<page>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 2006
Registration No. 333-__________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. __)
LINKWELL CORPORATION
(Name of small business issuer in its charter)
Florida 2842 65-1053546
- --------------------- --------------------- --------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
No. 476 Hutai Branch Road
Baoshan District
Shanghai, China 200436
(86) 21-56689332
(Address and telephone number of principal executive
offices) (Address of principal place of business or intended
principal place of business)
-------------------------
Mr. Xue Lian Bian
Chief Executive Officer
Linkwell Corporation
No. 476 Hutai Branch Road
Baoshan District
Shanghai, China 200436
(86) 21-56689332
(Name, Address and Telephone Number of Agent For Service)
------------------------------
Copies of all communications to:
James M. Schneider, Esq.
Schneider Weinberger & Beilly LLP
2200 Corporate Boulevard, N.W.
Suite 210
Boca Raton, Florida 33431
Telephone: 561-362-9595
Facsimile No: 561-361-9612
Approximate Date of Proposed Sale to the Public: As soon as practicable after
the effective date of this registration statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. []
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. []
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. []
<table>
<caption>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of each Dollar maximum maximum
class of securities Amount to be offering price aggregate amount of
to be registered registered per security offering price(1) registration fee
-------------------- ------------- -------------- ------------------ ----------------
<s> <c> <c> <c> <c>
Common stock,
par value $0.0005
per share (2) 20,608,450 $0.19 $3,915,606 $419
Common stock,
par value $0.0005
per share (3) 3,753,450 $0.10 375,345 41
Common stock,
par value $0.0005
per share (4) 17,991,665 $0.20 3,598,333 386
Common stock,
par value $0.0005
per share (5) 15,000,000 $0.30 4,500,000 482
---
Total Registration Fee $1,328
</table>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933 based on the
average of the high and low sale price of the common stock as reported
on the OTC Bulletin Board on February 6, 2006.
(2) Includes 1,855,000 shares of common stock presently outstanding,
3,753,450 shares of common stock issuable upon the conversion of
375,345 shares of outstanding Series A Convertible Preferred Common
Stock and 15,000,000 shares of common stock issuable upon the
conversion of 1,500,000 shares of outstanding Series B 6% Cumulative
Convertible Preferred Stock.
(3) Includes shares issuable upon the exercise of common stock purchase
warrants with an exercise price of $0.10 per share.
(4) Includes shares issuable upon the exercise of common stock purchase
warrants with an exercise price of $0.20 per share.
(5) Includes shares issuable upon the exercise of common stock purchase
warrants with an exercise price of $0.30 per share.
To the extent permitted by Rule 416, this registration statement also covers
such additional number of shares of common stock as may be issuable as a result
of the anti-dilution provisions of the Series A Convertible Preferred Stock,
Series B 6% Cumulative Convertible Preferred Stock and common stock purchase
warrants listed above.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, dated February 8, 2006
PROSPECTUS
LINKWELL CORPORATION
57,353,565 Shares of Common Stock
This prospectus covers the resale of a total of 57,353,565 shares being
offered by selling security holders listed in the section of this prospectus
entitled "Selling Security Holders." Of the shares covered by this prospectus,
1,855,000 shares are presently outstanding, 18,763,450 shares are issuable upon
the conversion of shares of our Series A Convertible Preferred Stock and Series
B 6% Cumulative Convertible Preferred Stock and 36,745,115 shares are issuable
upon exercise of warrants with exercise prices ranging from $0.10 to $0.30 per
share. We will not receive any of the proceeds from the sale of the shares being
offered by the selling security holders.
For a description of the plan of distribution of the shares, please see
page 60 of this prospectus.
Our common stock is traded on the OTC Bulletin Board under the trading
symbol "LLWL." On February 5, 2006 the last sale price for our common stock was
$0.19.
--------------------------
Investment in our common stock involves a high degree of risk. See
"Risk Factors" beginning on page 4 of this prospectus to read about risks of
investing in our common stock.
--------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is ________________ , 2006
PROSPECTUS SUMMARY
Our company, which is located in Shanghai, China, specializes in the
development, production, sale, and distribution of disinfectant health care
products. We manufacture and sell disinfectant products in tablet, liquid,
powder and aerosol form as well as disinfectant instruments, devices, and
materials such as the air disinfection machine, hot press bag, and disinfection
swabs. Our products are utilized by the medical industry in China.
Our principal executive offices are located at No. 476 Hutai Branch
Road, Baoshan District, Shanghai, China, and our telephone number is
(86)21-566893332. Our fiscal year end is December 31.
When used in this prospectus, the terms "Linkwell" "we," and "us"
refers to Linkwell Corporation, a Florida corporation, our wholly-owned
subsidiary Linkwell Tech Group, Inc., a Florida corporation ("Linkwell Tech")
and Linkwell Tech's 90% owned subsidiary Shanghai Likang Disinfectant High-Tech
Company, Limited ("Likang"). The information which appears on our web site at
www.linkwell.us is not part of this prospectus.
All per share information contained in this prospectus gives effect to
a one for 10 (1:10) reverse stock split effective March 24, 2005.
The Offering
This prospectus covers the resale of a total of 57,353,565 shares of
our common stock by the selling security holders. Of the shares covered by this
prospectus, 1,855,000 shares are presently outstanding, 3,753,450 shares are
issuable upon the conversion of shares of our Series A Convertible Preferred
Stock and 15,000,000 Series B 6% Cumulative Convertible Preferred Stock and
36,745,115 shares are issuable upon exercise of warrants with exercise prices
ranging from $0.10 to $0.30 per share. The selling security holders may resell
their shares from time-to-time, including through broker-dealers, at prevailing
market prices. We will not receive any proceeds from the resale of our shares by
the selling security holders. We will pay all of the fees and expenses
associated with registration of the shares covered by this prospectus.
Common Stock
Outstanding Prior to this Offering: 45,304,139 shares at December
31, 2005
Outstanding After this Offering: 101,192,454 shares, including an
aggregate of 55,888,315 shares
which are reserved for possible
issuance upon the conversion of
outstanding Series A Convertible
Preferred Stock, the conversion
of outstanding Series B
Convertible Preferred Stock,
exercise of outstanding common
stock purchase warrants or
exercise of options granted
under our stock option plans.
Common Stock Reserved: 55,888,315 shares, including:
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o 3,753,450 shares issuable upon the conversion of our
Series A Convertible Preferred Stock, the
resale of which is covered by this prospectus,
o 15,000,000 shares issuable upon the conversion of our
Series B 6% Cumulative Convertible Preferred Stock,
the resale of which is covered by this prospectus, and
o 37,134,865 shares upon the exercise of outstanding
warrants with exercise prices ranging from $0.10
to $2.50 per share, the resale of 36,745,115
shares of which is covered by this prospectus.
Risk Factors The securities offered hereby involve a high degree of
risk and immediate substantial dilution. See "Risk
Factors" and "Dilution."
OTC Bulletin Board
Symbol LWLL
Selected Consolidated Financial Data
The following summary financial information has been derived from the
financial statements that are included elsewhere in this prospectus. In June
2004 Linkwell Tech acquired 90% of Likang through a stock exchange which was
accounted for as a reverse acquisition under the purchase method for business
combinations. The combination was recorded as a recapitalization of Likang and
Linkwell Tech was treated as the continuing entity for accounting purposes. In
May 2005, we acquired Linkwell Tech through a stock exchange. For financial
accounting purposes, the share exchange between our company and Linkwell Tech
was treated as a recapitalization of our company with the former shareholders of
our company retaining approximately 12.5% of the outstanding stock. Our
consolidated financials statements included elsewhere in this prospectus for the
periods after the date of the stock exchange between our company and Linkwell
Tech reflect the change in the capital structure of our company due to the
recapitalization. The consolidated financial statements for the nine months
ended September 30, 2005 reflect the operations of our company including
Linkwell Tech and Likang for the periods presented while the results of
operations for the nine months ended September 30, 2004 are those of Likang. The
historical operating results for the fiscal years ended December 31, 2004 and
2003 are also those of Likang as a result of these transactions.
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Statement of Operations Data:
<table>
<caption>
Nine months ended Year ended
September 30, December 31,
------------------ --------------
2005 2004 2004 2003
(unaudited)
<s> <c> <c> <c> <c>
Net revenues $ 3,826,067 $3,300,022 $ 4,422,522 $3,680,679
Total Operating Expense 861,148 566,583 684,680 431,507
Operating income 411,273 467,047 688,078 292,366
Total other income (expense) (33,062) (20,798) (19,782) (23,620)
Income before minority interest 295,495 373,128 558,564 238,943
Net income $ 257,848 $ 335,815 $ 502,708 $ 215,049
Beneficial conversion feature preferred stock (300,276) 0 0 0
Net income (loss) available to shareholders $ (42,428) $ 335,815 $ 502,708 $ 215,049
Basic and diluted (loss) per common share $ 0.00 $ 0.01 $ .02 $ .01
</table>
<table>
<caption>
Balance Sheet Data:
September 30, 2005 December 31, 2004
------------------ -----------------
(unaudited)
<s> <c> <c>
Working capital $ 1,162,173 $ 849,304
Cash $ 257,590 $ 467,859
Total current assets $ 3,612,795 $ 2,847,870
Total assets $ 3,951,301 $ 3,102,151
Total current liabilities $ 2,450,622 $ 1,998,566
Total liabilities $ 2,676,472 $ 2,421,271
Total shareholders' equity $ 1,080,816 $ 528,316
</table>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this prospectus 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, our ability to increase our revenues,
develop our brands, implement our strategic initiatives, economic, political and
market conditions and fluctuations, government and industry regulation, U.S. 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 in this prospectus. Readers are
cautioned not to place undue reliance on these forward-looking statements and
readers should carefully review this prospectus in its entirety, including the
risks described in "Risk Factors". 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. For any
forward-looking statements contained in any document, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. These forward-looking statements speak
only as of the date of this prospectus, and you should not rely on these
statements without also considering the risks and uncertainties associated with
these statements and our business.
RISK FACTORS
Before you invest in our securities, you should be aware that there are
various risks. Additional risks and uncertainties not presently known to us or
that we currently believe to be immaterial may also adversely affect our
business. You should consider carefully these risk factors, together with all of
the other information included in this prospectus before you decide to purchase
our securities. If any of the following risks and uncertainties develop into
actual events, our business, financial condition or results of operations could
be materially adversely affected and you could lose your entire investment in
our company.
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Risks Related to our Company
We will need additional financing which we may not be able to obtain on
acceptable terms. If we cannot raise additional capital as needed, our ability
to execute our growth strategy and fund our ongoing operations will be in
jeopardy.
Historically, our operations have been financed primarily through the
issuance of equity. Capital is typically needed not only to fund our ongoing
operations and to pay our existing obligations, but capital is also necessary if
we wish to acquire additional assets or companies and for the effective
integration, operation and expansion of these businesses. Our future capital
requirements, however, depend on a number of factors, including our ability to
internally grow our revenues, manage our business and control our expenses. At
September 30, 2005, we had a working capital surplus of $1,162,173. Subsequent
to September 30, 2005 we raised an additional $1,420,000 in working capital.
However, it is likely we will need to raise additional capital to fund our
ongoing operations, pay our existing obligations and for future growth of our
company. We cannot assure you that additional working capital is available to us
in the future upon terms acceptable to us. If we do not raise funds as needed,
our ability to provide for current working capital needs, make additional
acquisitions, grow our company, and continue our existing business and
operations is in jeopardy. In this event, you could lose all of your investment
in our company.
We will need to raise additional capital to expand our operations in future
periods. If we cannot raise sufficient capital, our ability to implement our
business strategies and continue to expand will be at risk.
We want to build an additional manufacturing line and upgrade our
manufacturing facilities and technologies, in order to expand our disinfection
products. Based upon our preliminary estimates this will require capital and
other expenditures of approximately USD $1 million. We do not presently have
sufficient working capital to fund the additional line and upgrade our
manufacturing facilities and technologies, and we will need to raise additional
working capital to complete this project. We do not presently have any external
sources of capital and will in all likelihood raise the capital in a debt or
equity offering. If we raise the necessary capital through the issuance of debt,
this will result in increased interest expense. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our company held by existing shareholders will be reduced and those
shareholders may experience significant dilution. In addition, new securities
may contain certain rights, preferences or privileges that are senior to those
of our common stock. There can be no assurance that acceptable financing to fund
this project can be obtained on suitable terms, if at all. Our ability to
continue to implement our growth strategy could suffer if we are unable to raise
the additional funds on acceptable terms which will have the effect of adversely
affecting our ongoing operations and limiting our ability to increase our
revenues in the future.
The management of our company is located in the PRC and we are materially
dependent upon advisory services of a U.S. company.
None of the current members of our management have any experience in
U.S. public companies and these individuals are not fluent in English. We have
engaged China Direct Investments, Inc. to provide us with various advisory and
consulting services, including U.S. business methods and compliance with SEC
disclosure requirements. We selected China Direct Investments, Inc. to provide
these services to us in part because its staff includes Chinese-speaking
individuals with experience in the operation and regulatory framework applicable
to U.S. public companies. Until such time as we are able to expand our board of
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directors to include English-speaking individuals who have experience with the
operation and regulatory framework applicable to U.S. public companies, we are
materially dependent upon our relationship with China Direct Investments, Inc.
Our contract with this company expires in August 2006, subject to a 12 month
renewal upon the mutual consent of the parties. If for any reason China Direct
Investments, Inc. should fail to provide the contracted services at the
anticipated levels or fails to extend its services and we have not added members
to our board of directors with the requisite experience, the abilities of our
board of directors to do business as a U.S. public company could be materially
and adversely affected. In such instances, we may be unable to prepare and file
reports as required by the Securities Exchange Act of 1934 on a timely basis
which could lead to our common stock being removed from the OTCBB.
Certain agreements to which we are a party and which are material to our
operations lack various legal protections which are customarily contained in
similar contracts prepared in the United States.
We are a Chinese company and all of our business and operations are
conducted in China. We are a party to certain material contracts, including an
agreement for the lease for our principal offices and manufacturing facility.
While these contracts contain the basic business terms of the agreements between
the parties, these contracts do not contain certain provisions which are
customarily contained in similar contracts prepared in the U.S., such as
representations and warranties of the parties, confidentiality and non-compete
clauses, provisions outlining events of defaults, and termination and
jurisdictional clauses. Because our material contracts omit these types of
clauses, notwithstanding the differences in Chinese and U.S. laws we may not
have the same legal protections as we would if the contracts contained these
additional provisions. We anticipate that contracts we enter into in the future
will likewise omit these types of legal protections. While we have not been
subject to any adverse consequences as a result of the omission of these types
of clauses, and we consider the contracts to which we are a party to contain all
the material terms of our business arrangements with the other party, we cannot
assure you that future events will not occur which could have been avoided if
the contracts were prepared in conformity with U.S. standards, or what the
impact, if any, of this hypothetical future events could have on our company.
Each of our product groups operate in highly competitive businesses.
Each of our product groups is subject to competition from other
manufacturers of similar products. There are approximately 1,000 manufacturers
of similar disinfectant products in China, but only approximately 30
manufacturers, including our company, operate on a continuous basis with the
remainder of the companies periodically entering the market in times of
increased demand. While we believe we are one of the leading manufacturers of
disinfectant products in the PRC, from time to time there is a sporadic
oversupply of these products which can adversely impact our market share and
competitive position in this product group. As a result, we cannot assure you
that we will be able to effectively compete in our product segments.
Because of the specialized, technical nature of the business, we are highly
dependent on certain members of management, as well as our marketing,
engineering and technical staff.
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The loss of the services of our current management and skill employees
could have a material and negative effect on our ability to effectively pursue
our business strategy. In addition to manufacturing high volumes of our products
and developing new products, we must attract, recruit and retain a sizeable
workforce of technically competent employees, including additional skilled and
experienced managerial, marketing, engineering and technical personnel. If we
are unable to do so, our ability to effectively pursue our business strategy
could be materially and negatively affected.
We cannot control the cost of our raw materials, which may adversely impact our
profit margin and financial position.
Our principal raw materials are alcohol, trichloroisocyanuric acid,
iodine, potassium iodide, chlorhexidine acetate, glutaraldehyde, triclosan and
sodium dichloroisocyanurate. The prices for these raw materials are subject to
market forces largely beyond our control, including availability and competition
in the market place. The prices for these raw materials have varied
significantly in the past and may vary significantly in the future. We may not
be able to adjust our product prices, especially in the short term, to recover
the costs of increases in these raw materials. Our future profitability may be
adversely affected to the extent we are unable to pass on higher raw material
costs to our customers.
