
obsolete inventory amounted to $0.
PROPERTY
AND EQUIPMENT
Property
and equipment are carried at cost. Depreciation is provided using the
straight-line method over the estimated economic lives of the assets, which
range from five to twenty years. The cost of repairs and maintenance are
expensed as incurred; major replacements and improvements are capitalized. When
assets are retired or disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gains or losses are included in the
income statement in the year of disposition.
IMPAIRMENT
OF LONG-LIVED ASSETS
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily determinable.
Based on its review, the Company believes that, during the six months ended June
30, 2011 and 2010, there were no significant impairment of its long lived
assets.
10
ADVANCES
FROM CUSTOMERS
As of
June 30, 2011 and December 31, 2010, advances from customers were $293,613 and
$286,914, respectively. These advances consisted of prepayments from third
party customers to the Company for merchandise that had not yet been shipped by
the Company. The Company will recognize the prepayments as revenue as customers
take delivery of the goods, in compliance with its revenue recognition
policy.
INCOME
TAXES
The
Company utilizes Statement of Financial Accounting Standards ("SFAS") No. 109,
“Accounting for Income Taxes,” (codified in Financial Accounting Standard Board
(“FASB”) Accounting Standard Codification (“ASC” Topic 740), which requires
recognition of deferred tax assets and liabilities for expected future tax
consequences of events that were included in the financial statements or tax
returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The
Company adopted the provisions of the Financial Accounting Standards Board's
("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
(codified in FASB ASC Topic 740). When tax returns are filed, it is highly
certain that some positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions
taken that exceeds the amount measured as described above is reflected as a
liability for unrecognized tax benefits in the accompanying balance sheets along
with any associated interest and penalties that would be payable to the taxing
authorities upon examination. Interests associated with unrecognized tax
benefits are classified as interest expenses and penalties are classified in
selling, general and administrative expenses in the statements of income. At
June 30, 2011 and December 31, 2010, the Company did not take any uncertain
positions that would necessitate recording of tax related
liability.
BASIC
AND DILUTED EARNINGS PER SHARE
The
Company presents net income (loss) per share (“EPS”) in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per
Share” (codified in FASB ASC Topic 740). Accordingly, basic income (loss) per
share is computed by dividing income (loss) available to common shareholders by
the weighted average number of shares outstanding, without consideration for
common stock equivalents. Diluted net income per share is computed by dividing
the net income by the weighted-average number of common shares outstanding as
well as common share equivalents outstanding for the period determined using the
treasury-stock method for stock options and warrants and the if-converted method
for convertible notes. The Company has made an accounting policy election to use
the if-converted method for convertible securities that are eligible to common
stock dividends, if declared. If the if-converted method was anti-dilutive (that
is, the if-converted method resulted in a higher net income per common share
amount than basic net income per share calculated under the two-class method),
then the two-class method was used to compute diluted net income per common
share, including the effect of common share equivalents. Diluted earnings per
share reflects the potential dilution that could occur based on the exercise of
stock options or warrants, unless such exercise would be anti-dilutive,
with an exercise price of less than the average market price of the Company’s
common stock.
11
The following table presents a
reconciliation of basic and diluted earnings per share for the six months ended
June 30, 2011 and 2010:
|
2011
|
2010
|
||||||
Net
income
|
$
|
450,471
|
$
|
384,766
|
||||
Weighted
average shares outstanding - basic
|
88,240,834
|
86,605,475
|
||||||
Effect
of dilutive securities:
|
||||||||
Unexercised
warrants
|
-
|
-
|
||||||
Weighted
average shares outstanding - diluted
|
88,240,834
|
86,605,475
|
||||||
Earnings
per share - basic
|
$
|
0.01
|
$
|
0.00
|
||||
Earnings
per share - diluted
|
$
|
0.01
|
$
|
0.00
|
The
following table presents a reconciliation of basic and diluted earnings per
share for the three months ended June 30, 2011 and 2010:
|
2011
|
2010
|
||||||
Net
income
|
$
|
91,424
|
$
|
245,649
|
||||
Weighted
average shares outstanding - basic
|
89,858,222
|
86,605,475
|
||||||
Effect
of dilutive securities:
|
||||||||
Unexercised
warrants
|
-
|
|
||||||
Weighted
average shares outstanding - diluted
|
89,858,222
|
86,605,475
|
||||||
Earnings
per share - basic
|
$
|
0.00
|
$
|
0.00
|
||||
Earnings
per share - diluted
|
$
|
0.00
|
$
|
0.00
|
12
REVENUE
RECOGNITION
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). The Company
records revenue when an arrangement exists, services have been rendered or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectibility is reasonably assured. The following policies
reflect specific criteria for the various revenue streams of the Company. The
Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
The
Company's revenues from the sale of products to related parties are recorded
when the goods are shipped to the customers from our related parties. Upon
shipment, title passes, and collectibility is reasonably assured. The Company
receives purchase orders from our related parties on an as need basis from the
related party customers. Generally, the related party does not hold the
Company’s inventory. If the related party has inventory on hand at the end of a
reporting period, the sale is reversed and the inventory is included on the
Company’s balance sheet.
STATEMENT
OF CASH FLOWS
In
accordance with SFAS No. 95, “Statement of Cash Flows,” codified in FASB ASC
Topic 230, cash flows from the Company's operations are calculated based upon
the local currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheets.
CONCENTRATION
OF BUSINESS AND CREDIT RISK
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. The Company
places its cash with high credit quality financial institutions in the U.S. and
in China. The majority of the Company’s bank accounts in banks located in the
PRC are not covered by any type of protection similar to that provided by the
FDIC on funds held in U.S banks. As of June 30, 2011 and December 31, 2010, the
Company maintained cash in the U.S. in a financial institution insured by the
FDIC in the approximate amounts of $9,029 and $2,315,
respectively.
Almost
all of the Company's sales are credit sales which are primarily to customers
whose ability to pay is dependent upon the industry economics prevailing in
these areas; however, concentrations of credit risk with respect to trade
accounts receivables are limited due to the wide distribution of our products
and shorter payment terms than customary in the PRC. The Company also performs
ongoing credit evaluations of its customers to help further reduce credit risk.
For the six months ended June 30, 2011 and 2010, sales to related parties
accounted for 51% and 25% of net revenue, respectively. For the three
months ended June 30, 2011 and 2010, sales to related parties accounted for 52%
and 9% of net revenue, respectively.
The
Company is operating in the People’s Republic of China, which may give rise to
significant foreign currency risks from fluctuations and the degree of
volatility of foreign exchange rates between the U.S. dollar and the
RMB.
Payments
of dividends may be subject to some restrictions.
13
FOREIGN
CURRENCY TRANSLATION AND COMPREHENSIVE INCOME
The
Company primarily operates in the PRC. The financial position and results of
operations of the subsidiaries are determined using the local currency
(“Renminbi” or “RMB”) as the functional currency.
Translation
from RMB into United States dollars (“USD” or “$”) for reporting purposes is
performed by translating the results of operations denominated in foreign
currency at the weighted average rates of exchange during the reporting periods.
Assets and liabilities denominated in foreign currencies at the balance sheet
dates are translated at the market rate of exchange in effect at that date. The
registered equity capital denominated in the functional currency is translated
at the historical rate of exchange at the time of capital contribution. All
translation adjustments resulting from the translation of the financial
statements into USD are reported as a component of accumulated other
comprehensive income in shareholders’ equity. The exchange rates used in
translation from RMB to USD amount were published by People’s Bank of the
People’s Republic of China.
June
30,
2011
|
December
31,
2010
|
|||
(Unaudited)
|
(Audited)
|
|||
Balance
sheet items, except for the registered and paid-up capital and retained
earnings as of June 30, 2011 and December 31, 2010.
|
US$1=RMB6.4716
|
US$1=RMB6.6227
|
Six
Months Ended June 30,
|
||||
2011
|
2010
|
|||
(Unaudited)
|
(Unaudited)
|
|||
Amounts
included in the statements of operations, and statements of cash flow for
the six months ended June 30, 2011 and 2010.
|
US$1=RMB6.5411
|
US$1=RMB6.8252
|
SHIPPING
COSTS
Shipping
costs are included in selling expenses and totaled $268,837 and $211,512 for the
six months ended June 30, 2011 and 2010, respectively. Shipping costs
were $120,855 and $91,732, respectively for the three months ended June 30, 2011
and 2010.