If we experience customer concentration, we may be exposed to all of the risks
faced by our remaining material customers.
For the fiscal year ended December 31, 2004 revenues from one customer
represented approximately 37% of our total net revenues and for the nine months
ended September 30, 2005 revenues from one customer represented approximately
40% of our net revenues. Unless we maintain multiple customer relationships, it
is likely that we will experience periods during which we will be highly
dependent on a limited number of customers. Dependence on a few customers could
make it difficult to negotiate attractive prices for our products and could
expose us to the risk of substantial losses if a single dominant customer stops
conducting business with us. Moreover, to the extent that we are dependent on
any single customer, we are subject to the risks faced by that customer to the
extent that such risks impede the customer's ability to stay in business and
make timely payments to us.
We depend on factories to manufacture our products, which may be insufficiently
insured against damage or loss.
We have no direct business operation, other than our ownership of our
subsidiaries located in China, and our results of operations and financial
condition are currently solely dependent on our subsidiaries' factories in
China. We do not currently maintain insurance to protect against damage and loss
to our facilities and other leasehold improvements. Therefore, any material
damage to, or the loss of, any of our facilities due to fire, severe weather,
flooding or other cause, would not be shared with an insurance company, and if
large enough, would have a material and negative effect on our financial
condition. If the damage was significant, we could be forced to stop operations
until such time as the faculties could be repaired.
Our operations are subject to government regulation. If we fail to comply with
the applicable regulations, our ability to operate in future periods could be in
jeopardy.
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We are subject to various state and local environmental laws related to
our business. We are subject to local food, drug, environmental laws related to
certification of manufacturing and distributing of any disinfectant. We are also
licensed by the Shanghai City Government to manufacture and distribute
disinfectants. While we are in substantial compliance with all provisions of
those registrations, inspections and licenses and have no reason to believe that
they will not be renewed as required by the applicable rules of the Central
Government and the Shandong Province, any non-renewal of these authorities could
result in the cessation of our business activities.
We may not have sufficient protection of certain of our intellectual property.
We utilize certain technologies in the purification of raw material
which are used in our products which are proprietary in nature. To protect our
proprietary rights, we rely generally on confidentiality agreements with
employees and third parties, and agreements with consultants, vendors and
customers, although we have not signed such agreements in every case. Despite
such protections, a third party could, without authorization, utilize our
propriety technologies without our consent. The unauthorized use of this
proprietary information by third parties could adversely affect our business and
operations as well as any competitive advantage we may have in our market
segment. We can give no assurance that our agreements with employees,
consultants and others who participate in the production of our products will
not be breached, or that we will have adequate remedies for any breach, or that
our proprietary technologies will not otherwise become known or independently
developed by competitors.
We have not voluntarily implemented various corporate governance measures, in
the absence of which, shareholders may have reduced protections against
interested director transactions, conflicts of interest and other matters.
We are not subject to any law, rule or regulation requiring that we
adopt any of the corporate governance measures that are required by the rules of
national securities exchanges or The Nasdaq Stock Market such as independent
directors and audit committees. It is possible that if we were to adopt some or
all of the corporate governance measures, shareholders would benefit from
somewhat greater assurances that internal corporate decisions were being made by
disinterested directors and that policies had been implemented to define
responsible conduct. Prospective investors should bear in mind our current lack
of corporate governance measures in formulating their investment decisions
Risks Related to Doing Business in China
Our operations are located in the PRC and may be adversely affected by changes
in the political and economic policies of the Chinese government.
Our business operations may be adversely affected by the political
environment in the PRC. The PRC has operated as a socialist state since 1949 and
is controlled by the Communist Party of China. In recent years, however, the
government has introduced reforms aimed at creating a "socialist market economy"
and policies have been implemented to allow business enterprises greater
autonomy in their operations. Changes in the political leadership of the PRC may
have a significant effect on laws and policies related to the current economic
reforms program, other policies affecting business and the general political,
economic and social environment in the PRC, including the introduction of
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measures to control inflation, changes in the rate or method of taxation, the
imposition of additional restrictions on currency conversion and remittances
abroad, and foreign investment. Moreover, economic reforms and growth in the PRC
have been more successful in certain provinces than in others, and the
continuation or increases of such disparities could affect the political or
social stability of the PRC.
Although we believe that the economic reform and the macroeconomic
measures adopted by the Chinese government have had a positive effect on the
economic development of China, the future direction of these economic reforms is
uncertain and the uncertainty may decrease the attractiveness of our company as
an investment, which may in turn have material and negative impact on the market
price of our stock. In addition, the Chinese economy differs from the economies
of most countries belonging to the Organization for Economic Cooperation and
Development ("OECD"). These differences include:
o economic structure;
o level of government involvement in the economy;
o level of development;
o level of capital reinvestment;
o control of foreign exchange;
o methods of allocating resources; and
o balance of payments position.
As a result of these differences, our business may not develop in the
same way or at the same rate as might be expected if the Chinese economy were
similar to those of the OECD member countries.
The Chinese government exerts substantial influence over the manner in which we
must conduct our business activities.
The PRC only recently has permitted provincial and local economic
autonomy and private economic activities. The government of the PRC has
exercised and continues to exercise substantial control over virtually every
sector of the Chinese economy through regulation and state ownership.
Accordingly, government actions in the future, including any decision not to
continue to support recent economic reforms and to return to a more centrally
planned economy or regional or local variations in the implementation of
economic policies, could have a significant effect on economic conditions in the
PRC or particular regions thereof, and could require us to divest ourselves of
any interest we then hold in Chinese properties.
Future inflation in China may inhibit economic activity in China.
In recent years, the Chinese economy has experienced periods of rapid
expansion and high rates of inflation. During the past 10 years, the rate of
inflation in China has been as high as 20.7% and as low as -2.2%. These factors
have led to the adoption by the PRC government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. While inflation has been more moderate since 1995,
high inflation may in the future cause the PRC government to impose controls on
credit and/or prices, or to take other action, which could inhibit economic
activity in China, and thereby adversely affect the market for our products.
Any recurrence of severe acute respiratory syndrome, or SARS, or another
widespread public health problem, could adversely affect our operations.
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A renewed outbreak of SARS or another widespread public health problem
in China, where all of our revenue is derived, and in Shanghai, where our
operations are headquartered, could have a negative effect on our operations.
Our operations may be impacted by a number of health-related factors, including
the following:
o quarantines or closures of some of our offices which would
severely disrupt our operations,
o the sickness or death of our key officers and employees, and
o a general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public
health problems could adversely affect our operations.
Restrictions on currency exchange may limit our ability to receive and use our
revenues effectively.
Because all of our revenues are in the form of Renminbi, any future
restrictions on currency exchanges may limit our ability to use revenue
generated in Renminbi to fund any future business activities outside China or to
make dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the Renminbi
for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises may only
buy, sell or remit foreign currencies, after providing valid commercial
documents, at those banks authorized to conduct foreign exchange business. In
addition, conversion of Renminbi for capital account items, including direct
investment and loans, is subject to government approval in China, and companies
are required to open and maintain separate foreign exchange accounts for capital
account items. We cannot be certain that the Chinese regulatory authorities will
not impose more stringent restrictions on the convertibility of the Renminbi,
especially with respect to foreign exchange transactions.
We may be unable to enforce our rights due to policies regarding the regulation
of foreign investments in China.
The PRC's legal system is a civil law system based on written statutes
in which decided legal cases have little value as precedents, unlike the common
law system prevalent in the United States. The PRC does not have a
well-developed, consolidated body of laws governing foreign investment
enterprises. As a result, the administration of laws and regulations by
government agencies may be subject to considerable discretion and variation, and
may be subject to influence by external forces unrelated to the legal merits of
a particular matter. China's regulations and policies with respect to foreign
investments are evolving. Definitive regulations and policies with respect to
such matters as the permissible percentage of foreign investment and permissible
rates of equity returns have not yet been published. Statements regarding these
evolving policies have been conflicting and any such policies, as administered,
are likely to be subject to broad interpretation and discretion and to be
modified, perhaps on a case-by-case basis. The uncertainties regarding such
regulations and policies present risks which may affect our ability to achieve
our business objectives. If we are unable to enforce any legal rights we may
have under our contracts or otherwise, our ability to compete with other
companies in our industry could be materially and negatively affected.
-10-
<page>
It may be difficult for shareholders to enforce any judgment obtained in the
United States against us, which may limit the remedies otherwise available to
our shareholders.
All of our assets are located outside the United States and all of our
current operations are conducted in China. Moreover, all of our directors and
officers are nationals or residents of China. All or a substantial portion of
the assets of these persons are located outside the United States. As a result,
it may be difficult for our shareholders to effect service of process within the
United States upon these persons. In addition, there is uncertainty as to
whether the courts of China would recognize or enforce judgments of U.S. courts
obtained against us or such officers and/or directors predicated upon the civil
liability provisions of the securities law of the United States or any state
thereof, or be competent to hear original actions brought in China against us or
such persons predicated upon the securities laws of the United States or any
state thereof.
Risks Related to this Offering
If the selling security holders all elect to sell their shares of our common
stock at the same time, the market price of our shares may decrease.
It is possible that the selling security holders will offer all of the
shares for sale. Further, because it is possible that a significant number of
shares could be sold at the same time hereunder, the sales, or the possibility
thereof, may have a depressive effect on the market price of our common stock.
Provisions of our articles of incorporation and bylaws may delay or prevent a
take-over which may not be in the best interests of our shareholders.
Provisions of our articles of incorporation and bylaws may be deemed to
have anti-takeover effects, which include when and by whom special meetings of
our shareholders may be called, and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of the Nevada Revised Statutes also may
be deemed to have certain anti-takeover effects which include that control of
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless these voting rights are approved by a majority of a
corporation's disinterested shareholders.
In addition, our articles of incorporation authorize the issuance of up
to 10,000,000 shares of preferred stock with such rights and preferences as may
be determined from time to time by our Board of Directors, of which no shares
are currently outstanding. Our Board of Directors may, without shareholder
approval, issue preferred stock with dividends, liquidation, conversion, voting
or other rights that could adversely affect the voting power or other rights of
the holders of our common stock.
Our stock price will fluctuate and could subject our company to litigation.
The market price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond its control. These
factors include:
o quarterly variations in operating results;
o changes in accounting treatments or principles;
o additions or departures of key personnel;
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<page>
o stock market price and volume fluctuations of publicly-traded
companies in general and Chinese-based companies in
particular; and
o general political, economic and market conditions.
Because our stock currently trades below $5.00 per share, and is quoted on the
OTC Bulletin Board, our stock is considered a "penny stock" which can adversely
affect its liquidity.
As the trading price of our common stock is less than $5.00 per share,
our common stock is considered a "penny stock," and trading in our common stock
is subject to the requirements of Rule 15g-9 under the Securities Exchange Act
of 1934. Under this rule, broker/dealers who recommend low-priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements. The broker/dealer must make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction.
SEC regulations also require additional disclosure in connection with
any trades involving a "penny stock," including the delivery, prior to any penny
stock transaction, of a disclosure schedule explaining the penny stock market
and its associated risks. These requirements severely limit the liquidity of
securities in the secondary market because few broker or dealers are likely to
undertake these compliance activities. In addition to the applicability of the
penny stock rules, other risks associated with trading in penny stocks could
also be price fluctuations and the lack of a liquid market.
This prospectus permits selling security holders to resell their shares. If they
do so, the market price for our shares may fall and purchasers of our shares may
be unable to resell them.
This prospectus includes 57,353,565 shares being offered by existing
shareholders, including 1,855,000 shares of common stock which are presently
outstanding, 18,753,450 shares which are issuable upon the conversion of our
Series A Convertible Preferred Stock and Series B 6% Cumulative Convertible
Preferred Stock and 36,745,115 shares issuable upon the exercise of outstanding
common stock purchase warrants exercisable at prices ranging from $0.10 to $0.30
per share. To the extent that these shares are sold into the market for our
shares, there may be an oversupply of shares and an undersupply of purchasers.
If this occurs the market price for our shares may decline significantly and
investors may be unable to sell their shares at a profit, or at all.
We have not voluntarily implemented various corporate governance measures, in
the absence of which, shareholders may have more limited protections against
interested director transactions, conflicts of interest and similar matters.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002,
has resulted in the adoption of various corporate governance measures designed
to promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges and Nasdaq are
those that address board of directors' independence, audit committee oversight,
and the adoption of a code of ethics. Because our stock is not listed on an
exchange or quoted on Nasdaq, we are not required to adopt these corporate
governance standards. While our board of directors has adopted a Code of Ethics,
our Board has not established Audit and Compensation Committees and we have not
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<page>
adopted all of the corporate governance measures which we might otherwise have
been required to adopt if our securities were listed on a national securities
exchange or Nasdaq. It is possible that if we were to adopt all of these
corporate governance measures, shareholders would benefit from somewhat greater
assurances that internal corporate decisions were being made by disinterested
directors and that policies had been implemented to define responsible conduct.
Prospective investors should bear in mind our current lack of corporate
governance measures in formulating their investment decisions.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTCBB. On March 24, 2005 our symbol
was changed from KSHR to LWLL in connection with a 1:10 reverse split of our
common stock effective on that date. The reported high and low bid prices for
the common stock as reported on the OTCBB are shown below for the periods
indicated. The quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions.
High Low
Fiscal 2004
First quarter ended March 31, 2004 $ 0.085 $ 0.02
Second quarter ended June 30, 2004 $ 0.06 $ 0.01
Third quarter ended September 30, 2004 $ 0.02 $ 0.003
Fourth quarter ended December 31, 2004 $ 0.02 $ 0.002
Fiscal 2005
First quarter ended March 31, 2005 $ 0.20 $0.01
Second quarter ended June 30, 2005 $ 0.40 $0.11
Third quarter ended September 30, 2005 $ 0.32 $0.04
Fourth quarter ended December 31, 2005 $ 0.74 $0.148
On February 6, 2006, the last sale price of our common stock as
reported on the OTCBB was $0.19. As of December 31, 2005, there were
approximately 160 record owners of our common stock.
Dividend Policy
We have never paid cash dividends on our common stock. Payment of
dividends will be within the sole discretion of our Board of Directors and will
depend, among other factors, upon our earnings, capital requirements and our
operating and financial condition. At the present time, our anticipated
financial capital requirements are such that we intend to follow a policy of
retaining earnings in order to finance the development of our business.
While we have no current intention of paying dividends on our common
stock, should we decide in the future to do so, as a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiaries. In addition, our
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operating subsidiaries, from time to time, may be subject to restrictions on
their ability to make distributions to us, including as a result of restrictive
covenants in loan agreements, restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory restrictions.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under
our 2001 Equity Compensation Plan and any compensation plan not approved by our
shareholders as of December 31, 2004. We adopted our 2005 Equity Compensation
Plan after the end of fiscal 2004.
<table>
<caption>
Number of Weighted Number of
securities to be average securities remaining
issued upon exercise available for future
exercise of price of issuance under equity
of outstanding outstanding compensation plans
options, warrants options, (excluding securities
and rights (a) warrants reflected in column (a))
and rights (b)
<s> <c> <c> <c>
Plan category
2000 Equity Compensation Plan 188,000 $0.843 290,000
Equity compensation plans
not approved by shareholders 115,745 $8.90 0
Non-Qualified Stock Option Plan 0 n/a 0
</table>
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2005. This table gives no effect to the possible exercise of outstanding options
or common stock purchase warrants or the application of the proceeds therefrom.
The table, which gives no effect to the issuance of 1,500,000 shares of our
Series B 6% Cumulative Convertible Preferred Stock which were sold in December
2005, should be read in conjunction with the financial statements and related
notes included elsewhere in this prospectus.