ADVERTISING
Advertising
is expensed as incurred and included in selling expenses. For the six months
ended June 30, 2011 and 2010, advertising expenses amounted to $24,381 and
$33,222, respectively. For the three months ended June 30, 2011 and
2010, advertising expenses amounted to $5,173 and $17,297,
respectively.
STOCK-BASED
COMPENSATION
The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No.
123” (codified in FASB ASC Topics 718 & 505). The Company recognizes in
the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and non-employees.
14
NON-EMPLOYEE
STOCK BASED COMPENSATION
The cost
of stock-based compensation awards issued to non-employees for services are
recorded at either the fair value of the services rendered or the instruments
issued in exchange for such services, whichever is more readily determinable,
using the measurement date guidelines enumerated in Emerging Issues Task Force
Issue, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services”.
REGISTRATION
RIGHTS AGREEMENTS
The
Company accounts for payment arrangements under registration rights agreement in
accordance with FASB Staff Position EITF 00-19-2 (codified in FASB ASC Topic
815), which requires the contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, be separately recognized and measured in
accordance with FASB Statement No. 5, Accounting for Contingencies (codified in
FASB ASC Topic 450).
The
Company has adopted “Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument. Accordingly, the Company classifies as liability
instruments, the fair value of registration rights agreements when such
agreements (i) require it to file, and cause to be declared effective under the
Securities Act, a registration statement with the SEC within contractually fixed
time periods, and (ii) provide for the payment of liquidating damages in the
event of its failure to comply with such agreements. Accordingly, (i)
registration rights with these characteristics are accounted for as derivative
financial instruments at fair value and (ii) contracts that are (a) indexed to
and potentially settled in an issuer's own stock and (b) permit gross physical
or net share settlement with no net cash settlement alternative are classified
as equity instruments.
RESEARCH AND DEVELOPMENT
COST
Research
and development costs are expensed as incurred and included in general and
administrative expenses. These costs primarily consist of cost of materials used
and salaries paid for the development department of the Company and fees paid to
third parties. Research and development costs for the six months ended June 30,
2011 and 2010 were $65,284 and $103,506, respectively. Research and
development costs for the three months ended June 30, 2011 and 2010 were $10,571
and $34,566, respectively.
SEGMENT
REPORTING
SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(codified in FASB ASC Topic 280) requires use of the “management approach” model
for segment reporting. The management approach model is based on the way a
company's management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company.
SFAS 131
has no effect on the Company's financial statements as substantially all of the
Company's operations are conducted in one industry segment. All of the Company's
assets are located in the PRC.
15
RECLASSIFICATIONS
Certain
prior year amounts were reclassified to conform to the manner of presentation in
the current period.
RECENT
ACCOUNTING PRONOUNCEMENTS
In June
2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic
220): Presentation of Comprehensive Income. Under the
amendments in this update, an entity has the option to present the total of
comprehensive income, the components of net income and the components of other
comprehensive income either in a single continuous statement of comprehensive
income or in two separate but consecutive statements. In both choices, an entity
is required to present each component of net income along with total net income,
each component of other comprehensive income along with a total for other
comprehensive income and a total amount for comprehensive income. In a single
continuous statement, the entity is required to present the components of net
income and total net income, the components of other comprehensive income and a
total for other comprehensive income, along with the total of comprehensive
income in that statement. In the two-statement approach, an entity is required
to present components of net income and total net income in the statement of net
income. The statement of other comprehensive income should immediately follow
the statement of net income and include the components of other comprehensive
income and a total for other comprehensive income, along with a total for
comprehensive income. In addition, the entity is required to present on the face
of the financial statements reclassification adjustments for items that are
reclassified from other comprehensive income to net income in the statement(s)
where the components of net income and the components of other comprehensive
income are presented. The amendments in this update should be applied
retrospectively and are effective for fiscal years, and interim periods
within those years, beginning after December 15, 2011. The Company is currently
assessing the effect that the adoption of this pronouncement will have on
its financial statements.
In
December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other
(Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts. The amendments in this
update affect all entities that have recognized goodwill and have one or more
reporting units whose carrying amount for purposes of performing Step 1 of the
goodwill impairment test is zero or negative. The amendments in this update
modify Step 1 so that for those reporting units, an entity is required to
perform Step 2 of the goodwill impairment test if it is more likely than not
that a goodwill impairment exists. In determining whether it is more likely than
not that goodwill impairment exists, an entity should consider whether there are
any adverse qualitative factors indicating that impairment may exist. The
qualitative factors are consistent with existing guidance, which requires that
goodwill of a reporting unit be tested for impairment between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. The amendments in this
update are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2010. Early adoption is not permitted. Upon
adoption of the amendments, any resulting goodwill impairment should be recorded
as a cumulative-effect adjustment to retained earnings beginning in the period
of an adoption. Any goodwill impairments occurring after the initial adoption of
the amendments should be included in earnings. The adoption of this ASU did not
have a material impact on the Company’s consolidated financial
statements.
In
December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805):
Disclosure of Supplementary Pro Forma Information for Business Combinations. The
amendments in this update specify that if a public entity presents comparative
financial statements, the entity should disclose revenue and earnings of the
combined entity as though the business combination(s) that occurred during the
current year had occurred as of the beginning of the comparable prior annual
reporting period only. The amendments also expand the supplemental pro forma
disclosures to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business
combination included in the reported pro forma revenue and earnings. The
amendments in this update are effective prospectively for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. The Company adopted
the disclosure requirements for the business combinations in 2011.
16
In April
2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation
– Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades. This Update provides amendments to Accounting Standards
Codification (ASC) Topic 718 to clarify that an employee share-based payment
award with an exercise price denominated in the currency of a market in which a
substantial portion of the entity’s equity securities trades should not be
considered to contain a condition that is not a market, performance, or service
condition. Therefore, an entity would not classify such an award as a liability
if it otherwise qualifies as equity. The amendments in this Update are effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The amendments in this Update should be applied by
recording a cumulative-effect adjustment to the opening balance of retained
earnings. The cumulative-effect adjustment should be calculated for all awards
outstanding as of the beginning of the fiscal year in which the amendments are
initially applied, as if the amendments had been applied consistently since the
inception of the award. The cumulative-effect adjustment should be presented
separately. Earlier application is permitted. The adoption of this ASU did not
have a material impact on the Company’s consolidated financial
statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have
a material impact on the Company’s consolidated financial
statements.
In
January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.
This update provides amendments to ASC Topic 820 that will provide more robust
disclosures about (1) the different classes of assets and liabilities measured
at fair value, (2) the valuation techniques and inputs used, (3) the activity in
Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and
3. This standard is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
17
NOTE
2 – INVENTORIES
A summary
of inventories by major category as of June 30, 2011 and December 31, 2010 were
as follows:
2011
|
2010
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Raw
materials
|
$ | 1,094,397 | $ | 820,293 | ||||
Work-in-process
|
41,402 | 31,398 | ||||||
Finished
goods
|
1,676,025 | 1,221,285 | ||||||
Net
inventories
|
$ | 2,811,824 | $ | 2,072,976 |
NOTE
3 – PROPERTY AND EQUIPMENT
At June
30, 2011 and December 31, 2010, property and equipment consisted of the
following:
|
Estimated
Useful Life
(In years)
|
2011
|
2010
|
||||||
(Unaudited)
|
(Audited)
|
||||||||
Office
equipment and furniture
|
3-7
|
$
|
420,421
|
$
|
404,130
|
||||
Autos
and trucks
|
5
|
343,815
|
327,479
|
||||||
Manufacturing
equipment
|
2-10
|
844,380
|
826,136
|
||||||
Building
|
5-20
|
1,637,329
|
1,643,684
|
||||||
Subtotal
|
3,245,945
|
3,201,429
|
|||||||
Less:
Accumulated depreciation
|
(1,189,494
|
)
|
(1,009,134
|
)
|
|||||
Property
and equipment, net
|
$
|
2,056,451
|
$
|
2,192,295
|
For
the six months ended June 30, 2011 and 2010, depreciation expenses amounted to
approximately $172,000 and $125,000, respectively. For the three months
ended June 30, 2011 and 2010, depreciation expenses amounted to approximately
$102,000 and $68,000, respectively.