September 30, 2005
(unaudited)
Long-term liabilities $ 225,850
Shareholders' equity:
Preferred stock, no par value,
10,000,000 shares authorized,
Series A Convertible Preferred Stock, 500,000
shares authorized, 375,345 shares issued and outstanding
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234,240
Common stock, $0.0005 par value,
150,000,000 shares authorized,
45,304,139 shares issued and outstanding 22,652
Additional paid-in capital 1,072,062
Retained earnings ( 117,977)
Deferred compensation ( 146,667)
Other comprehensive gain - foreign currency 16,506
-----------
Total shareholders' equity $1,080,816
Total capitalization $1,306,666
USE OF PROCEEDS
We will not receive any proceeds upon the sale of shares by the selling
security holders. Any proceeds that we receive from the exercise of outstanding
warrants will be used by us for general working capital. The actual allocation
of proceeds realized from the exercise of these securities will depend upon the
amount and timing of such exercises, our operating revenues and cash position at
such time and our working capital requirements. There can be no assurances that
any of the outstanding warrants will be exercised. Pending utilization of any
proceeds from the exercise of warrants, the proceeds will be deposited in
interest bearing accounts or invested in money market instruments, government
obligations, certificates of deposits or similar short-term investment grade
interest bearing investments.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Overview
In May 2005, we closed a share exchange agreement with all of the
shareholders of Linkwell Tech under which we acquired 100% of the issued and
outstanding shares of Linkwell Tech's common stock in exchange for 36,273,470
shares of our common stock, which at closing represented approximately 87.5% of
the issued and outstanding shares of our common stock. As a result of the
transaction, Linkwell Tech became our wholly owned subsidiary. In June, 2004,
prior to our share exchange with Linkwell Tech, Linkwell Tech acquired 90% of
Likang through a stock exchange with Shanghai Likang Pharmaceuticals Technology
Company, Limited, the then 90% shareholder of Likang. Shanghai Shanhai Group, an
unaffiliated third party, owns the remaining 10% of Likang. For financial
accounting purposes, the transaction in which we acquired Linkwell Tech was
treated as a recapitalization of our company with the former shareholders of the
company retaining approximately 12.5% of the outstanding stock. We regard
Likang's business of disinfectant products for the commercial medical industry
as the primary segment of our business. Our consolidated financials statements
included elsewhere in this prospectus for the periods after the date of the
stock exchange between our company and Linkwell Tech reflect the change in the
capital structure of our company due to the recapitalization. The consolidated
financial statements for the nine months ended September 30, 2005 reflect the
operations of our company including Linkwell Tech and Likang for the periods
presented while the results of operations for the nine months ended September
30, 2004 are those of Likang. The historical operating results for the fiscal
years ended December 31, 2004 and 2003 are also those of Likang as a result of
these transactions.
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<page>
Since 1988 we have developed, manufactured and distributed disinfectant
health care products primarily to the medical industry in China. In the last few
years China has witnessed a variety of public health crises, such as the
outbreak of SARS, which demonstrated the need for increased health standards in
China. In response, 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 both hardware; including
facilities and machinery, and software; including the technology to monitor the
facilities, as well as the knowledge and capability of both the production staff
and quality control procedures. Following the adoption of the industry standards
in 2002, we have been granted 26 hygiene licenses by the Ministry of Public
Health.
We believe that the government standards adopted in July 2002 have
increased the barriers to entry for competitors in the disinfectant industry in
China. The implementation of these improved production standards and license
requirements has effectively decreased the competitiveness of small to mid size
manufacturers since the new standards are especially difficult for companies
with limited product offerings and inferior technical content. In addition,
prior to the adoption of industry standards, disinfectant products were
generally marketed and sold based on price as opposed to quality. We believe
that as a result of the adoption of industry standards, the marketplace is
evolving to 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. Recently we have made efforts to expand our
distribution reach to the retail market. We have repackaged certain of our
commercial disinfectant products for sale to the consumer market and have begun
to expand our customer base to include hotels, schools, supermarkets, and
drugstores. By virtue of the Chinese government's continuing focus on educating
the Chinese population about the benefits of proper sanitation procedures, we
believe that another key to increasing our revenues is the continued expansion
of the retail distribution of our products.
The disinfectant industry in China is an emerging industry and the
industry is populated with small, regional companies. We estimate that there are
in excess of 1,000 manufacturers and distributors of disinfectant products in
China; however, most domestic competitors offer a limited line of products and
there are few domestic companies with a nationwide presence. We believe that our
national marketing and sales presence throughout all 22 provinces, as well as
four autonomous regions, and four municipalities of China gives us a competitive
advantage over many other disinfectant companies in China and will enable us to
leverage the brand awareness for products with commercial customers to the
retail marketplace.
Our present manufacturing facilities and production capacities are
sufficient for the foreseeable future, and we believe that we otherwise have the
assets and capital available to us necessary to enable us to increase our
revenues in future periods as the overall market for disinfectant products in
China continues to increase. During the balance of fiscal 2006 we will continue
to focus our efforts on developing a retail market for our products, as well as
expanding our traditional base of commercial customers.
Sale of Aerisys Incorporated
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Prior to the transaction with Linkwell, our wholly-owned subsidiary,
Aerisys Incorporated, had represented our sole operations. Aerisys marketed and
sold the Aerisys Intelligent Community (TM), a web-based software program and
private, browser-based intranet product that allows schools to collaborate with
parents and faculty each day on classroom homework, assignments, critical dates,
team priorities and school news in a private forum, primarily to K through 12
private schools. Revenues from Aerisys Incorporated represented slightly less
than 1% of our total net revenues for the nine months ended September 30, 2005,
and we were not able to improve sales or business opportunities for Aerisys
since May 2005. In February 2006 we sold 100% of the stock of Aerisys
Incorporated to Mr. Gary Verdier, our former CEO, in exchange for assumption of
all liabilities and obligation of Aerisys Incorporated.
Results of Operations
Nine months ended September 30, 2005 as compared to nine months ended
September 30, 2004
The following table provides an overview of the our certain key factors
of our result of operations for the nine months ended September 30, 2005 as
compared to the nine months ended September 30, 2004:
<table>
Nine Months Ended
September 30,
------------- $ %
2005 2004 Change Change
---- ---- --------- ------
(unaudited)
<s> <c> <c> <c> <c>
Net revenues $ 3,826,067 $ 3,300,222 $ 525,045 +15.9%
Cost of sales 2,553,646 2,266,392 $ 287,254 +12.7%
Selling expenses 191,144 165,442 $ 25,702 +15.5%
G&A expenses 670,004 401,141 $ 268,863 +67.0%
Total operating expenses 861,148 566,583 $ 294,565 +52.0%
Operating income 411,273 467,047 $ (55,774) -11.9%
Total other (expense) ( 33,062) ( 20,798) $ 12,264 +59.0%
Net income $ 257,848 $ 335,815 $ (77,967) -23.2%
</table>
<table>
<caption>
Other key indicators:
Fiscal 2005 Fiscal 2004 % of change
----------- ----------- -----------
<s> <c> <c> <c>
Cost of sales as a percentage of revenues 66.7% 68.7% -2.0%
Gross profit margin 33.3% 31.3% +2.0%
Selling expenses as a percentage of revenues 5.0% 5.0% none
G&A expenses as a percentage of revenues 17.5% 12.2% +5.3%
Total operating expenses as a
percentage of revenues 22.5% 17.2% +5.3%
Net income as a percentage of revenues 6.7% 10.2% -3.5%
</table>
Net revenues for nine months ended September 30, 2005 were $3,826,067
as compared to net revenues of $3,300,022 for nine months ended September 30,
2004, an increase of $526,045 or approximately 16%. For the period from May 2,
2005 (acquisition date) to September 30, 2005, we included in our revenues
$22,871 generated from our subsidiary, Aerisys, Incorporated. For the nine
months ended September 30, 2005 and 2004, revenues from our Likang subsidiary,
located in China, amounted to $3,803,196 and $3,300,022, respectively. Our
increase in revenue was attributable to a recent surge in demand for
disinfectant products. Recent health scares such as SARS and the avian flu have
increased the public awareness of health standards in China. In response the
Chinese government has implemented a series of initiatives to establish minimum
health standards. As a result, public demand for disinfectant products has
increased. We cannot be assured that demand will continue to increase.
Additionally Linkwell introduced new products such as Jifro 4% Chlorhexidine
Gluconate, Dianerkang, 2% glutaraldehyde disinfectant, and the revised 84'
disinfectant. Initially, these products have been received favorably by the
public. There is no assurance that these products will continue to witness
increased public demand.
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<page>
For the nine months ended September 30, 2005, cost of sales amounted to
$2,553,646 or approximately 67% of net revenues as compared to cost of sales of
$2,266,392 or approximately 69% of net revenues for the nine months ended
September 30, 2004, a small percentage decrease in cost of sales. We experienced
an increase in overhead costs such as utilities and rent during the nine months
ended September 30, 2005 as compared to the nine months ended September 30,
2004. However, the increase in these expenses was offset by an increase in net
revenues in the current period.
Gross profit for the nine months ended September 30, 2005 was
$1,272,421 or approximately 33% of net revenues, as compared to $1,033,630 or
approximately 31% of revenues for the nine months ended September 30, 2004.
Operating expenses for nine months ended September 30, 2005 were
$861,148, an increase of $294,565, or approximately 52%, from operating expenses
in nine months ended September 30, 2004 of $566,583. This change from the nine
months ended September 30, 2004 to the nine months ended September 30, 2005
included the following:
o For the nine months ended September 30, 2005, selling expenses
amounted to $191,144 as compared to $165,442 for the nine months ended
September 30, 2004, an increase of $25,702 or approximately 16%. This
increase is attributable to increased local tax costs and commissions
associated with our increased revenues. Additionally, in 2005, we incurred
costs of approximately $14,000 in connection with sales training
conferences. We expect our selling expenses to increase as our revenues
increase and expect to spend increased funds on adverting and promotion of
our products as well as sales training.
o For the nine months ended September 30, 2005, general and
administrative expenses were $670,004 as compared to $401,141 for the nine
months ended September 30, 2004, an increase of $268,863, or approximately
67% and included the following:
o We incurred professional fees of approximately $55,262 in connection
with the audit of our financials statements. Additionally, we
experienced an increase in professional fees related to our corporate
SEC filings.
o For the period from May 2, 2005 (date of acquisition) to
September 30, 2005, we incurred expenses of $34,123 related to our
subsidiary Aerisys. This included items such as rent, phone and
utilities.
o In 2005, salaries and wages and related benefits increased
by approximately $69,500 due to the hiring of additional employees.
Additionally, labor-related insurance costs increased by approximately
$48,000.
o We incurred additional operating expenses associated with
overall price increases, increased telephone and communications usage,
and increase travel and entertainment.
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<page>
We reported income from operations of $411,273 for the nine months
ended September 30, 2005 as compared to income from operations of $467,047 for
the nine months ended September 30, 2004, a decrease of $55,774 or approximately
12%. This figure was impacted due to our higher general and administrative
costs.
For the nine months ended September 30, 2005 total other expenses
amounted to $33,062 as compared to $20,798 for the nine months ended September
30, 2004, an increase of $12,264, or approximately 59%, for nine months ended
September 30, 2005 as compared to nine months ended September 30, 2004. Included
in this change is:
o Interest expense was $32,046 as compared to $21,827 for the nine
months ended September 30, 2004, an increase of $10,219 due to
increased borrowings.
Our income before minority interest decreased by $77,633 or 20.8% to
$295,495 for the nine months ended September 30, 2005 as compared to $373,128
for the nine months ended September 30, 2004 primarily as a result of a decrease
in our gross profit margins for the nine months ended September 30, 2005 from
2004 period, together with the increase in total operating expense as described
above.
For the nine months ended September 30, 2005, we reported a minority
interest in income of subsidiary (Likang) in the amount of $37,647 as compared
to $37,313 for the nine months ended September 30, 2004. The minority interest
in income of subsidiary is attributable to Likang, which we allocate to our
minority shareholders, and had the effect of reducing our net income.
As a result of these factors, we reported net income of $257,848 for
the nine months ended September 30, 2005 as compared to net income of $335,815
for the nine months ended September 30, 2004. During the nine months ended
September 30, 2005, we recorded a preferred stock dividend of $300,276 related
to the beneficial conversion feature of our Series A Convertible Preferred
Stock. This translates to an overall per-share loss available to shareholders of
($.00) for the nine months ended September 30, 2005 compared to per-share income
of $.01 for the nine months ended September 30, 2004.
Fiscal year ended December 31, 2004 as compared to the fiscal year ended
December 31, 2003
We reported net revenues of $4,422,522 for the fiscal year ended
December 31, 2004, an increase of $741,843 or approximately 21%. Our increase in
net revenue from fiscal 2003 to fiscal 2004 was attributable to increased demand
for disinfectant products as described earlier in this section.
Cost of sales for fiscal 2004 amounted to $3,0 49,764 or approximately
69% of net revenues as compared to cost of sales of $2,956,806 or approximately
80% of net revenues for fiscal 2003. Gross profit for fiscal 2004 was $1,372,758
or approximately 31% of net revenues, as compared to $723,873 or approximately
20% of net revenues for fiscal 2003. This decrease in costs of sales as a
percentage of net revenues and corresponding increase in gross profit margins
for fiscal 2004 as compared to fiscal 2003 was the result of market acceptance
for our products and reduced sales education costs.
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<page>
Operating expenses for fiscal 2004 increased $253,173, or approximately
58.7%, from operating expenses for fiscal 2003. This increase included the
following:
o For fiscal 2004 selling expenses increased of $53,867 or approximately
26% from fiscal 2003. This increase is attributable to increased local
tax costs and commissions associated with our increased revenues in
fiscal 2004.
o For fiscal 2004 general and administrative expenses increased
$199,306, or approximately 88% from fiscal 2003 as a result of the
need to hire additional support staff.
We reported income from operations of $688,078 for fiscal 2004 as
compared to income from operations of $431,507 for fiscal 2003, an increase of
$395,712 or approximately 135%. This increase is primarily attributable to a
combination of our increased net revenues and larger gross profit margins in
fiscal 2004, which was partially offset by increased operating expenses as
described above.
Total other expenses decreased by $3,838, or approximately 16%, for
fiscal 2004 as compared to fiscal 2003. Included in this change is an increase
of $8,101, or 100%, in other income, which was partially offset by a decrease of
$ 378, or approximately 20%, in interest income and an increase of $3,885, or
approximately 15%, in interest expense due to increased borrowings.
Our income before minority interest increased by $319,621 or
approximately 134% for fiscal 2004 as compared to fiscal 2003 primarily as a
result of increased net revenues and gross profit margins as described above.
For fiscal 2004, we reported a minority interest in income of
subsidiary (Likang) of $55,856 as compared to $23,894 for fiscal 2003. The
minority interest in income of subsidiary is attributable to Likang, which we
allocate to our minority shareholders, and had the effect of reducing our net
income.
As a result of these factors, we reported net income of $502,708 for
fiscal 2004, an increase of $287,659, or approximately 134%, from fiscal 2003.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations and otherwise operate on
an ongoing basis. The following table provides certain selected balance sheet
comparisons between September 30, 2005 (unaudited) and December, 2004:
<table>
<caption>
Sept. 30, Dec. 31
------------------------ $ of % of
2005 2004 Change Change
----------------------------------------------------------
(unaudited)
<s> <c> <c> <c> <c>
Working capital $ 1,162,173 $ 849,304 $ 312,869 + 36.8%
Cash $ 257,590 $ 467,859 $(210,269) - 44.9%
Accounts receivable, net $ 1,496,832 $ 1,099,154 $ 397,678 + 36.2%
Inventories $ 761,183 $ 941,311 $(180,128) - 19.1%
Prepaid expenses $ 85,270 $ 78,242 $ 7,028 + 9.0%
Due from related party $ 1,011,920 $ 261,304 $ 750,616 + 287%
Total current assets $ 3,612,795 $ 2,847,870 $ 764,925 + 26.9%
Property and equipment, net $ 338,506 $ 254,281 $ 84,225 + 33.1%
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Loans payable $ 628,853 $ 301,933 $ 326,920 + 108%
Accounts payable and
accrued expenses $ 1,036,203 $ 1,191,554 $(155,351) - 13.0%
Deferred revenue/income $ 16,334 $ 0 $ 16,334 + 100%
Due to related party $ 19,667 $ 258,242 $(238,575) - 92.4%
Income tax payable $ 105,362 $ 0 $ 105,362 + 100%
Advances from customers $ 644,203 $ 246,837 $ 397,366 + 161%
Total current liabilities $ 2,450,622 $ 1,998,566 $ 452,056 + 22.6%
Total liabilities $ 2,676,472 $ 2,421,271 $ 255,201 + 10.5%
</table>
At September 30, 2005, we had a cash balance of $257,590. As of
September 30, 2005, our cash position by geographic area is as follows:
United States $ 35,841
China 221,749
-------
$ 257,590
Net cash flows provided by operating activities for the nine months
ended September 30, 2005 was $64,529 as compared to net cash provided by
operating activities of $156,150 for the nine months ended September 30, 2004.