NOTE
4 – CONSTRUCTION IN PROGRESS
The
Company had construction in progress of $150,778 for constructing a warehouse
for its finished products. The project was completed in July
2011.
NOTE
5 - INTANGIBLE ASSETS
At June
30, 2011 and December 31, 2010, intangible assets consisted of customers’ lists
arising from the acquisition of Likang Biological, amortized over 5 years. Net
intangible assets as of June 30, 2011 and December 31, 2010 totaled $359,554 and
$410,918, respectively. Amortization expenses for the six months
ended June 30, 2011 and 2010 were $51,365 and $51,365,
respectively. Amortization expenses for the three months ended June
30, 2011 and 2010 were 25,682 and $25,682. Annual amortization expenses for the
next five years from June 30, 2011 are expected to be: $102,730, $102,730,
$102,730, $51,363 and $0.
18
NOTE
6 - DEPOSITS
At June
30, 2011 and December 31, 2010, deposits mainly represented prepaid application
fee of $544,000 for the deposit of purchasing an acquisition target in
China.
NOTE 7 -
OTHER RECEIVABLES
At
June 30, 2011 and December 31, 2010, the Company had other receivables of
$4,913,455 (net of bad debt allowance $120,527) and $152,337, respectively.
Other receivables at June 30, 2011 primarily includes short-term advances to
Wuhai Likang of
approximately $2,500,000 made during the six months ended June 30, 2011. This
short-term
advance accrues interest at an annual rate of 4%, and is payable upon
demand.
Wuhai
Likang was a related party of the Company in 2010 due to the Company being in
the process of acquiring a controlling position in Wuhai Likang. As of December
31, 2010, the Company had made advances totaling $1,567,337 to Wuhai Likang to
advance this purchase and to provide operating funds to Wuhai Likang. Any
portion of such advances in support of acquisition, or to provide operating
funds to Wuhai Likang, was classified as of due from related party as of
December 31, 2010 pending approval of the acquisition. As of June 30, 2011
government approval for this acquisition has not occurred and is unable to be
completed. During the six months ended June 30, 2011, the existing shareholders
of Wuhai Likang contributed additional capital into Wuhai Likang, which resulted
in a reduction of the Company’s ownership position in Wuhai Likang to
approximately 7.65% of Wuhai Likang as of June 30, 2011. With this reduction in
ownership, and reduction in influence over Wuhai Likang, the Company’s
management has determined that Wuhai Likang is not deemed a related party.
Accordingly, the due from related party of $1,567,337 as of December 31, 2010
and the aforementioned approximate $2,500,000 advances made during the six
months ended June 30, 2011, have been classified as an other receivable as of
June 30, 2011.
NOTE
8 - LOANS PAYABLE
Loans
payable consisted of the following at June 30, 2011 and December 31,
2010:
|
2011
|
2010
|
||||||
(Unaudited)
|
(Audited)
|
|||||||
Loan
from Shanghai Rural Commercial Bank, Dachang Branch due on May 10,
2012 with interest rate of 6.94% per annum. Guaranteed by Shanhai
Group and Mr. Bian, Chairman of the Company (RMB
7,400,000).
|
$
|
1,143,458
|
$
|
739,880
|
||||
Loan
from Shanghai Rural Commercial Bank, Dachang Branch due on July 13,
2011 with interest rate of 5.31% per annum. Guaranteed by Shanhai
Group and Mr. Bian, Chairman of the Company (RMB
2,600,000)
|
401,755
|
392,589
|
||||||
$
|
1,545,213
|
$
|
1,132,469
|
NOTE
9 – RELATED PARTY TRANSACTIONS
Linkwell
Tech's wholly-owned subsidiary, LiKang Disinfectant, is engaged in business
activities with three related parties: Shanghai ZhongYou Pharmaceutical
High-Tech Co., Ltd., (“ZhongYou”), Shanghai Jiuqing Pharmaceuticals
Company, Ltd. (“Shanghai Jiuqing”) and Linkwell International Trading Co., Ltd.
(“Linkwell Trading”).
The
Company’s Chairman and Chief Executive Officer, Xuelian Bian, and Vice President
and Director, Wei Guan, own 90% and 10% respectively, of the capital stock of
ZhongYou. In March 2007, Wei Guan sold his 10% ownership to Bing Chen, the
President of LiKang Disinfectant. In August 2007, Xuelian Bian sold his 90%
ownership to his mother, Xiuyue Xing. In October 2007, the two new shareholders,
Bing Chen (10%) and Xiuyue Xing (90%) sold all of their shares in ZhongYou to
Shanghai Jiuqing, whose 100% owner is Shanghai Ajiao Shiye Co. Ltd. Mr. Bian is
currently a 60% shareholder of Shanghai Ajiao Shiye Co. Ltd.
For the
six months ended June 30, 2011 and 2010, the Company recorded sales of
$3,566,996 and $1,440,292 to ZhongYou, respectively. For the three
months ended June 30, 2011 and 2010, the Company recorded sales of $1,958,047
and $266,262 to ZhongYou, respectively. At June 30, 2011 and December
31, 2010, accounts receivables from sales to ZhongYou were $7,303,259 and
$6,701,229, respectively.
Shanghai
Ajiao Shiye Co. Ltd. owns 100% of Shanghai Jiuqing. Xuelian Bian is a 60%
shareholder of Shanghai Ajiao Shiye Co. Ltd. During the six months ended June
30, 2011 and 2010, the Company recorded sales of $0 and $1,483 to Shanghai
Jiuqing, respectively. During the three months ended June 30, 2011
and 2010, the Company recorded sales of $0 and $345 to Shanghai Jiuqing,
respectively. At June 30, 2011 and December 31, 2010, accounts
receivable from sales to Shanghai Jiuqing were $90,339 and $88,278,
respectively.
19
As
of June 30, 2011 and December 31, 2010, $1,102,131 and $2,100,204 were due from
related parties, respectively, representing short-term advances and other
receivables not including the receivables from sales. Wuhai
Likang was a related party of the Company at December 31, 2010 due being in the
process of acquiring a controlling position in Wuhai Likang. As of June 30, 2011
government approval for this acquisition has not occurred and is unable to be
completed. During the six months ended June 30, 2011, the existing shareholders
of Wuhai Likang contributed additional capital into Wuhai Likang, which resulted
in a reduction of the Company’s ownership position in Wuhai Likang to
approximately 7.65% of Wuhai Likang as of June 30, 2011. With this reduction in
ownership, and reduction in influence over Wuhai Likang, the Company’s
management has determined that Wuhai Likang is not deemed a related party (See
note 7).
As of
June 30, 2011, the Company owed its management $54,000 and other related parties
$947,046. As of December 31, 2010, the Company owed its management
$54,000 and other related parties $1,326,628.
NOTE
10 – TAXES PAYABLE
Taxes
payable consisted of the following at June 30, 2011 and December 31, 2010,
respectively:
2011
|
2010
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Income
tax payable
|
$
|
103,273
|
$
|
132,140
|
||||
Value
added tax payable
|
97,917
|
225,810
|
||||||
Other
taxes payable
|
8,740
|
7,425
|
||||||
$
|
209,930
|
$
|
365,375
|
NOTE
11 –PUT OPTION LIABILITY
On
February 15, 2008, the Company entered into a stock purchase agreement with
Ecolab pursuant to which Ecolab agreed to purchase and Linkwell Tech agreed to
sell 888,889 of its shares, or 10% of the issued and outstanding capital stock
of Linkwell Tech for $2,000,000. On May 31, 2008, the Company, Linkwell Tech and
Ecolab entered into a Stockholders Agreement (“Stockholders Agreement”), whereby
both the Company and Ecolab are subject to, and the benefit of, certain
pre-emptive rights, transfer restrictions and take along rights relating to the
shares of Linkwell Tech, the Company and Ecolab each hold.
Pursuant
to the terms of the Stockholders Agreement, Ecolab has an option (“Put Option”)
to sell the 888,889 shares (“Shares”) of common stock, par value $0.001, of
Linkwell Tech that Ecolab purchased under the Stock Purchase Agreement back to
Linkwell Tech in exchange for, as determined by Linkwell, cash in the amount of
$2,400,000 or the lesser of (a) 10,000,000 shares of Linkwell common stock, or
(b) such number of shares of Linkwell common stock as is determined by dividing
3,500,000 by the average daily closing price of Linkwell common stock for the
twenty days on which Linkwell shares of common stock were traded on the OTC
Bulletin Board prior to the date the Put Option is exercised (“Put Shares”). The
Put Option is exercisable during the period between the second and fourth
anniversaries of May 30, 2008, or upon the occurrence of certain events
including material breach by Linkwell Tech or its subsidiaries, of the
Consulting Agreement, Distributor Agreements or Sales Representative Agreement
entered into in connection with the Stock Purchase Agreement.
Under the
Stockholders Agreement, Ecolab also has a call option (“Call Option”),
exercisable if Linkwell is subject to a change of control transaction, to
require the Company to sell to Ecolab all of the equity interests in Linkwell
Tech, or any of Linkwell Tech’s subsidiaries, then owned by the Company. The
Company recognized the maximum expenses of the Put Option and the Call Option
described above as $2,400,000 put option liability.
20
NOTE
12 - INCOME TAXES
The
Company is subject to income taxes by entity on income arising in or derived
from the tax jurisdiction in which each entity is domiciled.
Linkwell
Corp and Linkwell Tech were incorporated in the U.S. and have net operating
losses (NOL) for income tax purposes. Linkwell Corp and Linkwell Tech
had net operating loss carry forwards for income taxes of approximately
$2,674,000 at June 30, 2011, which may be available to reduce future years’
taxable income as NOL’s can be carried forward up to 20 years from the year the
loss is incurred. Under IRC section 382, certain of these loss carry-forward
amounts may be limited due to the more than 50% change in ownership which took
place during 2004. The Company’s management believes that the realization of
benefits from these losses are uncertain due to the Company’s limited operating
history and continuing losses. Accordingly, a 100% valuation allowance has
been provided on the deferred tax asset of approximately
$1,015,000.
Likang
Disinfectant and Likang Biological are governed by the Income Tax Law of the PRC
concerning privately-run enterprises, which are generally subject to tax at a
statutory rate of 25% on income reported in the statutory financial statements
after appropriated tax adjustments. Likang Disinfectant is subject to
preferential income tax rate of 12.5% for 2011 and 2010; Likang Biological is
subject to income tax rate of 25% since 2010.
NOTE
13 - STATUTORY RESERVES
Pursuant
to the PRC’s corporate law effective as of January 1, 2006, the Company is now
only required to maintain one statutory reserve by appropriating from its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
Surplus
Reserve Fund
The
Company is now only required to transfer 10% of its net income, as determined
under PRC accounting rules and regulations, to a statutory surplus reserve fund
until such reserve balance reaches 50% of the Company’s registered
capital.
The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Common
Welfare Fund
The
common welfare fund is a voluntary fund that provides that the Company can elect
to transfer 5% to 10% of its net income to this fund. This fund can only be
utilized on capital items for the collective benefit of the Company’s employees,
such as construction of dormitories, cafeteria facilities, and other staff
welfare facilities. This fund is non-distributable other than upon
liquidation. The Company did not make any reserve to this fund during
six months ended June 30, 2011 and 2010.
21
NOTE
14 – STOCKHOLDERS’ EQUITY
Common
Stock
On July
1, 2009, the Company entered into a two year consulting agreement with FirsTrust
Group, Inc. for business development and capital markets advisory services. In
connection with this agreement, the Company issued 1,800,000 shares of common
stock valued at $0.09 per share to FirsTrust Group, Inc. and recorded $162,000
as deferred compensation. The Company had accumulated amortization of $162,000
for stock-based compensation as of June 30, 2011. This agreement has a penalty
to the stock recipient for non-compliance with its terms. The Company
recorded stock based compensation of $40,500 during the six months ended June
30, 2011 and 2010 with respect to this agreement. The stock-based compensation
expense was fully expensed in June 2011.
On August
1, 2009, the Company entered into a two year agreement with Shanghai Hai Mai Law
Firm for legal services. In connection with this agreement, the Company issued
2,350,000 shares of common stock valued at $0.10 per share to Shanghai Hai
Mai Law Firm and recorded $235,000 as deferred compensation. The Company had
accumulated amortization of $225,208 for stock-based compensation as of June 30,
2011. This agreement has a penalty to the stock recipient for
non-compliance with its terms. The Company recorded stock based
compensation of $58,750 during the six months ended June 30, 2011 and 2010 with
respect to this agreement.
On
December 30, 2009, the Company issued 4,000,000 shares of common stock in
exchange for acquiring a 51% equity interest in an acquisition target
in China for $544,000 which was accounted for as a deposit as of March 31,
2011. However, the acquisition target has increased its registered capital to
RMB 50 million by the contribution of new investors in April 2010, which
resulted in a decrease of the equity interest owned by Linkwell to 9.18%. The
Company is in the process of closing the acquisition, which is contingent upon
receiving governmental approval. This acquisition has not closed as of June
30, 2011.
On May
25, 2011, the Company issued 8,000,000 shares of common stock to two directors
and two employees under the Company’s 2005 Equity
Compensation Plan, as amended.
NOTE
15 - COMMITMENTS
On
July 16, 2008, the Company entered a two-year lease agreement for its
administrative office with expiration date on July 15, 2010, for monthly
rent of $4,400 (RMB 30,237) until April 2009, the monthly rent increased to
$9,470 (RMB 64,669) after April 2009. The Company renewed this lease
after the expiration and monthly rent increased to $11,000 (RMB 73,173). The
lease will expire at December 31, 2011.
On
November 1, 2008, the Company entered another two-year lease agreement for its
branch office with expiration date on October 31, 2010, for monthly rent of
$3,500 (RMB 24,000). The Company renewed this lease with the same amount of rent
after the expiration. The new lease will expire on October 31,
2011.
Future
minimum rental payments required under these operating leases are as
follows:
As
of June 30, 2011
|
||||
Remainder
of Fiscal 2011
|
$
|
80,000
|
22
NOTE
16 – CONTINGENCY
On May
23, 2011, we entered into a Settlement Agreement (“Settlement Agreement”) with
Alpha Capital Aktiengesellschaft (“Alpha”) and Osher Capital Inc. (“Osher”)
(Alpha and Osher collectively the “Plaintiffs”) for the lawsuit the Plaintiffs
filed against us in the Supreme Court of the State of New York, County of New
York, as previously disclosed in the Quarterly Report Form 10-Q filed with the
SEC on May 16, 2011. In satisfaction of all the obligations stated under the
terms of the Settlement Agreement, we agreed to pay Alpha Eighty Thousand
Dollars ($80,000) and Osher Forty Thousand Dollars ($40,000). Upon the execution
of the Settlement Agreement and in consideration of the terms and conditions in
the Agreement, both parties will mutually release and forever discharge any and
all claims, whether known or unknown, that the parties may now have or may
hereafter have against each other from the beginning of time through the date of
the Settlement Agreement. The Company recorded $120,000 as expense
accordingly.
NOTE
17 – OPERATING RISK
(a)
|
Country
risk
|
Currently,
the Company’s revenues are primarily derived from the sale of a line of
disinfectant product to customers in the PRC. The Company hopes to expand
its operations to countries outside the PRC, however, such expansion has not
been commenced and there are no assurances that the Company will be able to
achieve such an expansion successfully. Therefore, a downturn or stagnation
in the economic environment of the PRC could have a material adverse effect
on the Company’s financial condition.
(b)
|
Products
risk
|
In
addition to competing with other domestic manufacturers of disinfectant product
offerings, the Company competes with larger U.S. companies who have greater
funds available for expansion, marketing, research and development and the
ability to attract more qualified personnel. These U.S. companies may be able to
offer products at a lower price. There can be no assurance that the Company will
remain competitive should this occur.
(c)
|
Exchange
risk
|
The
Company cannot guarantee that the current exchange rate will remain steady;
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods. This is because a fluctuating exchange rate
may post a higher or lower profit depending on exchange rate of Renminbi
converted to US dollars on that day. The exchange rate could fluctuate depending
on changes in the political and economic environments without
notice.
(d)
|
Political
risk
|
Currently,
the PRC is in a period of growth and is openly promoting business development in
order to bring more business into the country. Additionally, the PRC currently
allows a Chinese corporation to be owned by a United States corporation. If the
PRC government changes laws or regulations relating to the ownership of a
Chinese corporation, then the Company's ability to operate the PRC subsidiaries
could be affected.