For the nine months ended September 30, 2005, we used cash in operations to fund
an increase in accounts receivable of $510,867, increases in amounts due from a
related party of $416,941, repayments of accounts payable and accrued expenses
of $117,801, and repayments in amounts due to a related party of $238,575 offset
by our net income of $257,848, the add back of non-cash items of $193,485,
increases in inventories of $180,128, and increases in advanced from customers
of $397,366. For the nine months ended September 30, 2004, we received cash from
operations from our net income of $335,815, the add back of non-cash items of
$63,500, increases in accounts payable of $812,164, and increases in prepaid
expenses and other current assets of $70,603 offset by cash used in operations
to fund an increase in accounts receivable of $739,759, increases in inventory
of $172,705, repayments in amounts due to a related party of $103,136, and
decreases in advances from customers of $140,309.
Net cash used in investing activities for the nine months ended
September 30, 2005 was $101,848 as compared to net cash used in investing
activities of $96,086 for the nine months ended September 30, 2004, an increase
of $5,762 primarily related to capital expenditures for the acquisition of
manufacturing equipment.
Net cash flows provided by financing activities was $189,456 for the
nine months ended September 30, 2005 as compared to net cash used in financing
activities of $283,206 for the nine months ended September 30, 2004. For the
nine months ended September 30, 2005, we received proceeds from a preferred
stock offering of $234,240 and proceeds from loans payable of $326,920 offset by
increases in amounts due from a related party of $333,675. For the nine months
ended September 30, 2004, we used cash of $283,206 related to increase in
amounts due from a related party.
-21-
<page>
We reported a net decrease in cash for the nine months ended September
30, 2005 of $210,269 as compared to a net decrease in cash of $223,142 for the
nine months ended September 30, 2004.
We currently have no material commitments for capital expenditures,
however during the quarter ended September 30, 2005 we acquired approximately
$80,000 of property and equipment to upgrade our production line.
As of September 30, 2005, we had approximately $629,000 in short term
loans maturing at or prior to April 2006. We plan on renewing these loans when
they become due at term comparable to current terms. If we fail to repay these
obligations with revenues from operations or obtain debt or equity financing to
meet these obligations or fail to obtain extensions of the maturity dates of
these debt obligations, our overall liquidity and capital resources will be
adversely affected as a result of our efforts to satisfy these obligations.
Other than working capital, loans and proceeds from the sale of
preferred stock, we presently have no other alternative source of working
capital. We seek to raise additional capital through the sale of equity
securities. No assurances can be given that we will be successful in obtaining
additional capital, or that such capital will be available in terms acceptable
to our company. At this time, we have no commitments or plans to obtain
additional capital. Further, there can be no assurances that even if such
additional capital is obtained that we will sustain profitability or positive
cash flow.
Recent Capital Raising Transactions
On June 30, 2005, we completed a $300,000 financing consisting of
375,345 shares of our Series A Convertible Preferred Stock, and common stock
purchase warrants to purchase an additional 3,753,450 shares. We sold these
securities to 12 accredited investors in a private transaction exempt from
registration under the Securities Act in reliance on exemptions provided by
Section 4(2) of that act and Regulation D. Each share of Series A Convertible
Preferred Stock is convertible into 10 shares of common stock. Each warrant
entitles the holder to purchase one share of common stock for a period of five
years, at an exercise price of $.10 per share, subject to adjustment. The net
proceeds from the transaction of $234,240 are being used for general working
capital purposes.
On December 28, 2005, we completed a $1,500,000 financing of units of
our securities in a transaction exempt from registration under the Securities
Act in reliance on exemptions provided by Section 4(2) of that act and
Regulation D resulting in gross proceeds to us of $1,500,000. The offering
consisted of 1,500,000 shares of our Series B 6% Cumulative Convertible
Preferred Stock, Class A Common Stock Purchase Warrants to purchase 15,000,000
shares of common stock and Class B Common Stock Purchase Warrants to purchase
15,000,000 shares of common stock. The Class A Warrants are exercisable at $0.20
per share, and the Class B Warrants are exercisable at $0.30 per share, and both
warrants are for a term of five years.
The purchasers of the units were certain accredited institutional and
individual investors. Conversion of the preferred shares and exercise of the
warrants are also subject to a 4.99% cap on the beneficial ownership that each
investor may have at any point in time while the securities are outstanding. We
paid a due diligence fee of $65,000 in cash and Class B Warrants to purchase
866,665 shares of our common stock to certain of the investors. The net proceeds
from the transaction will be used for working capital purposes.
-22-
<page>
We agreed to file a registration statement covering the shares of
common stock underlying the securities issued. This prospectus is part of that
registration statement. In the event the registration statement is not filed by
February 13, 2006 or does not become effective by June 28, 2006, we are required
to pay liquidated damages in the amount of $30,000 per month until the
deficiency is cured. The transaction documents also provide for the payment of
liquidated damages to the investors in certain events, including our failure to
maintain an effective registration statement covering the resale of the common
shares issuable upon conversion or exercise of the securities.
The securities are subject to anti-dilution protections afforded to
the investors. In addition, to the extent that the investors continue to own
shares of our common stock received upon conversion or exercise of the
securities, we have agreed to issue the investors additional shares to protect
against our future issuances of common stock or derivative securities at less
than the price of the common shares underlying the securities.
Critical Accounting Policies
Our financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. These estimates and assumptions are affected by management's
applications of accounting policies. Critical accounting policies for our
company include revenue recognition and the useful lives of property, plant and
equipment.
Revenue Recognition - We follow the guidance of the Securities and
Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In
general, we record revenue when persuasive evidence of an arrangement exists,
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectibility is reasonably assured. We assess whether the
fee associated with our revenue transactions is fixed or determinable based on
the payment terms associated with the transaction. If a significant portion of
the fee is due after our normal payment terms, we access if the fee is not fixed
or determinable. In these cases, we may recognize revenue as the fees become
due. We assess collectibility based on the credit worthiness of the customer and
past transaction history. We perform initial credit evaluations of our customers
and do not require collateral from our customers. If we determine that
collection of a fee is not reasonably assured, we defers the fee and recognize
the revenue at the time that collection becomes reasonably assured. The
following policies reflect specific criteria for our various revenues streams:
o Revenues of Aerisys are recognized at the time the services are
rendered to customers. Services are rendered when our company's
representatives receive the customers' requests and complete the
customers' orders. For contacts over a period of time, Aerisys
recognizes the revenue on a straight-line basis over the period that
the services are provided.
o Our revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
-23-
<page>
We record property and equipment at cost. Depreciation on property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Expenditures for major renewals and betterments that extend
the useful lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred. We review these
long-lived assets for impairment whenever circumstances and situations change
such that there is an indication that the carrying amounts may not be
recoverable. If the undiscounted future cash flows of the long-lived assets are
less than the carrying amount, their carrying amount is reduced to fair value
and an impairment loss is recognized. To date, we have not recognized any
impairment losses.
Accounting for Stock Based Compensation - We account for stock based
compensation utilizing Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. We have chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the estimated fair market value of our stock
at the date of the grant over the amount an employee must pay to acquire the
stock. We have adopted the "disclosure only" alternative described in SFAS 123
and SFAS 148 (See Recent Accounting Pronouncements), which require pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been applied. Because of this election, we continue to account
for our employee stock-based compensation plans under Accounting Principles
Board (APB) Opinion No. 25 and the related interpretations. We are required to
comply with SFAS No. 123 (revised 2004) starting on the first day of our fiscal
year 2006. We are currently evaluating the effect that the adoption of SFAS No.
123 (revised 2004) will have on our consolidated operating results and financial
condition. No stock-based compensation cost is currently reflected in net income
for employee and director option grants as all options granted under the 2005
Incentive Stock Plan and the Non-Employee Directors Stock Plan had an exercise
price equal to the market value of the underlying common stock on the date of
grant.
Recent Accounting Pronouncements
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based
Payment, an Amendment of FASB Statement No. 123" ("FAS No.123R"). FAS No. 123R
requires companies to recognize in the statement of operations the grant date
fair value of stock options and other equity-based compensation issued to
employees. FAS No. 123R is effective for the first fiscal year beginning after
December 15, 2005. We are in process of evaluating the impact of this
pronouncement on its financial position.
In April 2005, the Securities and Exchange Commission's Office of the
Chief Accountant and its Division of Corporation Finance has released Staff
Accounting Bulletin (SAB) No.107 to provide guidance regarding the application
of FASB Statement No.123 (revised 2004), Share-Based Payment. Statement No.
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SAB 107 provides
interpretative guidance related to the interaction between Statement No. 123R
and certain SEC rules and regulations, as well as the staff's views regarding
the valuation of share-based payment arrangements for public companies. SAB 107
also reminds public companies of the importance of including disclosures within
filings made with the SEC relating to the accounting for share-based payment
transactions, particularly during the transition to Statement No. 123R.
-24-
<page>
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 154, "Accounting Changes and
Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). This Statement replaces APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. This Statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
APB Opinion No. 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period of
the change the cumulative effect of changing to the new accounting principle.
This Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, this Statement requires that the new
accounting principle be applied as if it were adopted prospectively from the
earliest date practicable. This Statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. We do not believe that the adoption of SFAS 154 will have a
significant effect on its financial statements.
Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the consolidated
financial statements upon adoption.
Change of Independent Registered Public Accounting Firm
On May 12, 2005, we dismissed Berkovits, Lago & Company, LLP as our
independent registered public accounting firm. Berkovits, Lago & Company, LLP
had been the independent registered public accounting firm for and audited the
consolidated financial statements of our company as of December 31, 2004 and
2003. The reports of Berkovits, Lago & Company, LLP on our financial statements
for the past two fiscal years contained no adverse opinion or disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principles, except such reports were modified as to an explanatory
paragraph relating to our ability to continue as a "going concern" as a result
of its lack of existing commitments from lenders to provide necessary financing,
lack of sufficient working capital, and recurring losses from operations. The
decision to change accountants was approved unanimously by the Board of
Directors.
-25-
<page>
In connection with the audit for the two most recent fiscal years and
in connection with Berkovits, Lago & Company, LLP's review of the subsequent
interim periods preceding dismissal on May 12, 2005, there were no disagreements
between our company and Berkovits, Lago & Company, LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to the satisfaction of Berkovits,
Lago & Company, LLP, would have caused Berkovits, Lago & Company, LLP to make
reference thereto in their report on our financial statements for these fiscal
years. During the two most recent fiscal years and prior to the date of
dismissal we had no reportable events (as defined in Item 304(a)(1) of
Regulation S-B).
On May 12, 2005 we engaged Sherb & Co., LLP as our independent
registered public accounting firm. We had not consulted with Sherb & Co., LLP
regarding the application of accounting principles to any contemplated or
completed transactions nor the type of audit opinion that might be rendered on
our financial statements, and neither written nor oral advice was provided that
would be an important factor considered by us in reaching a decision as to an
accounting, auditing or financial reporting issues.
OUR BUSINESS
Overview
We operate under a holding company structure and currently have one
operating subsidiary, Linkwell Tech. Linkwell Tech owns 90% of Likang and we
regard Likang's business of hospital disinfectant products as our primary
business.
Through our subsidiary we are involved in the development, manufacture,
sale and distribution of disinfectant health care products primarily to the
medical industry in China. Likang was founded by the Second Military Medical
University of the Chinese Army in 1988. Recently we have made efforts to
penetrate the civil disinfection, industrial disinfection, livestock and
agricultural disinfection markets of China. Currently we offer a variety of
disinfectant products for the following applications:
|X| Skin and mucous membrane disinfection
|X| Hand disinfectants (external)
|X| Environment and surface disinfectants
|X| Medical devices and equipment disinfectants
|X| Machine disinfectants
We have been granted 26 hygiene licenses by the Ministry of Public
Health of the central government of China. We have filed two additional product
applications, and are presently developing three additional products. We also
sell products which have been developed and manufactured by third parties. These
parties manufacture disinfectant products which generate approximately 5% of our
revenue and products which we manufacture account for approximately 95% of our
total revenues for the fiscal year ended December 31, 2005.
We have a national marketing and sales presence throughout all 22
provinces as well as four autonomous regions and four municipalities of China.
We currently employ 19 full-time sales and marketing people based in Shanghai
and 72 independent sales representatives in various provinces of China.
-26-
<page>
Industry Background
Likang is a member of the disinfectant industry in China. According to
a survey conducted by China Federation of Industrial Economics (CFIC), the
disinfectant market in China is approximately $6.25 billion (USD) in 2004(1).
The disinfectant industry in China is an emerging market. Currently we market
our products to the medical industry in China and we have recently made efforts
to diversify and expand our reach to the retail market.
Recent Health Concerns in China
China has witnessed a variety of public health crises in recent history
and which demonstrated the need for increased health standards in China. In
response, the Chinese government has taken initiatives to improve public health
and living standards, including the establishment by The Ministry of Public
Health in China for the disinfectant industry in China. The heightened public
concerns as well as these new public standards have led to a surge in interest
for disinfectant products in China with consumers maintaining stockpiles of
disinfectant products. This activity represented a surge in sales for the
industry. We believe that the stockpiles will continue to deplete which may lead
to an additional surge in demand. There is no assurance as to the timing of this
surge; however increased public awareness and heightened national standards, a
growing population, and a higher standard of living, are just a few factors
which we believe support the growth of demand for disinfectant products.
The table illustrates recent health care crises in China.
<table>
<s> <c> <c> <c>
Outbreak time Location Disease Situation
- ----------------------- ----------------------- --------------------- -----------------------------------------
January, 1988 Shanghai Hepatitis A 310,000 reported cases of Hepatitis A,
47 deaths
- ----------------------- ----------------------- --------------------- -----------------------------------------
April - May, 1998 Shengzhen Sub- Tuberculosis Shenzhen Woman and Children Hospital
bacillus disease reports an airborne infection. 168
M. chelonae patients infected, 46 severe cases
- ----------------------- ----------------------- --------------------- -----------------------------------------
November 2002 Throughout China SARS 8,000 reported cases, 800 deaths
- ----------------------- ----------------------- --------------------- -----------------------------------------
June 24 - August 20 Sichuan Province Swine Streptococcus 204 reported cases of humans infected
2005 suis with the Swine streptococci in Sichuan,
38 deaths
- ----------------------- ----------------------- --------------------- -----------------------------------------
April 2005 Throughout China Pulmonary Pulmonary tuberculosis, Hepatitis B
tuberculosis, remain top 2 priorities on the
Hepatitis B infectious disease list in China
- ----------------------- ----------------------- --------------------- -----------------------------------------
June, 2005 Tibet Bubonic plague 5 infected cases reported, 2 deaths
- ----------------------- ----------------------- --------------------- -----------------------------------------
July-September 2005 Hunan, Fujian, Cholera 638 cases reported, 2 deaths
Zhejiang provinces
- ----------------------- ----------------------- --------------------- -----------------------------------------
August, 2005 Guizhou, Ningxia, Anthrax 140 cases reported, 1 death
Liaoning, Jilin
- ----------------------- ----------------------- --------------------- -----------------------------------------
October, 2005 Inner Mongol , Hunan Avian Flu 3 confirmed cases reported, 2 deaths
, Anhui , Liaoning ,
and Hubei provinces
- ----------------------- ----------------------- --------------------- -----------------------------------------
</table>
1 http://cfie.org.cn/main000.jsp
-27-
<page>
SARS - Severe Acute Respiratory Syndrome
In recent years the Severe Acute Respiratory Syndrome (SARS) has
threatened the public community. SARS, which is a viral respiratory illness
caused by a corona virus, called SARS-associated corona virus (SARS-CoV), was
first reported in Asia in November 2002. Over the next few months, the illness
spread to more than two dozen countries in North America, South America, Europe,
and Asia before the SARS global outbreak of 2003 was contained. In April 2004,
the Chinese Ministry of Health reported several new cases of possible SARS in
Beijing and the Anhui Province, which is located in east-central China.
According to the Center for Disease Control of the central government
of China, the common manner in which SARS seems to spread is by close
person-to-person contact. The virus that causes SARS is thought to be
transmitted most readily by respiratory droplets ("droplet spread") when an
infected person coughs or sneezes. Droplet spread occurs as germs from the cough
or sneeze of an infected person are propelled a short distance (generally up to
three feet) through the air and deposited on the mucous membranes of the mouth,
nose, or eyes of nearby persons. The virus also can spread when a person touches
a surface or object contaminated with infectious droplets and then touches his
or her mouth, nose, or eye(s). Ultimately there is much the global community
does not know about SARS, and it is possible that the SARS virus might spread
more broadly through the air (airborne spread) or by other ways that are not yet
known.
Avian Influenza
In 2005, the threat of a global pandemic as a result of the avian flu
has captured the attention of the global community. The avian flu is a type of
the A strain virus that infects birds. Typically, it is not common for humans to
be infected with the virus via contact with birds, however a few bird-to-human
outbreaks have been reported; most have been in Asia. Humans were infected when
they came into contact with sick birds or contaminated surfaces. In most cases,
infected persons reported flu-like symptoms, but some had more serious
complications, including pneumonia and acute respiratory distress. The avian flu
has led to increased concerns for improved health conditions.
China Health Standards
In July 2002, the Chinese Ministry of Public Health issued the 27th
order of Ministry of Health of the People's Republic of China establishing
national standards for the disinfection industry. The first criterion of the new
order stipulated that disinfectant manufacturers in China must obtain a license
to manufacture hygiene disinfectants. Secondly, prior to release, all
disinfectant instruments must obtain the official hygiene permit document of
both the local provincial hygiene administrative department and the Ministry of
Public Health.
The process to obtain a manufacturing license, involves three stages:
o Manufacturers file application materials to local public health
administrative department;
o Local administrative department perform an inspection of the
manufacturing facilities according to "qualified disinfection
product manufacturing enterprise requirements"; and
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<page>
o Upon satisfaction of "qualified disinfection product
manufacturing enterprise requirements", the manufacturer will be
issued a license
The process to obtain the official hygiene permit for individual
disinfectant or instrument, the company must follow the steps listed as below:
1. File the application;
2. Explain disinfectant ingredient or instrument layout and
function;
3. Hygiene administrative department will examine the
sample, and perform independent tests to verify industry
standards and benefits; and
4. If all the standards are met, the permit will be issued.
The table below details the 26 licenses issued to Likang by the
Ministry of Public Health of the central government of China.
# PRODUCTS DATE
- ----------- ----------------------------------------------------- --------------
1 An'erdian Skin Disinfectant 2003.2.13
- ----------- ----------------------------------------------------- --------------
2 An'erdian type 2nd skin disinfectant 2002.11.22
- ----------- ----------------------------------------------------- --------------
3 An'erdian type 3rd skin and mucous
membrane disinfectant 2005.1.19
- ----------- ----------------------------------------------------- --------------
4 Dian'erkang Aerosol Disinfectant 2004.3.22
- ----------- ----------------------------------------------------- --------------
5 Dian'erkang 2% glutaraldehyde disinfectant 2002.11.22
- ----------- ----------------------------------------------------- --------------
6 Aiershi disinfectant tablets 2004.2.9
- ----------- ----------------------------------------------------- --------------
7 Aiershi disinfectant 2004.2.9
- ----------- ----------------------------------------------------- --------------
8 Dian'erkang PVP-I disinfectant 2005.3.30
- ----------- ----------------------------------------------------- --------------
9 Dian'erkang Iodophor disinfectant 2004.2.19
- ----------- ----------------------------------------------------- --------------
10 Jifro disinfectant gel 2005.1.19
- ----------- ----------------------------------------------------- --------------
11 Dian'erkang alcohol disinfectant 2003.12.23
- ----------- ----------------------------------------------------- --------------
12 Jifro disinfectant 2003.2.13
- ----------- ----------------------------------------------------- --------------
13 JifroTaixin disinfectant 2003.2.13
- ----------- ----------------------------------------------------- --------------
14 Dian'erkang compound iodine disinfectant 2004.4.28
- ----------- ----------------------------------------------------- --------------
15 Lvshaxing disinfectant granule 2004.2.19
- ----------- ----------------------------------------------------- --------------
16 Lvshaxing disinfectant tablets 2004.3.29
- ----------- ----------------------------------------------------- --------------
17 Likang test paper of chlorine 2004.1.16
- ----------- ----------------------------------------------------- --------------
18 Lvshaxing LKQG-1000 air disinfection machine 2004.3.10
- ----------- ----------------------------------------------------- --------------
19 Jifro 4% Chlorhexidine gluconate surgical hand scrub 2004.9.7
- ----------- ----------------------------------------------------- --------------
20 JifroSongning disinfectant 2004.9.7
- ----------- ----------------------------------------------------- --------------
21 Lineng glutaraldehyde disinfectant 2005.2.17
- ----------- ----------------------------------------------------- --------------
22 Likang 121 stream pressure sterilization chemical
indicator 2005.3.30
- ----------- ----------------------------------------------------- --------------
23 Likang 132 stream pressure sterilization
chemical indicator 2005.3.30
- ----------- ----------------------------------------------------- --------------
24 Likang stream pressure sterilization
chemical indicator 2005.4.1
- ----------- ----------------------------------------------------- --------------
25 Likang 84 disinfectant 2005.6.27
- ----------- ----------------------------------------------------- --------------
26 Likang Glutaraldehyde Monitors (Strip) 2005.12.14
- ----------- ----------------------------------------------------- --------------
Product Lines
We offer a diverse range of product offerings. We manufacture 38
disinfectant products and our product offerings come in three primary forms:
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<page>
o Liquids-gel
o Tablets-powder
o Aerosol
Our disinfectant products range from air disinfection machines to hot
press bags, disinfection swabs, and disinfection indicators. We believe that
this wide product line has served as an advantage for our company in our efforts
to create a national audience for our products and services.
Approximately 95% of our sales are derived from products we have
internally developed and produced and the remaining 5% of sales are produced by
outside companies. The tables below offer a summary of our current product
offerings:
Skin and Mucous Membrane Disinfectants
Skin and mucous membrane disinfectants target both exterior and
internal applications. Prior to operations, incisions, or injections; the
products can clean the skin surface. Mucous membrane disinfectants target
internal germs located in the mouth, eye, perineum and other internal sources.
This product group accounted for approximately 50% of our 2004 sales and
approximately 57% of our 2005 sales.
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<page>
<table>
<s> <c> <c> <c>
PRODUCT NAMES INGREDIENTS APPLICATION INDUSTRY STANDARD
- --------------------------------------------- --------------------- ----------------------- -------------------------
An'erdian Skin Disinfectant iodine, alcohol Skin Disinfectant Q/SUVE 20-2003
- --------------------------------------------- --------------------- ----------------------- -------------------------
An'erdian type 3rd skin and mucous membrane iodine, skin & mucous Q/SUVE 22-2003
disinfectant chlorhexidine membrane disinfectant
- --------------------------------------------- --------------------- ----------------------- -------------------------
Dian'erkang PVP-I disinfectant Povidone-iodine skin & mucous Q/SUVE 28-2004
membrane disinfectant
- --------------------------------------------- --------------------- ----------------------- -------------------------
Dian'erkang alcohol disinfectant alcohol Skin disinfectant Q/SUVE 08-2004
- --------------------------------------------- --------------------- ----------------------- -------------------------
</table>
Hand Disinfectants
Theses disinfectants target the skin surface. Products are applied to
the skin prior to medial procedures. This product group accounted for
approximately 6% of our 2004 sales and approximately 10% of our 2005 sales.
<table>
<s> <c> <c> <c>
PRODUCT NAMES INGREDIENTS APPLICATION INDUSTRY STANDARD
- -------------------------------------------- ------------------ --------------------------- -------------------------
Jifro antimicrobial hand washing Chlorhexidine Hand washing Q/SUVE 04-2003
- -------------------------------------------- ------------------ --------------------------- -------------------------
Jifro disinfectant gel DP300 (Triclosan) Hand disinfectant Q/SUVE 02-2003
- -------------------------------------------- ------------------ --------------------------- -------------------------
Jifro 4% Chlorhexidine gluconate surgical Chlorhexidine surgical hand disinfectant Q/SUVE 09-2004
hand scrub gluconate
- -------------------------------------------- ------------------ --------------------------- -------------------------
</table>
Environment and Surface Disinfectants
These disinfectants target a variety of surfaces, such as floors,
walls, tables, and medical devices. Additionally the products can be applied to
cloth materials including furniture and bedding. This product group accounted
for approximately 17.5% of our 2004 sales and approximately 15% of our 2005
sales.
<table>
<s> <c> <c> <c>
PRODUCT NAMES INGREDIENTS APPLICATION INDUSTRY STANDARD
- ---------------------------- --------------------------------- ---------------------------- -------------------------
Aiershi disinfectant Trichloroisocyanuric acid Circumstance and surface Q/SUVE 34-2004
tablets disinfection
- ---------------------------- --------------------------------- ---------------------------- -------------------------
Lvshaxing disinfectant Dichloro dimethylhydantoin Circumstance and surface Q/SUVE 33-2003
tablets disinfection
- ---------------------------- --------------------------------- ---------------------------- -------------------------
Dian'erkang Aerosol Benzethonium Chloride Circumstance and surface Q/SUVE 07-2004
Disinfectant disinfection, preventing
the spread of
airborne viruses
such as human
influenza virus,
SARS and the Bird
flu virus.
- ---------------------------- --------------------------------- ---------------------------- -------------------------
Lvshaxing disinfectant Dichloro dimethylhydantoin Circumstance and surface Q/SUVE 32-2003
granule disinfection
- ---------------------------- --------------------------------- ---------------------------- -------------------------
</table>
Medical Devices and Equipment Disinfectants
This line of disinfectants target medical equipment including the
sterilization of thermo sensitive instruments and endoscope equipment. This
product group accounted for approximately 16% of our 2004 and approximately 12%
of our 2005 sales.
<table>
<s> <c> <c> <c>
PRODUCT NAMES INGREDIENTS APPLICATION INDUSTRY STANDARD
- ------------------------------------------ ---------------------- ------------------------- -------------------------
Dian'erkang 2% glutaraldehyde Glutaraldehyde Disinfection and Q/SUVE 10-2003
disinfectant sterilization of device
- ------------------------------------------ ---------------------- ------------------------- -------------------------
Dian'erkang 2% glutaraldehyde Glutaraldehyde Disinfection and Q/SUVE 10-2003
disinfectant (for the sterilization of
endoscopes
- ------------------------------------------ ---------------------- ------------------------- -------------------------
Dian'erkang multi-enzyme rapid detergents Multi-Enzyme Rinsing and Q/SUVE 14-2004
decontamination of
device
- ------------------------------------------ ---------------------- ------------------------- -------------------------
</table>
Machine Series
This line of disinfectants targets air quality. The devices will
monitor and disinfect air quality. This product group accounted for
approximately 1% of our 2004 sales and approximately 3% of our 2005 sales.
<table>
<s> <c> <c> <c>
PRODUCT NAMES INGREDIENTS APPLICATION INDUSTRY STANDARD
- --------------------------------------------- ------------------ -------------------------- -------------------------
Lvshaxing LKQG-1000 air disinfection machine Ozone, Air disinfection Q/SUPE 09-2003
ultraviolet
radiation,
electrostatic
- --------------------------------------------- ------------------ -------------------------- -------------------------
An'erdian disinfection swab An'erdian Skin & disinfection Q/NYMN07-2003
- --------------------------------------------- ------------------ -------------------------- -------------------------
Dian'erkang hot press bag Iron powder, Drive the "feng" Stop Q/NYMN01-2001
active carbon the pain Dispel the
"han"
- --------------------------------------------- ------------------ -------------------------- -------------------------
Likang test paper of chlorine reaction regent Indicator of Q/SUVE 40-2003
disinfectant
concentration
- --------------------------------------------- ------------------ -------------------------- -------------------------
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Likang 121 stream pressure sterilization Indication oil Indication of Q/SUVE 16-2005
chemical indicator sterilization effect
- --------------------------------------------- ------------------ -------------------------- -------------------------
Likang 132 stream pressure sterilization Indication oil Indication of Q/SUVE 17-2005
chemical indicator sterilization effect
- --------------------------------------------- ------------------ -------------------------- -------------------------
Likang stream pressure sterilization Indication oil Indication of Q/SUVE 18-2005
chemical indicator sterilization effect
- --------------------------------------------- ------------------ -------------------------- -------------------------
</table>
Retail products
Recently we have made efforts to expand our distribution reach to the
retail market. As a result our products have gained access to hotels, schools,
supermarkets, and drugstores. We have repackaged commercial disinfectant
products for sale to the consumer market. Since October 1999, we redeveloped
four separate products for distribution to the retail market. Likang redeveloped
the following products:
- Jin Zhongda collutory (mouth wash) October 1999
- antibacterial lubricant October 1999
- Likang 84 disinfectant August 2005
- Dian'erkang aerosol disinfectant October 2005
Customers
We sell our products on a wholesale and retail basis to the medical
community in China. We have approximately 5,000 active and recurring customers
including hospitals, medical suppliers and distribution companies throughout
China. We maintain about over 20 distribution contracts with wholesale dealers
and agents. We generally offer payment terms of three to six months before
payment for the products is due. For fiscal years ended December 31, 2005 and
2004 one customer, Shanghai Likang Pharmaceutical Technology Company, Limited,
an affiliate, represented approximately 40% and approximately 37% of our total
net revenues. See "Certain Relationships and Related Transactions" appearing
later in this prospectus. We have contracts with all our dealer and agent
customers.
Manufacturing
We operate two factory facilities in Shanghai, one located in the
Shanghai Jiading district and one located in the Shanghai Jinshan district.
Products are manufactured primarily in liquid, tablet, and powder form.
Approximately 95% of Likang revenues are derived from products manufactured in
these two factories.
The Shanghai Jiading district factory is approximately 21,500 square
feet, all of which is used for production. This factory meets the good
manufacturing practice ("GMP") standards established by the central government
for the production of medical and chemical products. The main products produced
here are liquid and index disinfectant devices. The manufacturing facility has
the capacity to produce approximately 9 million liters of liquid disinfectant
annually. The manufacturing cycle for the liquids, from formulation to finish
product, is one day.
The Shanghai Jinshan district factory located is approximately 4,300
square feet and is used in the manufacture of the tablet and powder forms of
disinfectants. The manufacturing capacity is 300 metric tons of tablet and 180
metric tons of powder disinfectant annually. The manufacturing cycle for the
tablets and powder, from formulation to finish product, is one day.
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Products which represent the remaining approximate 5% of our revenues
are manufactured by third parties as set forth below:
% OF
PRODUCT MANUFACTURER REVENUE
- ----------------------------- --------------------------------------- ---------
Lvshaxing Air Disinfectant Shanghai Likang Meirui Pharmaceutical
Machine High-Tech Co., Ltd.
- ----------------------------- --------------------------------------- 2%
Likang Surgery hand-washing Shanghai Likang Meirui Pharmaceutical
Table High-Tech Co., Ltd.
- ----------------------------- --------------------------------------- ---------
Junle disinfectant Shanghai JunLe Daily Chemicals Co., Ltd.
- ----------------------------- ---------------------------------------
Jiewang disinfectant Hangzhou JieWang Disinfectant Co., Ltd 3%
- ----------------------------- ---------------------------------------
Shenle disinfectant Shanghai ShenLe Daily Chemicals Co., Ltd.
- ----------------------------- ---------------------------------------
Sterilized Q-tip (very Shanghai DiCheng Health Products
small quantity) Manufacturing Co., Ltd
- ----------------------------- --------------------------------------- ---------
We package our products in various packages to meet different needs
from the market.
Liquid and gel disinfectants
- 40 ml - 750ml
- 50 ml - 1L
- 60 ml - 1.5L
- 80 ml - 2.5L
- 500ml - 5L
Tablets disinfectants
- 50 tablets/bottle each tablet is 1g which contains
500ml active chlorine
- 100 tablets/bottle
- 200 tablets/bottle
Powder disinfectants
- 250g
- 500g.
We maintain an inventory of finished products equal to approximately
2.5 months average sales. Currently, we are manufacturing at about 50% of full
capacity based upon our current product demand, and we have the ability to
produce at full capacity if demand continues to increase.
We have an in-house fulfillment and distribution operation, which is
used to manage the supply chain, beginning with the placement of the order,
continuing through order processing, and then fulfilling and shipping of the
product to the customer. We maintain inventory and fill customer orders from
both Jiading factory and Jinshan factory.