Note
18 – SUBSEQUENT
EVENTS
For
the six months ended June 30, 2011, the Company has evaluated subsequent events
for potential recognition and disclosure through the date of the financial
statement issuance.
23
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). We have based these forward-looking statements on
our current expectations and projections about future events. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions about us that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“continue,” or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those listed under the heading
“Risk Factors” and those listed in our other Securities and Exchange Commission
filings. The following discussion should be read in conjunction with
our Financial Statements and related Notes thereto included elsewhere in this
report. Throughout this Quarterly Report, we will refer to Linkwell Corporation.
as "Linkwell," the "Company," "we," "us," and "our."
The
Management’s Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements and related Notes to Consolidated Financial
Statements in Item 1.
OVERVIEW
We
operate under a holding company structure and currently have one direct 90%
owned operating subsidiary, Linkwell Tech Group Inc. (“Linkwell Tech”), a
Florida corporation. Linkwell Tech owns 100% of Shanghai LiKang
Disinfectant High-Tech Company, Limited (“LiKang Disinfectant”). On February 15,
2008, Linkwell Tech sold 10% of its issued and outstanding capital stock to
Ecolab Inc., a Delaware corporation (“Ecolab”). On March 5, 2009,
LiKang Disinfectant purchased 100% of LiKang Biological Company for
approximately $292,500 (RMB 2,000,000) and 500,000 shares of our common
stock.
We, through Linkwell Tech’s
wholly-owned subsidiaries, LiKang Disinfectant and Likang Biological, are
engaged in the development, manufacture, sale and distribution of disinfectant
health care products primarily to the medical industry in
China.
Since our
incorporation in 1988, we have developed, manufactured and distributed
disinfectant health care products primarily to the medical industry in China. In
recent years, China has experienced a variety of public health crises, such as
the outbreak of SARS, which demonstrated the need for increased health standards
in China. In response, since the beginning in 2002, the Chinese government has
undertaken various initiatives to improve public health and living standards,
including continuing efforts to educate the public about the need for proper
sanitation procedures and the establishment of production standards for the
disinfectant industry in China. As a result of this heightened license and
permit system, all disinfectant manufacturers must comply with “qualified
disinfection product manufacturing enterprise requirements” established by the
Ministry of Public Health. The requirements include standards for hardware, such
as facilities and machinery, and software, including the technology to monitor
the facilities, as well as the heightened knowledge and capability of the
production staff regarding quality control procedures. Following the adoption of
the industry standards in 2002, we were granted thirty-one hygiene licenses
by the Ministry of Public Health.
24
We
believe that government standards adopted in July 2002 have increased the
barriers for competitors to enter into the disinfectant industry in China. The
implementation of these improved production standards and license requirements
has effectively decreased the competitive landscape as it pertains to small to
medium size manufacturers, since the new standards are especially difficult
for companies with limited product offerings and inferior technical content. In
addition, prior to the adoption of industry standards, disinfectant products
were generally marketed and sold based on price as opposed to quality. We
believe that as a result of the adoption of industry standards, the marketplace
is evolving with a more stringent focus on product quality, which we believe
will enable us to increase our base of commercial customers thereby increasing
our revenues.
Historically,
our focus has been on the commercial distribution of our products. Our customers
include hospitals, medical suppliers and distribution companies throughout
China. We have made efforts to expand our distribution to reach the retail
markets. We have repackaged certain of our commercial disinfectant products for
sale to the consumer market and have commenced upon expanding our customer base
to include hotels, schools, supermarkets and pharmacies. By virtue of the
Chinese government's continuing focus on educating the Chinese population about
the benefits of proper sanitation procedures, we believe that another key to
increasing our revenue is the continued expansion of the retail distribution of
our products.
The
disinfectant industry in China is an emerging industry that is populated with
small, regional companies. We estimate that there are more than 1,000
manufacturers and distributors of disinfectant products in China; however, most
domestic competitors offer a limited line of products and there are only a few
domestic companies with a nationwide presence. We believe that our national
marketing and sales presence throughout all twenty-two provinces, as well as
four autonomous regions and four municipalities in China, give us a competitive
advantage over many other disinfectant companies in China and will enable us to
leverage the brand awareness for our products with commercial customers to the
retail marketplace.
Our
present manufacturing facilities and production capacities are sufficient for
the foreseeable future, and we believe that we have the assets and the capital
necessary to enable the increase of our revenue as the market for disinfectant
products in China continues to increase. We will continue to focus
our efforts on the retail market for our products, as well as on expanding our
traditional base of commercial customers. In addition, we may also consider the
possible acquisition of independent sales networks, which may be used to
increase our product distribution capacity and align us with small, regional
companies in the industry.
25
RESULTS
OF OPERATIONS
Comparison
of the six months ended June 30, 2011 and 2010
The table
below sets forth the results of operations for the six months ended June 30,
2011, as compared to the six months ended June 30, 2010, accompanied by the
percentage changes.
|
2011
|
2010
|
||||||||||||||
|
$
|
% of Sales
|
$
|
% of Sales
|
||||||||||||
Net
Sales
|
||||||||||||||||
Non-related
companies
|
$
|
3,454,099
|
49.2
|
%
|
$
|
4,423,073
|
75.4
|
%
|
||||||||
Related
companies
|
3,566,996
|
50.8
|
%
|
1,441,775
|
24.6
|
%
|
||||||||||
Total
Net Sales
|
7,021,095
|
100
|
%
|
5,864,848
|
100
|
%
|
||||||||||
Cost
of Sales
|
3,781,224
|
53.9
|
%
|
2,993,896
|
51.0
|
%
|
||||||||||
Gross
Profit
|
3,239,871
|
46.1
|
%
|
2,870,952
|
49.0
|
%
|
||||||||||
Selling
Expense
|
521,059
|
7.4
|
%
|
690.883
|
11.8
|
%
|
||||||||||
General
and Administrative
|
1,860,681
|
26.5
|
%
|
1,582,126
|
27.0
|
%
|
||||||||||
Total
Operating Expenses
|
2,381,739
|
33.9
|
%
|
2,273,009
|
38.8
|
%
|
||||||||||
Income
from Operations
|
858,132
|
12.2
|
%
|
597,943
|
10.2
|
%
|
||||||||||
Other
Income (Expenses), net
|
(53,688)
|
(0.8)
|
%
|
(10,114)
|
(0.2)
|
%
|
||||||||||
Income
tax expense
|
(235,115
|
)
|
(3.3
|
)%
|
(142,885
|
)
|
(2.4
|
)%
|
||||||||
Net
Income including non-controlling interest
|
569,329
|
8.1
|
%
|
444,944
|
7.6
|
%
|
||||||||||
Less:
net income attributable non-controlling interest
|
(118,858
|
)
|
(1.7
|
)%
|
(60,178
|
)
|
(1.0
|
)%
|
||||||||
Net
Income attributable to Linkwell Corp
|
450,471
|
6.4
|
%
|
384,766
|
6.6
|
%
|
NET
SALES
Net sales
for the six months ended June 30, 2011 were $7,021,095 as compared to net sales
of $5,864,848 for the same period in 2010, an increase of $1,156,247, or
approximately 19.7%. This increase in net sales was due to our efforts in
developing new customer base and diversity of our products, as well as increased
demand from our existing customers. Of our total net sales for
the six months ended June 30, 2011, $3,566,996, or approximately 51%, was
attributable to related parties as compared to net sales of $1,441,775, or
approximately 25%, in 2010.
COST
OF SALES
Cost of
sales includes raw materials and manufacturing costs, which include labor, rent
and an allocated portion of overhead expenses, such as utilities, directly
related to product production. For the six months ended June 30, 2011, cost of
sales amounted to $3,781,224, or approximately 53.9% of net sales, as compared
to the cost of sales of $2,993,896, or approximately 51.0% of net sales for the
same period in 2010. The increase in cost of sales as a percentage of
sales was mainly due to new levied city construction tax and education surcharge
tax, which started from December 2010, as well as increase in the price of raw
materials.
26
GROSS
PROFIT
Gross
profit for the six months ended June 30, 2011 was $3,239,871, or approximately
46.1% of net revenue, as compared to $2,870,952, or approximately 49.0% of net
revenue for the same period in 2010. The decrease in gross profit margin was
mainly due to the increased cost of revenue as a percentage of
revenue.