Raw Materials
We purchase raw materials from six primary suppliers and we have signed
purchase contracts with these suppliers in an effort to ensure a steady supply
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of raw materials. We have maintained stable business relations with these
suppliers for over 10 years, and we believe that our relationships with these
primary suppliers will remain stable. In the event the relationships falter,
there are many suppliers with the capability to supply our company. We purchase
raw materials on payment terms of 30 days to three months. These suppliers
import from foreign countries listed as below and we purchase directly from
these suppliers.
The table below details the supply relationships for raw materials
RAW MATERIALS SUPPLIERS ORIGIN
- ---------------------- --------------------------------------- ------------
Iodine Shanghai Wenshui Chemical Co., Ltd USA
- ---------------------- --------------------------------------- ------------
Potassium iodide Shanghai Wenshui Chemical Co., Ltd Holland
- ---------------------- --------------------------------------- ------------
Glutaraldehyde Shanghai Jin an tang Hygienical
Product Factory Germany
- ---------------------- --------------------------------------- ------------
Triclosan Ciba Specialty Chemicals (China)LTD Domestic
- ---------------------- --------------------------------------- ------------
Alcohol Shanghai Jangbo Chemical Co., Ltd Domestic
- ---------------------- --------------------------------------- ------------
Trichloroisocyanuric Xuzhou Keweisi Disinfectant Co., Ltd Domestic
acid
- ---------------------- --------------------------------------- ------------
Ozone producing Shanghai Likang Meirui Pharmaceutical
device equipment High-Tech Co., Ltd. Domestic
- ---------------------- --------------------------------------- ------------
Ultraviolet radiation Shanghai Likang Meirui Pharmaceutical
lamp light High-Tech Co., Ltd. Domestic
- ---------------------- --------------------------------------- ------------
Customer Service and Support
We believe that a high level of customer service and support is
critical in retaining and expanding our customer base. Customer care
representatives participate in ongoing training programs under the supervision
of our training managers. These training sessions include a variety of topics
such as product knowledge and customer service tips. Our customer care
representatives respond to customers' e-mails and calls that are related to
order status, prices and shipping. If our customer care representatives are
unable to respond to a customer's inquiry at the time of the call, we strive to
provide an answer within 24 hours. We believe our customer care representatives
are a valuable source of feedback regarding customer satisfaction. Our customer
returns and credits average approximately 1% of total sales.
New Product Development
We are committed to research and development. Likang was created as a
research and development organization by the Second Military Medical University
of the Chinese Army in 1988. We utilize the facilities of the Second Military
Medical University of the Chinese Army to conduct research and development
efforts and we pay for the use of the facilities on an as needed basis. We are
not a party to a formal agreement with the Second Military Medical University of
the Chinese Army related to the use of these facilities, however, we have used
the facilities since Likang's inception in 1988 and we expect the relationship
to remain stable. Likang owns all rights to the research and formulas developed
utilizing the capabilities of the Second Military Medical University research
and development unit.
We recently developed new products which have received critical
acclaim. An'erdian Type 3 Skin and Mucous Membrane Disinfectant, a skin
disinfectant, was recently honored as a 2005 National Key New Product by the
Chinese Ministry of Science & Technology. This product has numerous critical
uses in gynecology, skin disease treatment as well as daily hygiene. We are
currently in the patent application process for this product. We believe that
another key new product will be Likang #84 Disinfectant, which was recently
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approved by the Chinese Public Health Department. This product is a liquid
chemical disinfectant that contains the sodium hypochlorite and can be used in
households on almost all surfaces. This new formula carries a shelf life of two
years versus the competitors which have a limited shelf life of 90 days.
In addition, we have completed the development of two new products set
forth below and are awaiting approval of our pending product licenses:
PROJECT NAME SUB SECTOR
------ ---------------------------------- ---------------------------
1 B-D test paper chemical indicators
------ ---------------------------------- ---------------------------
2 B-D test standard test bag chemical indicators
------ ---------------------------------- ---------------------------
The Bowie and Dick ("B-D") test paper and B-D test standard test bag
are used in a B-D test in order to determine if a pre-vacuum steam sterilization
apparatus is qualified to complete the sterilization cycle. As the approval
process can take up to 36 months, we are unable to predict at this time when we
will be able to introduce these new products to market.
We are conducting research on additional products, including the
Lvshaxing Air Disinfectant Machine Type 1, Lvshaxing Air Disinfectant Machine
Type 2 and Likang 5% (chloride content) Disinfectant Liquid.
We also recently announced the launch of the initial development stage
for a new series of disinfectants employing Hypericin, a major compound found in
St. Johns Wort. The new series of disinfectants will target the H5N1 and H9N2
strains of avian flu. Hypericin is a primary compound of St. Johns Wort, which
is the English word for a Chinese herb. In recent laboratory tests, Hypericin
has proven effective as a treatment for poultry infected with strands of the
avian flu. We intend to coordinate our efforts with the Shanghai Municipal
Center for Disease Control & Prevention to develop this new disinfectant series,
however, we have yet to produce a product to treat avian flu and there is no
assurance that we will ever produce such a product.
Marketing and Sales
We market our products to the medical industry in China. We have a
national marketing and sales presence throughout all 22 provinces, as well as
four autonomous regions, and four municipalities of China. We currently employ
19 full-time sales and marketing people based in Shanghai. Shanghai Likang
Pharmaceuticals Technology Company, an affiliate, also sells our products using
72 independent sales representatives in additional provinces of China.
Approximately 30% of our sales are achieved by our proprietary sales force while
the remaining approximately 70% are outsourced to independent dealers and
agents. We compensate our proprietary salesman with a base salary and
commission. The sales representatives are located in provinces other than
Shanghai. The external sales network currently covers hospitals in 20 provinces
including: Beijing, Guangdong, Tianjin, Fujian, Yunnan, Hainan, Jiangsu,
Zhejiang, Anhui, Shandong, Henan, Hebei, Liaoning, Heilongjiang, Shanxi, Gansu,
Ningxia, Guizhou, Hunan, Sichuan, Xinjiang, Neimenggu. The independent sales
representatives sell directly to the end-users.
We also have relationships with 23 independent distribution agents who
purchase products from us in larger quantities and then resell in smaller
quantities to smaller health care facilities. In January 2005 we signed a two
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year agreement with Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. to
market our products to the retail/consumer market. Shanghai Likang Meirui
Pharmaceutical High-Tech Co., Ltd., a company of which Shanghai Shanhai Group,
Likang's minority shareholder, owns a 68% interest, has a sales network which
covers certain sectors of the retail/consumer market in China.
Intellectual Property
We have received six patents and have four pending patent applications
with National Property Right Administration of the PRC. The patent approval
process can take up to 36 months. The following is a list of Likang's patents
and pending patent applications:
<table>
<s> <c> <c> <c>
PATENT CATEGORY PATENT NAME PATENT NO NOTES
- ------------------------- -------------------------------------- ------------------------------ -------------------
Product Improvement a kind of bottle can be open ZL 03 2 29616.9 Approved
repeatedly easily
- ------------------------- -------------------------------------- ------------------------------ -------------------
Appearance design Bottle (with the wing stretch) ZL 00 3 14391.0 Approved
- ------------------------- -------------------------------------- ------------------------------ -------------------
Appearance design Packaging bottle ZL 2003 3 0108274.5 Approved
- ------------------------- -------------------------------------- ------------------------------ -------------------
Appearance design Test paper box of chlorine ZL 2004 3 0022740.2 Approved
- ------------------------- -------------------------------------- ------------------------------ -------------------
Product Improvement A kind of high strength water ZL 03 2 10513.4 Approved
sterilizer which adopts the Model H
ultraviolet lamp
- ------------------------- -------------------------------------- ------------------------------ -------------------
Product Improvement The device dealing with the sewage ZL 2004 2 0037013.8 Approved
without the additional energy
- ------------------------- -------------------------------------- ------------------------------ -------------------
Product Improvement Container with the vacuum pump Application # Pending. Applied
200420090682.1 on 2004-9-29
- ------------------------- -------------------------------------- ------------------------------ -------------------
New invention Anti HP Gel Application # Pending. Applied
200410099002-7 on 2004-12-24
- ------------------------- -------------------------------------- ------------------------------ -------------------
New invention Low smell and stimulus contain Application # 200410068135.8 Pending. Applied
chlorine disinfectant tablet, powder on 2004-11-12
etc
- ------------------------- -------------------------------------- ------------------------------ -------------------
New invention A new skin &mucous membrane Application # 200410025305.4 Pending. Applied
disinfectant including preparation on 2004-6-21
methods
- ------------------------- -------------------------------------- ------------------------------ -------------------
</table>
We have four registered trademarks with the China State Administration
for industry and commerce trademark office for An'erdian, Jifro, Dian'erkang and
Lvshaxing.
In addition, to protect our proprietary rights, we rely generally on
confidentiality agreements with employees, salespersons and third parties, and
agreements with consultants, vendors and customers, although we have not signed
such agreements in every case. Despite such protections, a third party could,
without authorization, utilize our propriety technologies without our consent.
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We can give no assurance that our agreements with employees, consultants and
others who participate in the production of our products will not be breached,
or that we will have adequate remedies for any breach, or that our proprietary
technologies will not otherwise become known or independently developed by
competitors.
Competition
We operate in a highly fragmented, competitive national market for
healthcare disinfectant products. The disinfectant industry in China is an
emerging industry and the industry is populated with small regional players. We
estimate there are over 1,000 manufacturers and distributors of disinfectant
products in China; however, most domestic competitors offer a limited line of
products and there are few domestic companies with a nationwide presence. We
believe that our national marketing and sales presence throughout all 22
provinces, as well as four autonomous regions, and four municipalities of China
gives us a competitive advantage over many other disinfectant companies in
China. In addition, prior to the adoption of industry standards in July 2002 by
the central government of China, disinfectant products were generally marketed
and sold based on price. We believe the recent standards implemented by the
government will shift the customer demand from price to quality.
Furthermore we estimate the new government standards adopted in July
2002 have increased the barriers to entry and increased the bar for competitors
in the disinfectant industry. We believe that the new standards may lead to
fewer competitors as companies falter in their efforts to adhere to the new
standards. The implementation of these improved production standards and
licenses has effectively decreased the competitiveness of small to mid size
manufacturers. The new standards are especially difficult for companies with
limited product offerings and inferior technical content. As a result of this
heightened license and permit system, all disinfectant manufacturers must comply
with "qualified disinfection product manufacturing enterprise requirements"
established by the Ministry of Public Health. The requirements include standards
for both hardware and software. Hardware would include facilities and machinery.
Software would include the technology to monitor the facilities. Furthermore the
requirements will encompass the knowledge and capability of both the production
staff and quality control procedures.
We believe that the following are the principal competitive strengths
that differentiate our company from the competition:
o Product selection and availability
o Advanced technology
o Research and development
o Manufacturing capacity
o Trained service personnel
o Reliability and speed of delivery
o Customer service
o Price
Our primary competitors in the sale of chemical disinfectants are
3M and Ace Disinfection Factory Co., Ltd. The primary competitors for
instrument disinfectants are Chengdu Kangaking Instrument Co., Ltd. and
Hangzhou Yangchi Medicine Article Co., Ltd. and the primary competitors for
chemical indicators are 3M and Shandong Xinhua Medical Instrument Co., Ltd.
Domestic competition comes from regional companies which tend to offer
products in small geographic areas and do not distribute their product lines
throughout China.
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Our primary domestic competitors include:
Competitor Products
3M: Hand disinfectant, skin and mucous disinfectant
Ace: Skin and mucous disinfectant
Chengdu Kangaking: medical equipment and devices
Hangzhou Yangchi: sterilized Q-tip
Shandong Xinhua: chemical indicators
Our primary foreign competitor is 3M Company which has had a presence
in China for more than 20 years. 3M Company entered the hand disinfection market
at the end of 2004 and primarily offers products in the areas of index and
control devices and some disinfectant machines. At present 3M Company has five
products which target use in operating rooms and its products are found in some
provincial capital cities of China such as Shanghai, Beijing, Guangzhou,
Hangzhou, Nanjin, Chengdu and Xi'an. 3M Company's product line in China is very
narrow and there are few overlapping products between 3M Company and our
company.
Another foreign competitor is Johnson & Johnson, which established
operations in China in 1994. In China, Johnson & Johnson offers a variety of
skin, hand, and medical equipment disinfectants. Prior to the recent initiatives
by the government, disinfectant products were marketed based on price and
despite the brand awareness of Johnson & Johnson; its products did not have
widespread reception amongst the community. Furthermore, Johnson & Johnson does
not offer a wide variety of disinfectant products in China. Due to the
difficulties in attaining a critical mass Johnson & Johnson recently withdrew
from the surgical disinfectant market in China and has refocused its efforts on
the disinfection of medical devices.
Government Regulations
Our business and operations are located in the PRC. We are subject to
local food, drug, environmental laws related to certification of manufacturing
and distributing of any disinfectant. We are also licensed by the Shanghai City
Government to manufacture and distribute disinfectants. We are in substantial
compliance with all provisions of those licenses and have no reason to believe
that they will not be renewed as required by the applicable rules of Shanghai.
In addition, our operations must conform to general governmental regulations and
rules for private companies doing business in China.
Pursuant to the July 2002 Ministry of Public Health 27th Order of
Ministry of Health of the People's Republic of China, all disinfectant
manufacturers in China must obtain a license to manufacture hygiene
disinfectants. Prior to release, all disinfectant instruments must obtain the
official hygiene permit document of Ministry of Public Health and the approval
of the provincial hygiene administrative department. The implementation of these
improved production standards and licenses has effectively decreased the
competitiveness of small to mid size manufacturers with single product and
inferior technical content. Presently we meet all standards initiated by this
ordinance and we have been granted 26 hygiene licenses by the Ministry of Public
Health. We have filed applications for two additional products.
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We are also subject to various other rules and regulations, including
the People's Republic of China Infectious Disease Prevention and Cure Law,
Disinfection Management Regulation, Disinfection Technique Regulation,
Disinfection Product Manufacturer Sanitation Regulation, and Endoscope Rinse and
Disinfection Technique Manipulation Regulation. We believe we are in material
compliance with all of the applicable regulations.
PRC Legal System
Since 1979, many laws and regulations addressing economic matters in
general have been promulgated in the PRC. Despite development of its legal
system, the PRC does not have a comprehensive system of laws. In addition,
enforcement of existing laws may be uncertain and sporadic, and implementation
and interpretation thereof inconsistent. The PRC judiciary is relatively
inexperienced in enforcing the laws that exist, leading to a higher than usual
degree of uncertainty as to the outcome of any litigation. Even where adequate
law exists in the PRC, it may be difficult to obtain swift and equitable
enforcement of such law, or to obtain enforcement of a judgment by a court of
another jurisdiction. The PRC's legal system is based on written statutes and,
therefore, decided legal cases are without binding legal effect, although they
are often followed by judges as guidance. The interpretation of PRC laws may be
subject to policy changes reflecting domestic political changes. As the PRC
legal system develops, the promulgation of new laws, changes to existing laws
and the preemption of local regulations by national laws may adversely affect
foreign investors. The trend of legislation over the past 20 years has, however,
significantly enhanced the protection afforded foreign investors in enterprises
in the PRC. However, there can be no assurance that changes in such legislation
or interpretation thereof will not have an adverse effect upon our business
operations or prospects.
Economic Reform Issues
Since 1979, the Chinese government has reformed its economic systems.
Many reforms are unprecedented or experimental; therefore they are expected to
be refined and improved. Other political, economic and social factors, such as
political changes, changes in the rates of economic growth, unemployment or
inflation, or in the disparities in per capita wealth between regions within
China, could lead to further readjustment of the reform measures. We cannot
predict if this refining and readjustment process may negatively affect our
operations in future periods.
Over the last few years, China's economy has registered a high growth
rate. Recently, there have been indications that rates of inflation have
increased. In response, the Chinese government recently has taken measures to
curb this excessively expansive economy. These measures have included
devaluations of the Chinese currency, the Renminbi ("RMB"), restrictions on the
availability of domestic credit, reducing the purchasing capability of certain
of its customers, and limited re-centralization of the approval process for
purchases of some foreign products. These austerity measures alone may not
succeed in slowing down the economy's excessive expansion or control inflation,
and may result in severe dislocations in the Chinese economy. The Chinese
government may adopt additional measures to further combat inflation, including
the establishment of freezes or restraints on certain projects or markets.
To date reforms to China's economic system have not adversely impacted
our operations and are not expected to adversely impact operations in the
foreseeable future; however, there can be no assurance that the reforms to
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China's economic system will continue or that we will not be adversely affected
by changes in China's political, economic, and social conditions and by changes
in policies of the Chinese government, such as changes in laws and regulations,
measures which may be introduced to control inflation, changes in the rate or
method of taxation, imposition of additional restrictions on currency conversion
and remittance abroad, and reduction in tariff protection and other import
restrictions.
China's Accession into the WTO
On November 11, 2001, China signed an agreement to become a member of
the World Trade Organization ("WTO"), the international body that sets most
trade rules, further integrating China into the global economy and significantly
reducing the barriers to international commerce. China's membership in the WTO
was effective on December 11, 2001. China has agreed, upon its accession to the
WTO, to reduce tariffs and non-tariff barriers, remove investment restrictions,
provide trading and distribution rights for foreign firms, and open various
service sectors to foreign competition. China's accession to the WTO may
favorably affect our business in that reduced market barriers and a more
transparent investment environment will facilitate increased investment
opportunities in China, while tariff rate reductions and other enhancements will
enable us to develop better investment strategies for our clients. In addition,
the WTO's dispute settlement mechanism provides a credible and effective tool to
enforce members' commercial rights.
Employees
Likang employs approximately 163 full time employees, including our
executive officers, as follows:
DEPARTMENT NUMBER OF EMPLOYEES
- ----------------------------------------------------- -------------------
Administrative center 7
- ----------------------------------------------------- -------------------
Accounting 19
- ----------------------------------------------------- -------------------
Production 73
- ----------------------------------------------------- -------------------
Logistics 36
- ----------------------------------------------------- -------------------
Sales and Marketing staff in Shanghai 19
- ----------------------------------------------------- -------------------
Research and development 9
- ----------------------------------------------------- -------------------
Total 163
- ----------------------------------------------------- -------------------
History of our company
We were incorporated in the state of Colorado on December 11, 1996.
From our inception through December 28, 1999, we were involved in the business
of acquiring, developing and operating oil and gas properties. On December 28,
1999, we sold 60% of our issued and outstanding common stock to HBOA.Com, Inc.,
a District of Columbia corporation ("HBOA-DC"). Pursuant to this stock sale,
there was a change in our business and management team and we began to focus on
HBOA's business, which was related to the sale of products and services to the
owners of home based businesses through its Internet web site.
On May 31, 2000, HBOA-DC was merged with and into our wholly owned
subsidiary, HBOA.Com, Inc., a Florida corporation ("HBOA-FL"). In June 2000, we
began to develop our application service provider business, in addition to
HBOA's web site. We focused on development of an Internet portal through which
home based business owners, as well as commercial private label businesses,
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obtain the products, services, and information necessary to start, expand and
profitably run their businesses. On November 10, 2000, our shareholders approved
our proposal to change our name from Mizar Energy Company to HBOA Holdings, Inc.
and to change our state of incorporation from Colorado to Florida and recorded a
loss of approximately $258,000. On December 28, 2000, we formed a new
subsidiary, Aerisys, Incorporated, a Florida corporation, to handle commercial
private business. Effective as of July 18, 2003, we changed our name to Kirshner
Entertainment & Technologies, Inc.
On May 2, 2005, we closed a share exchange with all of the shareholders
of Linkwell Tech in which we acquired 100% of the issued and outstanding shares
of Linkwell Tech's common stock in exchange for 36,273,470 shares of our common
stock, which at closing represented approximately 87.5% of the issued and
outstanding shares of our common stock. As a result of the transaction, Linkwell
Tech became our wholly owned subsidiary. Linkwell Tech was founded in June 2004.
On June 30, 2004, Linkwell Tech acquired 90% of Likang through a stock exchange
with Shanghai Likang Pharmaceuticals Technology Company, Limited, the then 90%
shareholder of Likang. Shanghai Shanhai Group, an unaffiliated third party, owns
the remaining 10% of Likang. Shanghai Shanhai Group is owned by Group Employee
Share-holding Commission (16.25%) and Baoshan District Dachang Town South
Village Economic Cooperation Club (83.75%). Likang's officers and directors,
Messrs. Xue Lian Bian and Wei Guan, own Shanghai Likang Pharmaceuticals
Technology Company, Limited, owning 90% and 10%, respectively, of that company.
Our then officers and directors resigned at the closing of the share
exchange and Messrs. Wei Guan and Xue Lian Bian, who were the officers and
directors of Linkwell Tech, were appointed our officers and directors. In
connection with the share exchange, in order to satisfy all outstanding
obligations and indebtedness owed by our company to our former CEO and certain
third parties, Linkwell Tech provided us $175,000 which we provided to our
former CEO to be used by him to satisfy these obligations. We also issued our
former CEO 1,400,000 shares of our common stock.
In July 2005 we changed our name to Linkwell Corporation. As described
earlier in this prospectus under "Management's Discussion and Analysis or Plan
of Operation - Sale of Aerisys Incorporated" in February 2006 we sold our
interest in that subsidiary to our former CEO in exchange for the assumption of
all liabilities related to it.
Legal Proceedings
We are not a party to any material litigation presently pending nor, to
the best of our knowledge, have any such proceedings been threatened, except as
follows.
In January 2004, the SEC commenced an informal inquiry of our company.
At this time we have not received any further information on this matter and are
therefore uncertain of the status of the SEC's informal investigation.
Property
Our facilities include our principal executive offices, located at No.
476 Hutai Branch Road, Baoshan District, Shanghai, China, and our two
manufacturing facilities are located at 1104 Jiatang Road, Jiading District,
Shanghai, 201807 and 2058 Linqiao Road, Zhuhang Town, Jinshan District,
Shangahi, 201506. We own all of the manufacturing equipment in both of our
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factories. We lease our principal executive office building, which consists of
approximately 14,000 square feet, from Shanghai Shanhai Group, an unaffiliated
third party, under a lease expiring in December 2010. Until February 2006 we
leased approximately 21,500 square feet of manufacturing space from Shanghai
Likang Pharmaceutical Technology Company, Limited, an affiliate, under a lease
expiring December 2006 for an annual rent of approximately $10,890. In February
2006 we purchased this building, which includes an assignment of the land use
permit, for $333,675. See "Certain Relationships and Related Transactions"
appearing later in this prospectus. We lease approximately 4,300 square feet of
manufacturing space from Shanghai Jinshan Zhuhang Plastics Lamps Factory, an
unaffiliated third party, under a lease expiring in December 2006 for an annual
rent of approximately $3,125.
MANAGEMENT
Directors and executive officers
Name Age Positions
Xue Lian Bian 40 Chief Executive Officer, President and
Chairman of the Board
Wei Guan 40 Vice President, Secretary and director
Xue Lian Bian. Mr. Bian has served as our Chief Executive Officer,
President and director since May 2, 2005, Chief Executive Officer, President and
director of Linkwell Tech since its inception in June 2004 and General Manager
of Shanghai Likang Disinfectant Company, Limited since 1993. From 1990 to 1993,
he was a project assistant in charge of science and technology achievement
application in the Second Military Medical University, Shanghai, China. From
1986 to 1990, Mr. Bian was a member of the technical staff in the
Epidemiological Institute in the Second Military Medical University. Mr. Bian
contributed to the compilation of "Disinfection - Antiseptic - Anticorrosion -
Preservation" and "Modern Disinfection Study" of which the first book laid the
foundation of the Chinese disinfectant study. Mr. Bian started related research
with his colleagues on the microbiology sterilization effect examination, high
strength ultraviolet lamp tube and decontaminating apparatus prior to the
inception of Likang. Mr. Bian graduated from the China Army Second Military
Medical University in 1990 with a bachelor degree in public health.
Wei Guan. Mr. Guan has served as our Vice President and a member of our
Board of Directors since May 2, 2005. He has served as Vice President of
Linkwell Tech since its inception in June 2004 and vice General Manager of
Shanghai Likang Disinfectant Company, Limited since 2002. From 1987 to 1990, Mr.
Guan worked Hunan Machinery Importing & Exporting Corporation as a member of
management. From 1990 to 2002, Mr. Guan worked for Division of Importing and
Export at Worldbest Group as a general manager. Mr. Guan graduated from Hunan
University in Changsha, Hunan Province with a bachelor degree in Industry
Foreign Trading in 1987.
There are no family relationship between any of the executive officers
and directors. Directors are elected at our annual meeting of shareholders and
hold office for one year or until his or her successor is elected and qualified.
Key Employees
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Mr. Guoqiang Fan. Mr. Fan, 42, has been our Vice-General Manager in
charge of marketing since May 2005 and has held the same position at Likang
since 1997. From 1987 to 1997, Mr. Fan was employed at the Population College of
Jiangsu Province as a teacher. Prior to his work as a teacher, Mr. Fan worked at
Second Military Medical University's Shanghai Hospital as a pharmacist. Mr. Fan
graduated from the Second Military Medical University School of Pharmacy with a
degree in medicine.
Ms. Gendi Li . Ms. Li, 54, has served as Likang's Controller since
2003. From 1996 to 2003, Ms. Li was employed as an Executive Accountant and
Financial Manager for QiaoFu Construction Holding Company (Shanghai). From 1993
to 1996, Ms. Li was employed as an Executive Accountant and Head of the Finance
Department at Shanghai Yuxin Machinery Co., Ltd. From 1968 to 1993, Ms. Li was
employed in various financial positions, including Executive Accountant, and
Head of the Finance Department at First Plastic Machinery Factory. Ms. Li
graduated from the Shanghai Finance and Economics Institute.
Mr. Wensheng Sun. Mr. Sun, 38, has been Likang's Vice-General Manager
for Production since 1995 and has held the same position at Likang since 1995
following completion of his Masters degree in Medicine at the Second Military
Medical University School of Pharmacy.
U.S. Advisor
On August 24, 2005, we engaged China Direct Investments, Inc., whose
staff includes Chinese-speaking individuals with experience in operation and
regulatory framework applicable to U.S. public companies, as a consultant to
advise the our management in areas related to marketing and operational support
in the U.S., media and public relations, mergers and acquisitions, financial
advisory and SEC disclosure compliance. In addition, China Direct Investment
also provides us with translation services for both English and Chinese
documents. Under the terms of one year agreement, we issued China Direct
Investments, Inc. 2,000,000 shares of the our common stock, valued at $160,000,
as compensation for its services, and granted it three year warrants to purchase
2,125,000 shares of our common stock at an exercise price of $0.20 per share
commencing in January 2006. We also agreed to pay China Direct Investments, Inc.
additional fees for its services as may be mutually agreed upon. Messrs. James
Wang, Marc Siegel and David Stein are the officers, directors and shareholders
of China Direct Investments, Inc.
Committees of the Board of Directors
Our Board of Directors has not established any committees, including an
Audit Committee or a Nominating Committee. The functions of those committees are
being undertaken by the entire board as a whole. As we expand our board in the
future to include independent directors we will establish an Audit Committee.
Director Independence, Audit Committee Of The Board Of Directors And Audit
Committee Financial Expert
None of the members of our Board of Directors are "independent" within
the meaning of definitions established by the Securities and Exchange
Commission. Our Board of Directors are presently comprised of individuals who
were integral in Likang's operations. As a result of our limited operating
history and minimal resources, small companies such as ours generally have
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difficulty in attracting independent directors. In addition, we will require
additional resources to obtain directors and officers insurance coverage which
is generally necessary to attract and retain independent directors. As we grow,
in the future our Board of Directors intends to seek additional members who are
independent, have a variety of experiences and backgrounds, who will represent
the balanced, best interests of all of our shareholders and at least one of
which who is an "audit committee financial expert" described below.
None of our directors is an "audit committee financial expert" within
the meaning of Item 401(e) of Regulation S-B. In general, an "audit committee
financial expert" is an individual member of the audit committee or Board of
Directors who:
o understands generally accepted accounting principles and
financial statements,
o is able to assess the general application of such principles
in connection with accounting for estimates, accruals and
reserves,
o has experience preparing, auditing, analyzing or evaluating
financial statements comparable to the breadth and complexity
to our financial statements,
o understands internal controls over financial reporting, and
o understands audit committee functions.
Code of Ethics
In December 2005, we adopted a Code of Ethics applicable to our Chief
Executive Officer, principal financial and accounting officers and persons
performing similar functions. A Code of Ethics is a written standard designed to
deter wrongdoing and to promote:
o honest and ethical conduct,
o full, fair, accurate, timely and understandable
disclosure in regulatory filings and public statements,
o compliance with applicable laws, rules and regulations,
o the prompt reporting violation of the code, and
o accountability for adherence to the Code.
A copy of our Code of Ethics is filed as an exhibit to the registration
statement of which this prospectus forms a part, and we will provide a copy,
without charge, to any person desiring a copy of the Code of Ethics, by written
request to us at our principal offices.
Executive compensation
Cash Compensation
The following table summarizes all compensation recorded by us in each
of the last three fiscal years for our Chief Executive Officer and each other
executive officers serving as such whose annual compensation exceeded $100,000.
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<table>
<caption>
Long-Term
Annual Compensation Compensation
------------------------------------ ------------------------------
Restricted Securities
Name and Other Annual Stock Underlying All
Principal Fiscal Salary Bonus Compensation Awards Options Other
Position Year ($) ($) ($) ($) SAR (#) Compensation
- -------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c> <c>
Gary Verdier(1) 2004 $0 $0 $0 $0 20,000 0
2003 $0 $0 $0 $0 0 0
2002 $0 $0 $0 $0 0 0
Daniel Zipkin(2) 2004 $0 $0 $0 $0 0 0
2003 $7,500 $0 $0 $0 0 0
2002 $0 $0 $0 $0 0 0
</table>
(1) Gary Verdier has served as our CEO and President from December 28, 1999 to
August 2000, from February 21, 2001 to September 19, 2003 and October 31, 2004
to May 2, 2005. On August 24, 2004 the Board of Directors granted him a five
year option to purchase 10,000 shares of common stock at an exercise price of
$0.15 and on January 3, 2004 the Board of Directors granted him a five option to
purchase 10,000 shares of common stock at an exercise price of $1.00 per share.
(2) Mr. Zipkin served as Chief Executive Officer from September 19, 2003 to
October 30, 2003.
Option/SAR Grants in Last Fiscal Year
The following table sets forth information concerning individual grants
of options made during fiscal 2004 to the named executive officers.
% of Total
Number of Shares Options Granted Exercise or
Underlying Options to Employees in Base Price Expiration
Granted (#) Fiscal Year ($/Sh) Date
- --------------------------------------------------------------------------------
Gary Verdier 10,000 5.3% $1.00 January 3, 2009
10,000 5.3% $0.15 December 31, 2009
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
The following table indicates each exercise of stock options (or tandem
SARS) and freestanding SARS during the last fiscal year by each of the named
executive officers and the fiscal year end value of unexercised options and
SARs.
<table>
<caption>
Shares Number of Securities Underlying Value of Unexercised
Acquired on Value Unexercised Options/SARs at In-the-money Options/SARs at
Exercise (#) Realized ($) FY End (#) FY End (#)
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Gary Verdier 0 n/a 20,000 0 n/a n/a
</table>
Stock Option Plans
Year 2000 Equity Compensation Plan
On October 10, 2000, our Board of Directors adopted our Year 2000
Equity Compensation Plan under which a total of 540,000 shares of common stock
are made available for the granting of awards, a portion or all of which may
qualify as incentive stock options, non-incentive stock options and restricted
stock grants. The purpose of the plan, which was approved by our shareholders on
November 10, 2000, is to encourage stock ownership by our officers, directors,
key employees and consultants, and to give such persons a greater personal
interest in the success of our business and an added incentive to continue to
advance and contribute to us.. If any option or restricted stock grant expires
or terminates before it has been exercised in full, the shares of common stock
allocable to the unexercised portion of such option or restricted stock grant
may again be subject to an option or restricted stock grant under the 2000
Equity Compensation Plan. The number of shares available and subject to options,
option prices and, to the extent applicable, the number of shares subject to any
restricted stock grant will be adjusted upward or downward, as the case may be,
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in the event of any subdivision or consolidation of shares or other capital
readjustment, stock dividend, merger, consolidation or similar transaction
affecting the shares. At December 31, 2005 we did not had any options to
purchase shares of our common stock outstanding under the plan.