OPERATING
EXPENSES
Total
operating expenses consisted of selling, general and administrative expenses.
For the six months ended June 30, 2011, total operating expenses were
$2,381,739, an increase of $108,730, or approximately 4.8%, from total operating
expenses of $2,273,009 for the same period in 2010. The increase in operating
expenses was mainly due to recorded expenses resulted from the settlement of
a lawsuit mentioned in further detail in Part II, Item 1, “Legal
Proceedings,” despite decreased
travel expenses, meeting expenses, and meals and entertainment.
NONCONTROLLING
INTEREST
On
February 15, 2008, we entered into a stock purchase agreement with Ecolab,
pursuant to which Ecolab purchased and Linkwell Tech sold 888,889 of its shares,
or 10% of the issued and outstanding capital stock of Linkwell Tech, for a total
of $2,000,000. On March 28, 2008 and June 4, 2008, Linkwell Tech received
$200,000 and $1,388,559, respectively, from Ecolab. Linkwell Tech received a
total of $2,000,000 from Ecolab, inclusive of a $400,000 loan that Ecolab
released to Linkwell Tech and accrued interest of $11,441. On May 31, 2008,
Linkwell Tech and Ecolab entered into the Linkwell Tech Group Inc. Stockholders
Agreement, whereby both our Company and Ecolab are subject to, and are the
beneficiaries of, certain pre-emptive rights, transfer restrictions and
take-along rights relating to the shares of Linkwell Tech that we and Ecolab
each hold. As of May 31, 2008, the principal and accrued interest of $11,441 on
the short-term $400,000 loan became part of Ecolab’s investment and no longer
needed to be repaid. After this transaction, Ecolab became a 10% minority
interest holder of Linkwell Tech. For the six months ended June 30, 2011, we had
a minority interest expense of $118,858 as compared to $60,178 in
2010.
NET
INCOME
Our net
income for the six months ended June 30, 2011 was $450,471 compared to $384,766
for the same period in 2010, an increase of $65,705 or 17.1%. Net
income as a percentage of revenue was 6.4% for the six months ended June 30,
2011, while it was 6.6% for the same period in 2010. This increase in net income
was attributable to an increase in sales.
27
Comparison
of the three months ended June 30, 2011 and 2010
The table
below sets forth the results of operations for the three months ended June 30,
2011, as compared to the three months ended June 30, 2010, accompanied by the
percentage of changes.
|
2011
|
2010
|
||||||||||||||
|
$
|
% of Sales
|
$
|
% of Sales
|
||||||||||||
Net
Sales
|
||||||||||||||||
Non-related
companies
|
$
|
1,839,839
|
48.4
|
%
|
$
|
2,574,186
|
90.6
|
%
|
||||||||
Related
companies
|
1,958,047
|
51.6
|
%
|
266,773
|
9.4
|
%
|
||||||||||
Total
Net Sales
|
3,797,886
|
100
|
%
|
2,840,959
|
100
|
%
|
||||||||||
Cost
of Sales
|
2,101,993
|
55.3
|
%
|
1,442,850
|
50.8
|
%
|
||||||||||
Gross
Profit
|
1,695,893
|
44.7
|
%
|
1,398,109
|
49.2
|
%
|
||||||||||
Selling
Expense
|
317,894
|
8.4
|
%
|
334,913
|
11.8
|
%
|
||||||||||
General
and Administrative
|
1,079,103
|
28.4
|
%
|
713,955
|
25.1
|
%
|
||||||||||
Total
Operating Expenses
|
1,396,996
|
36.8
|
%
|
1,048,868
|
36.9
|
%
|
||||||||||
Income
from Operations
|
298,897
|
7.9
|
%
|
349,241
|
12.3
|
%
|
||||||||||
Other
Income (Expenses), net
|
3,678
|
0.1
|
%
|
3,479
|
0.1
|
%
|
||||||||||
Income
tax expense
|
(134,962
|
)
|
(3.6
|
)%
|
(74,253
|
)
|
(2.6
|
)%
|
||||||||
Net
Income including non-controlling interest
|
167,613
|
4.4
|
%
|
278,467
|
9.8
|
%
|
||||||||||
Less:
net income attributable non-controlling interest
|
(76,189
|
)
|
(2.0
|
)%
|
(32,818
|
)
|
(1.2
|
)%
|
||||||||
Net
Income attributable to Linkwell Corp
|
91,424
|
2.4
|
%
|
245,649
|
8.6
|
%
|
NET
SALES
Net sales
for the three months ended June 30, 2011 were $3,797,886 as compared to net
sales of $2,840,959 for the same period in 2010, an increase of $956,927, or
approximately 33.7%. This increase in net sales was due to our efforts in
developing new customer base and diversity of our products, as well as the
increased demand from our existing customers. Of our total net sales
for the three months ended June 30, 2011, $1,958,047, or approximately 52%, was
attributable to related parties as compared to net sales of $266,773, or
approximately 9%, in 2010.
COST
OF SALES
Cost of
sales includes raw materials and manufacturing costs, which include labor, rent
and an allocated portion of overhead expenses, such as utilities, directly
related to product production. For the three months ended June 30, 2011, cost of
sales amounted to $2,101,993, or approximately 55.3% of net sales, as compared
to the cost of sales of $1,442,850, or approximately 50.8% of net sales for the
same period in 2010. The increase in cost of sales as a
percentage of sales was mainly due to new levied city construction tax and
education surcharge tax for Likang Disinfectant starting from December 2010,
which was previously exempted by the tax authority, as well as the increase in
the price of raw materials.
28
GROSS
PROFIT
Gross
profit for the three months ended June 30, 2011 was $1,695,893, or approximately
44.7% of net revenue, as compared to $1,398,109, or approximately 49.2% of net
revenue for the same period in 2010. The decrease in gross profit margin was
mainly due to the increased cost of revenue as a percentage of
revenue.
OPERATING
EXPENSES
Total
operating expenses consisted of selling, general and administrative expenses.
For the three months ended June 30, 2011, total operating expenses were
$1,396,996, an increase of $348,128, or approximately 33.2%, from total
operating expenses of $1,048,868 for the same period in 2010. The increase in
operating expenses was mainly due to recorded expenses of $120,000 resulted from
settlement of lawsuit, and increased employee salaries as a result of overall
inflation in China.
NONCONTROLLING
INTEREST
On
February 15, 2008, we entered into a stock purchase agreement with Ecolab,
pursuant to which Ecolab purchased and Linkwell Tech sold 888,889 of its shares,
or 10% of the issued and outstanding capital stock of Linkwell Tech, for a total
of $2,000,000. On March 28, 2008 and June 4, 2008, Linkwell Tech received
$200,000 and $1,388,559, respectively, from Ecolab. Linkwell Tech received a
total of $2,000,000 from Ecolab, inclusive of a $400,000 loan that Ecolab
released to Linkwell Tech and accrued interest of $11,441. On May 31, 2008,
Linkwell Tech and Ecolab entered into the Linkwell Tech Group Inc. Stockholders
Agreement, whereby both our Company and Ecolab are subject to, and are the
beneficiaries of, certain pre-emptive rights, transfer restrictions and
take-along rights relating to the shares of Linkwell Tech that we and Ecolab
each hold. As of May 31, 2008, the principal and accrued interest of $11,441 on
the short-term $400,000 loan became part of Ecolab’s investment and no longer
needed to be repaid. After this transaction, Ecolab became a 10% minority
interest holder of Linkwell Tech. For the three months ended June 30, 2011, we
had a minority interest expense of $76,189 as compared to $32,818 in
2010.
NET
INCOME
Our net
income for the three months ended June 30, 2011 was $91,424 compared to $245,649
for the same period in 2010, a decrease of $154,225 or 62.8%. Net
income as a percentage of revenue was 2.4% for the three months ended June 30,
2011, while it was 8.6% for the same period in 2010. This decrease in net income
was attributable to increased cost of goods sold, general and administrative
expenses and income tax for Likang Disinfectant whose income tax rate increased
from 12.5% in 2010 to 15% in 2011.
LIQUIDITY
AND CAPITAL RESOURCES
As shown
in the accompanying financial statements, our working capital increased
$1,476,620, or approximately 11%, from $13,214,658 on December 31, 2010 to
$14,691,278 on June 30, 2011. With the expansion of our businesses, we
anticipate the need to utilize our capital resources in the near future. In
addition to our working capital, we intend to obtain required capital through a
combination of bank loans and the sale of our equity
securities.
29
We
currently have no material commitments for capital expenditures. As of June 30,
2011, we had a total of $1,545,213 in outstanding short-term loans, which will
mature in July 2011. Other than our working capital and loans, we presently have
no other alternative capital resources available to us. We plan to build
additional product lines and upgrade our manufacturing facilities in order to
expand our production capacity and improve the quality of our products. Based on
our preliminary estimates, upgrades and expansion will require additional
capital of approximately $1,000,000.
We need
to raise additional capital to meet the demands described above. We may raise
additional capital through the sale of equity securities. There can be no
assurances that any additional debt or equity financing will be available to us
on acceptable terms, if at all. The inability to obtain debt or equity financing
could have a material adverse effect on our operating results, and as a
result, we could be required to cease or significantly reduce our operations,
seek a merger partner or sell additional securities on terms that may be
disadvantageous to shareholders.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the six months ended June 30, 2011 and
2010:
2011
|
2010
|
|||||||
Cash
provided by (used in):
|
||||||||
Operating
Activities
|
$
|
(2,309,537)
|
$
|
131,491
|
||||
Investing
Activities
|
(178,930)
|
(160,211)
|
||||||
Financing
Activities
|
(353,540)
|
447,515
|
NET
CASH FROM OPERATING ACTIVITES
Net cash
used in operating activities for the six months ended June 30, 2011 was
$2,309,537, as compared to net cash provided by operating activities of
$131,491 for the same period in 2010, an increase of cash outflow of $2,441,028.
The increase in cash outflow in the six months ended June 30, 2011 was mainly a
result of an increase in other receivables outstanding, prepaid expense and
payment for inventory despite increased net income, and timely collection on
accounts receivable from unrelated sales as compared to the same period in
2010.
NET
CASH FROM INVESTING ACTIVITIES
Net cash
used in investing activities for the six months ended June 30, 2011 was $178,930
as compared to net cash used in investing activities of $160,211 in the same
period in 2010, an increase of $18,719. Cash used in investing activities
in the six months ended June 30, 2011 mainly consisted of $149,176 increase of
construction in progress and $29,754 for the purchase of equipment, while in
2010, we spent $117,575 for purchase of fixed assets and $42,636 for
construction in progress.
NET
CASH FROM FINANCING ACTIVITIES
Net cash
provided by financing activities was $353,540 for the six months ended June 30,
2011 compared to net cash provided by financing activities of $447,515 in
the same period of 2010. This increase was primarily a result of $405,498
decrease in due to related parties, a decrease of $376,839 for due from related
parties, and $382,199 proceeds from short-term loan. In comparison to the six
months ended June 30, 2010, we had a $703,276 cash inflow from short-term loans,
and a $255,761 decrease in due to related parties
30
CRITICAL ACCOUNTING
POLICIES
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and
liabilities.
We base
our estimates and judgments on historical experiences and on various other
assumptions we believe to be reasonable under the circumstances. Future events,
however, may differ markedly from our current expectations and assumptions.
While there are a number of significant accounting policies affecting our
consolidated financial statements, we believe the following critical accounting
policies involve the most complex, difficult and subjective estimates and
judgments: allowance for doubtful accounts; income taxes; stock-based
compensation; asset impairment and option value.
While our
significant accounting policies are more fully described in Note 1 to our
consolidated financial statements, we believe the following accounting
policies are the most critical to help develop a full understanding and
evaluation of our management discussion and analysis.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
We
maintain an allowance for doubtful accounts to reduce amounts to their estimated
realizable value. A considerable amount of judgment is required when we
assess the realization of accounts receivables, including assessing the
probability of collection and the current credit-worthiness of each customer. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, an additional provision for
doubtful accounts could be required. We initially record a provision for
doubtful accounts based on our historical experiences, and we then adjust this
provision at the end of each reporting period based on a detailed
assessment of our accounts receivables and allowance for doubtful accounts. In
estimating the provision for doubtful accounts, we consider, among other
factors: (i) the aging of the accounts receivable; (ii) trends within and ratios
involving the age of the accounts receivable; (iii) the customer mix in
each of the aging categories and the nature of the receivable; (iv) our
historical provision for doubtful accounts; (v) the credit worthiness of the
customer; and (vi) the economic conditions of the customer's industry as well as
general economic conditions.
REVENUE
RECOGNITION
Our
revenue recognition policies are in compliance with SEC Staff Accounting
Bulletin (“SAB”) 104 (codified in FASB ASC Topic 480). We record revenue when
persuasive evidence of an arrangement exists, services have been rendered or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectibility is reasonably assured. The following policies
reflect specific criteria for our various revenue streams.
Our
revenue from the sale of products to related parties are recorded when the goods
are shipped to the customers from our related parties. Upon shipment, title
passes, and collectibility is reasonably assured. We receive purchase orders
from our related parties on an as needed basis from the related party customers.
Generally, the related party does not hold our inventory. If the related party
has inventory on hand at the end of a reporting period, the sale is reversed and
the inventory is included in our balance sheet.
31
INCOME
TAXES
We
account for income taxes in accordance with Accounting for Income Taxes,
which prescribes the use of the liability method. Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred
tax assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. We then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we establish a valuation
allowance. To the extent we establish a valuation allowance, or increase or
decrease this allowance in a period, we increase or decrease our income tax
provision in our statement of operations. If any of our estimates of our
prior period taxable income or loss prove to be incorrect, material differences
could impact the amount and timing of income tax benefits or payments for any
period. In addition, as a result of the significant change in our
ownership, our future use of its existing net operating losses may be
limited.
We
currently operate in the PRC, however, our operations could change in the near
future and we could be subject to tax liability involving a consideration of
uncertainties in the application and interpretation of complex tax regulations
in a multitude of jurisdictions across operations in other
countries.
We
recognize potential liabilities and record tax liabilities for anticipated tax
audit issues in the U.S. and other tax jurisdictions based on our estimate of
whether, and the extent to which, additional taxes will be due. The tax
liabilities are a reflected net of realized tax loss carry forwards. We
adjust these reserves upon specific events; however, due to the complexity of
some of these uncertainties, the ultimate resolution may result in a payment
that is different from our current estimate of the tax liabilities. If our
estimate of tax liabilities proves to be less than the ultimate assessment, an
additional charge to expense would result. If payment of these amounts
ultimately proves to be less than the recorded amounts, the reversal of the
liabilities would result in tax benefits being recognized in the period when the
contingency has been resolved and the liabilities are no longer
necessary.
Changes
in tax laws, regulations, agreements and treaties, foreign currency exchange
restrictions or our level of operations or profitability in each taxing
jurisdiction could have an impact upon the amount of income taxes that we
provide during any given year.
FOREIGN
CURRENTY TRANSLATION AND COMPREHENSIVE INCOME (LOSS)
Our functional currency is the Chinese
Yuan - Renminbi (“RMB”). For financial reporting purposes, RMB was translated
into United States dollars ("USD") as the reporting currency. Assets and
liabilities are translated at the exchange rate in effect at the balance sheet
date. Revenue and expenses are translated at the average rate of exchange
prevailing during the reporting period. Translation adjustments arising from the
use of different exchange rates from period to period are included as a
component of shareholders' equity as "Accumulated other comprehensive income."
Gains and losses resulting from foreign currency transactions are included in
income. There has been no significant fluctuation in exchange rate for the
conversion of RMB to USD after the balance sheet date.
32
RECENT
ACCOUNTING PRONOUNCEMENTS
In June
2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic
220): Presentation of Comprehensive Income. Under the
amendments in this update, an entity has the option to present the total of
comprehensive income, the components of net income and the components of other
comprehensive income either in a single continuous statement of comprehensive
income or in two separate but consecutive statements. In both choices, an entity
is required to present each component of net income along with total net income,
each component of other comprehensive income along with a total for other
comprehensive income and a total amount for comprehensive income. In a single
continuous statement, the entity is required to present the components of net
income and total net income, the components of other comprehensive income and a
total for other comprehensive income, along with the total of comprehensive
income in that statement. In the two-statement approach, an entity is required
to present components of net income and total net income in the statement of net
income. The statement of other comprehensive income should immediately follow
the statement of net income and include the components of other comprehensive
income and a total for other comprehensive income, along with a total for
comprehensive income. In addition, the entity is required to present on the face
of the financial statements reclassification adjustments for items that are
reclassified from other comprehensive income to net income in the statement(s)
where the components of net income and the components of other comprehensive
income are presented. The amendments in this update should be applied
retrospectively and are effective for fiscal years, and interim periods
within those years, beginning after December 15, 2011. We are currently
assessing the effect that the adoption of this pronouncement will have on
our financial statements.
In
December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other
(Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts. The amendments in this
update affect all entities that have recognized goodwill and have one or more
reporting units whose carrying amount for purposes of performing Step 1 of the
goodwill impairment test is zero or negative. The amendments in this update
modify Step 1 so that for those reporting units, an entity is required to
perform Step 2 of the goodwill impairment test if it is more likely than not
that a goodwill impairment exists. In determining whether it is more likely than
not that goodwill impairment exists, an entity should consider whether there are
any adverse qualitative factors indicating that impairment may exist. The
qualitative factors are consistent with existing guidance, which requires that
goodwill of a reporting unit be tested for impairment between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. The amendments in this
update are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2010. Early adoption is not permitted. Upon
adoption of the amendments, any resulting goodwill impairment should be recorded
as a cumulative-effect adjustment to retained earnings beginning in the period
of an adoption. Any goodwill impairments occurring after the initial adoption of
the amendments should be included in earnings. The adoption of this ASU did not
have a material impact on our consolidated financial statements.
In
December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805):
Disclosure of Supplementary Pro Forma Information for Business Combinations. The
amendments in this update specify that if a public entity presents comparative
financial statements, the entity should disclose revenue and earnings of the
combined entity as though the business combination(s) that occurred during the
current year had occurred as of the beginning of the comparable prior annual
reporting period only. The amendments also expand the supplemental pro forma
disclosures to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business
combination included in the reported pro forma revenue and earnings. The
amendments in this update are effective prospectively for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. We have adopted the
disclosure requirements for the business combinations in 2011.
33
In April
2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation
– Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades. This Update provides amendments to Accounting Standards
Codification (ASC) Topic 718 to clarify that an employee share-based payment
award with an exercise price denominated in the currency of a market in which a
substantial portion of the entity’s equity securities trades should not be
considered to contain a condition that is not a market, performance, or service
condition. Therefore, an entity would not classify such an award as a liability
if it otherwise qualifies as equity. The amendments in this Update are effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The amendments in this Update should be applied by
recording a cumulative-effect adjustment to the opening balance of retained
earnings. The cumulative-effect adjustment should be calculated for all awards
outstanding as of the beginning of the fiscal year in which the amendments are
initially applied, as if the amendments had been applied consistently since the
inception of the award. The cumulative-effect adjustment should be presented
separately. Earlier application is permitted. The adoption of this ASU did not
have a material impact on our Company’s consolidated financial
statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for our Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have
a material impact on our Company’s consolidated financial
statements.
In
January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.
This update provides amendments to ASC Topic 820 that will provide more robust
disclosures about (1) the different classes of assets and liabilities measured
at fair value, (2) the valuation techniques and inputs used, (3) the activity in
Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and
3. This standard is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
adoption of this ASU did not have a material impact on our Company’s
consolidated financial statements.
CONTRACTUAL
OBLIGATION
Loans
payable consisted of the following at June 30, 2011 and December 31,
2010:
|
2011
|
2010
|
||||||
Loan
from Shanghai Rural Commercial Bank, Dachang Branch due on May 10,
2012 with interest rate of 6.94% per annum. Guaranteed by Shanhai
Group and Mr. Bian, Chairman of the Company (RMB
7,400,000).
|
$
|
1,143,458
|
$
|
739,880
|
||||
Loan
from Shanghai Rural Commercial Bank, Dachang Branch due on July 13,
2011 with interest rate of 5.31% per annum. Guaranteed by Shanhai
Group and Mr. Bian, Chairman of the Company (RMB
2,600,000)
|
401,755
|
392,589
|
||||||
$
|
1,545,213
|
$
|
1,132,469
|
34
OFF-BALANCE
SHEET ARRANGEMENTS
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our stocks and
classified as shareholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We
do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES.
Our
management, with the participation of our principal executive officer, conducted
an evaluation of the design and operation of our disclosure controls and
procedures, as defined under Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), as of June 30, 2011. Our
disclosure controls and procedures are designed (i) to ensure that information
required to be disclosed by it in the reports that we files or submit under the
Exchange Act are recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and (ii) to ensure that
information required to be disclosed in the reports we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer, who also serves as our principal financial officer and
principal accounting officer, to allow timely decisions regarding required
disclosure.
Based on
the evaluation of our disclosure controls and procedures as of June 30, 2011,
our principal executive officer concluded that, as of such date, our disclosure
controls and procedures were not effective to ensure that (i) information
required to be disclosed by our Company in reports that we file or submit under
the Securities Exchange Act of 1934 is accumulated and communicated to our
Company’s management, including the Chief Executive Officer, as appropriate to
allow timely decisions regarding required disclosure by our Company; and (ii)
information required to be disclosed by our Company in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time period specific in the Securities and
Exchange Act rules and forms.
There
were no changes in our internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f)) that occurred during the second quarter ended June
30, 2011 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
35
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
On
May 23, 2011, we entered into a Settlement Agreement (“Settlement Agreement”)
with Alpha Capital Aktiengesellschaft (“Alpha”) and Osher Capital Inc. (“Osher”)
(Alpha and Osher collectively the “Plaintiffs”) for the lawsuit the Plaintiffs
filed against us in the Supreme Court of the State of New York, County of New
York, as previously disclosed in the Quarterly Report Form 10-Q filed with the
SEC on May 16, 2011. In satisfaction of all the obligations stated under the
terms of the Settlement Agreement, we agreed to pay Alpha Eighty Thousand
Dollars ($80,000) and Osher Forty Thousand Dollars ($40,000). Upon the execution
of the Settlement Agreement and in consideration of the terms and conditions in
the Agreement, both parties will mutually release and forever discharge any and
all claims, whether known or unknown, that the parties may now have or may
hereafter have against each other from the beginning of time through the date of
the Settlement Agreement.
ITEM
6. EXHIBITS.
The following documents are filed as a
part of this report or are incorporated by reference to previous filings, if so
indicated:
Exhibit
No.
|
Description
|
|
3.1
|
Articles
of Incorporation (1)
|
|
3.2
|
Articles
of Amendment to Articles of Incorporation (2)
|
|
3.3
|
Articles
of Amendment to Articles of Incorporation (3)
|
|
3.4
|
Articles
of Amendment to Articles of Incorporation (4)
|
|
3.5
|
Articles
of Amendment to the Articles of Incorporation (5)
|
|
3.6
|
Bylaws
(1)
|
|
3.7
|
Articles
of Amendment to the Articles of Incorporation (6)
|
|
31.1
|
Section
302 Certificate of Chief Executive Officer
|
|
31.2
|
Section
302 Certificate of principal financial and accounting officer
*
|
|
32.1
|
Section
906 Certificate of Chief Executive Officer
*
|
*
|
filed
herewith
|
(1)
|
Incorporated
by reference to the Report on Form 8-K as filed on December 8,
1999.
|
(2)
|
Incorporated
by reference to the Report on Form 8-K as filed on December 27,
2001.
|
(3)
|
Incorporated
by reference to the annual report on Form 10-KSB for the fiscal year ended
December 31, 2002.
|
(4)
|
Incorporated
by reference to the Report on Form 8-K as filed on March 17,
2005.
|
(5)
|
Incorporated
by reference to the Report on Form 8-K as filed on August 22,
2006.
|
(6)
|
Incorporated
by reference to the Report on Form 8-K as filed on September 15,
2006.
|
36
LINKWELL
CORPORATION
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Linkwell
Corporation
|
|||
Date:
August 15, 2011
|
By:
|
/s/ Xuelian Bian | |
Xuelian
Bian,
|
|||
Chief
Executive Officer
|
|||
President
and Principal Executive
Officer
|
37