The 2000 Equity Compensation Plan is administered by our Board of
Directors who have the sole authority to determine which eligible employees of
our company receive options and restricted stock grants under the plan, the
times when options and restricted stock grants are granted, the number of shares
covered by the option and restricted stock grant, the provisions of any
agreement and when options may be exercised or when restricted stock grants
become vested. In addition, the Board has the power and authority to construe
and interpret the Plan.
Stock options may be granted by the Board at prices determined in the
discretion of the Board, provided that the option price must be at least equal
to the fair market value of the common stock on the date of the grant. The
option price is payable in cash, common stock or such other form of payment as
may be determined by the Board. The exercise price of an incentive stock option
must be at least equal to the fair market value of our common stock on the date
of grant or 110% of such value in the case of options granted to an individual
who is a 10% or greater shareholder of our company.
An optionee generally may exercise an option only while an employee of
our company. If an optionee becomes disabled or dies while in the employ of our
company, the option may be exercised within one year of the optionee's death or
termination due to disability. The expiration date of an option will be
determined by the Board at the time of the grant, but in no event will an
incentive stock option be exercisable after the expiration of 10 years from the
date of grant or five years in the case of incentive options granted to a 10% or
greater shareholder. The Board may grant to an eligible individual shares of our
common stock subject to specified restrictions on transferability and vesting as
provided in a written grant agreement or resolutions in which the restricted
stock grant is adopted and approved by the Board. Restricted stock grants may be
made in lieu or cash compensation or as additional compensation. The Board may
also make restricted stock grants contingent on pre-established performance
goals determined by the Board. Except for certain transfers that may be
permitted by the Board, no option or restricted stock grant may be transferred
by an eligible individual other than by will or the laws of descent or
distribution.
The 2000 Equity Compensation Plan terminates on October 10, 2010. The
Board of Directors may at any time amend, suspend or discontinue the plan,
except that no amendment may be made without the approval of the shareholders
which would increase the number of shares subject to the plan, materially change
the designation of the class of employees eligible to receive options, remove
the administration of the plan from the Board or a committee of the Board or
materially increase the benefits accruing to participants under the plan.
Non-Qualified Stock Option Plan
On December 21, 2000 our Board of Directors adopted our Non-Qualified
Stock Option Plan under which a total of 200,000 shares of common stock are made
available for granting of non-qualified stock options to officers, directors,
employees and key advisors or consultants. The purpose of the plan is to
encourage the participants to contribute materially to our growth. If any option
expires or terminates before it has been exercised in full, the shares of common
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stock allocable to the unexercised portion of such option may again be subject
to an option under the Non Qualified Stock Option Plan. The number of shares
available and subject to options and option prices will be adjusted upward or
downward, as the case may be, in the event of any subdivision or consolidation
of shares or other capital readjustment, stock dividend, merger, consolidation
or similar transaction affecting the shares. At December 31, 2005 we did not had
any options to purchase shares of our common stock outstanding under the plan.
The Non-Qualified Stock Option Plan is administered by our Board of
Directors who have the sole authority to determine which who is eligible to
receive grants of non-qualified options under the plan, the times when options
are granted, the number of shares covered by the option, the provisions of any
agreement and when options may be exercised. In addition, the Board has the
power and authority to construe and interpret the Plan.
Stock options may be granted by the Board at prices determined in the
discretion of the Board and the exercise price of the option may be greater
than, or less than, the fair market value of our common stock. The option price
is payable in cash, common stock or such other form of payment as may be
determined by the Board. An optionee generally may exercise an option only while
the grantee is employed by us or otherwise providing our company services. If an
optionee becomes disabled or dies while in the employ of our company or while
otherwise providing services to us, the option may be exercised within 90 days
after optionee's death or termination due to disability. The expiration date of
an option will be determined by the Board at the time of the grant, but in no
event will a stock option be exercisable after the expiration of 10 years from
the date of grant. Except for certain transfers that may be permitted by the
Board, no option may be transferred by an eligible individual other than by will
or the laws of descent or distribution.
The 2000 Equity Compensation Plan terminates on December 21, 2010. The
Board of Directors may at any time amend, suspend or discontinue the plan,
except that no amendment may be made without the approval of the shareholders
which would increase the number of shares subject to the plan, materially change
the designation of the class of employees eligible to receive options, remove
the administration of the plan from the Board or a committee of the Board or
materially increase the benefits accruing to participants under the plan.
2005 Equity Compensation Plan
On June 28, 2005, our Board of Directors adopted our 2005 Equity
Compensation Plan under which 5,000,000 shares of our common stock have been
reserved for issuance upon the exercise of options or stock grants under the
plan. Our officers, directors, key employees and consultants are eligible to
receive stock grants and non-qualified options under the Plan. Only our
employees are eligible to receive incentive options. The purpose of the 2005
Equity Compensation Plan is to encourage stock ownership by our officers,
directors, key employees and consultants, and to give such persons a greater
personal interest in the success of our business and an added incentive to
continue to advance and contribute to us. Shares used for stock grants and plan
options may be authorized and unissued shares or shares reacquired by us,
including shares purchased in the open market. Shares covered by plan options
which terminate unexercised will again become available for grant as additional
options, without decreasing the maximum number of shares issuable under the
plan, although such shares may also be used by us for other purposes. As of
December 31, 2005 we had no outstanding under the plan and there were 3,000,000
shares available for issuance under the 2005 Equity Compensation Plan.
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Our Board of Directors, or a committee of the Board, administers the
2005 Equity Compensation Plan including, without limitation, the selection of
the persons who will be awarded stock grants and granted options, the type of
options to be granted, the number of shares subject to each option and the
exercise price. Plan options may either be options qualifying as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified options. In addition, the plan allows for the inclusion of a
reload option provision, which permits an eligible person to pay the exercise
price of the option with shares of common stock owned by the eligible person and
receive a new option to purchase shares of common stock equal in number to the
tendered shares. Any incentive option granted under the Plan must provide for an
exercise price of not less than 100% of the fair market value of the underlying
shares on the date of grant, but the exercise price of any incentive option
granted to an eligible employee owning more than 10% of our outstanding common
stock must not be less than 110% of fair market value on the date of the grant.
The exercise price of non-qualified options shall be determined by the Board of
Directors, but shall not be less than the par value of our common stock on the
date the option is granted.
The term of each plan option and the manner in which it may be
exercised is determined by the Board of Directors or the committee, provided
that no option may be exercisable more than 10 years after the date of its grant
and, in the case of an incentive option granted to an eligible employee owning
more than 10% of the common stock, no more than five years after the date of the
grant. The plan provides that, with respect to incentive stock options, the
aggregate fair market value (determined as of the time the option is granted) of
the shares of common stock, with respect to which incentive stock options are
first exercisable by any option holder during any calendar year shall not exceed
$1,000,000. Unless the plan is approved by our shareholders within one year of
the effective date, no incentive stock options may be granted and all incentive
stock options that may have been previously granted shall automatically be
converted into non-qualified stock options. As of the date of this prospectus we
have not submitted the 2005 Equity Compensation Plan to our shareholders for
approval.
The plan provides that, if our outstanding shares are increased,
decreased, exchanged or otherwise adjusted due to a share dividend, forward or
reverse share split, recapitalization, reorganization, merger, consolidation,
combination or exchange of shares, an appropriate and proportionate adjustment
shall be made in the number or kind of shares subject to the plan or subject to
unexercised options and in the purchase price per share under such options. Any
adjustment, however, does not change the total purchase price payable for the
shares subject to outstanding options. In the event of our proposed dissolution
or liquidation, a proposed sale of all or substantially all of our assets, a
merger or tender offer for our shares of common stock, the Board of Directors
may declare that each option granted under the plan shall terminate as of a date
to be fixed by the Board of Directors; provided that not less than 30 days
written notice of the date so fixed shall be given to each participant holding
an option, and each such participant shall have the right, during the period of
30 days preceding such termination, to exercise the participant's option, in
whole or in part, including as to options not otherwise exercisable.
Plan options are exercisable by delivery of written notice to us
stating the number of shares with respect to which the option is being
exercised, together with full payment of the purchase price therefor. Payment is
to be in the form of cash, checks, certified or bank cashier's checks,
promissory notes secured by the shares issued through exercise of the related
options, shares of common stock or in such other form or combination of forms
which may be acceptable to the Board of Directors, provided that any loan or
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guarantee by us of the purchase price may only be made upon resolution of the
Board that such loan or guarantee is reasonably expected to benefit us.
All plan options are nonassignable and nontransferable, except by will
or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee shall die while
our employee or within three months after termination of employment by us
because of disability, or retirement or otherwise, such options may be
exercised, to the extent that the optionee shall have been entitled to do so on
the date of death or termination of employment, by the person or persons to whom
the optionee's right under the option pass by will or applicable law, or if no
such person has such right, by his executors or administrators.
In the event of termination of employment because of death while an
employee or because of disability, the optionee's options may be exercised not
later than the expiration date specified in the option or one year after the
optionee's death, whichever date is earlier, or in the event of termination of
employment because of retirement or otherwise, not later than the expiration
date specified in the option or one year after the optionee's death, whichever
date is earlier. If an optionee's employment by us terminates because of
disability and such optionee has not died within the following three months, the
options may be exercised, to the extent that the optionee shall have been
entitled to do so at the date of the termination of employment, at any time, or
from time to time, but not later than the expiration date specified in the
option or one year after termination of employment, whichever date is earlier.
If an optionee's employment terminates for any reason other than death
or disability, optionee may exercise the options to the same extent that the
options were exercisable on the date of termination, for up to three months
following such termination, or on or before the expiration date of the options,
whichever occurs first. In the event that the optionee was not entitled to
exercise the options at the date of termination or if the optionee does not
exercise such options (which were then exercisable) within the time specified
herein, the options will terminate. If an optionee's employment terminates for
any reason other than death, disability or retirement, all right to exercise the
option terminate not later than 90 days following the date of such termination
of employment.
The Board of Directors may amend, suspend or terminate the plan at any
time. Unless the plan shall have been earlier suspended or terminated by the
Board of Directors, the 2005 Equity Compensation Plan terminates on June 28,
2015.
Limitation on liability and indemnification matters
As authorized by the Florida Business Corporation Law, our articles of
incorporation provide that none of our directors shall be personally liable to
us or our shareholders for monetary damages for breach of fiduciary duty as a
director, except liability for:
o any breach of the director's duty of loyalty to our company or
its shareholders; o acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock redemptions or
repurchases; and o any transaction from which the director
derived an improper personal benefit.
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This provision limits our rights and the rights of our shareholders to
recover monetary damages against a director for breach of the fiduciary duty of
care except in the situations described above. This provision does not limit our
rights or the rights of any shareholder to seek injunctive relief or rescission
if a director breaches his duty of care. These provisions will not alter the
liability of directors under federal securities laws. Our by-laws require us to
indemnify directors and officers against, to the fullest extent permitted by
law, liabilities which they may incur under the circumstances described above.
Our articles of incorporation further provide for the indemnification
of any and all persons who serve as our director, officer, employee or agent to
the fullest extent permitted under Florida law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
according to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Likang is engaged in business activities with Shanghai Likang
Pharmaceuticals Technology Company, Limited, an affiliated entity. Messrs.
Xuelian Bian and Wei Guan, our officer, directors and principal shareholders,
are the shareholders of Shanghai Likang Pharmaceuticals Technology Company,
Limited, owning 90% and 10%, respectively. We previously leased approximately
21,500 square feet of manufacturing space from Shanghai Likang Pharmaceuticals
Technology Company, Limited for approximately $11,500 annually. In February 2006
we entered into an asset purchase agreement with Shanghai Likang Pharmaceuticals
Technology Company, Limited and Mr. Bian under which we purchased this
previously leased building for $333,675. The funds representing the
consideration had previously been advanced to Shanghai Likang Pharmaceuticals
Technology Company, Limited and were reflected on our balance sheet at September
30, 2005 as due from an affiliate.
Shanghai Likang Pharmaceuticals Technology Company, Limited distributes
our products to the commercial medical industry. At September 30, 2005 Shanghai
Likang Pharmaceuticals Technology Company, Limited owed us approximately
$678,000 as a related party receivable for products purchased from us.
Likang is engaged in business activities with other related entities,
including:
o Shanghai Likang Meirui Pharmaceutical High-Tech Co., Limited.
Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. is a supplier
of both raw materials and finished products to Likang. Specifically Shanghai
Likang Meirui Pharmaceutical High-Tech Co., Ltd. provides Likang with Ozone
producing device equipment and Ultraviolet radiation lamp lights to Likang. In
addition, under the terms of a two year agreement entered into in January 2005
Shanghai Likang Meirui Pharmaceuticals High-Tech Co., Ltd. produces the
Lvshaxing Air Disinfectant Machine and Likang Surgery hand-washing table for
Likang. In January 2005 Likang signed a two year agreement with Shanghai Likang
Meirui Pharmaceutical High-Tech Co., Ltd. to market its products to the
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retail/consumer market using Shanghai Likang Meirui Pharmaceutical High-Tech
Co. Ltd.'s proprietary sales network which caters to the retail/consumer market
in China. At September 30, 2005, Likang owed Shanghai Likang Meirui
Pharmaceuticals High-Tech Company $4,667. Shanghai Shanhai Group is the majority
owner of Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd.,
owning a 68% interest.
o Shanghai Shanhai Group.
Shanghai Shanhai Group, which is the minority shareholder of our Likang
subsidiary, is owned by Group Employee Share-holding Commission (16.25%) and
Baoshan District Dachang Town South Village Economic Cooperation Club (83.75%).
We lease our principal executive offices from Shanghai Shanhai Group for $10,600
a year. Shanghai Shanhai Group also holds the land use permit for the principal
executive office building. .
At September 30, 2005, we owed $15,000 to a shareholder for working
capital advanced to our subsidiary, Aerisys. The advances are non-interest
bearing and are payable on demand.
For the fiscal year ended December 31, 2004, Likang made distributions
to its shareholders, Shanghai Likang Pharmaceuticals Technology Company, Limited
and Shanghai Shanhai Group, in the aggregate amount of $559,633. Shanghai Likang
Pharmaceuticals Technology Company, Limited is owned by Messrs. Bian and Guan,
our officers and directors.
PRINCIPAL SHAREHOLDERS
At December 31, 2005, there were 45,304,139 shares of our common stock
issued and outstanding which is our only outstanding class of voting securities.
The following table sets forth, as of December 31, 2005, information known to us
relating to the beneficial ownership of these shares by:
o each person who is the beneficial owner of more than 5% of the
outstanding shares of common stock;
o each director;
o each executive officer; and
o all executive officers and directors as a group.
Unless otherwise indicated, the address of each beneficial owner in the table
set forth below is care of No. 476 Hutai Branch Road, Baoshan District Shanghai,
China 200436.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of beneficially owned by them. Under
securities laws, a person is considered to be the beneficial owner of securities
he owns and that can be acquired by him within 60 days from December 31, 2005
upon the exercise of options, warrants, convertible securities or other
understandings. We determine a beneficial owner's percentage ownership by
assuming that options, warrants or convertible securities that are held by him,
but not those held by any other person and which are exercisable within 60 days
of December 31, 2005, have been exercised or converted. Unless otherwise noted,
the address of each of these principal shareholders is our principal executive
offices.
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Name of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
Xue Lian Bian 22,670,919 50.0%
Wei Guan 13,602,551 30.1%
All officers and directors
as a group (two persons) 36,273,470 80.1%
China Direct Investments, Inc. (1) 3,080,000 6.5%
CIIC Investment Banking
Services Co., Ltd. (2) 2,715,260 5.8%
* represents less than 1%
(1) The number of shares beneficially owned by China Direct Investments, Inc.
includes 955,000 shares of common stock presently outstanding and 2,125,000
shares of common stock issuable upon the exercise of outstanding common stock
purchase warrants with an exercise price of $0.20 per share. Messrs. James Wang,
David Stein and Marc Siegel have voting and dispositive control over securities
held by China Direct Investments, Inc. China Direct Investments, Inc. serves as
the U.S. advisor to our company. See "Management - U.S. Advisor" appearing on
page 42 of this prospectus. The number of shares beneficially owned by China
Direct Investments, Inc. excludes any securities owned individually by Messrs.
Wang, Stein and Siegel, or any entities over which they may hold voting or
dispositive control.
(2) The number of shares beneficially owned by CIIC Investment Banking Services
Co., Ltd. includes 900,000 shares of common stock which are presently
outstanding, 907,630 shares of common stock issuable upon the conversion of
shares of our Series A Convertible Preferred Stock and 907,630 shares issuable
upon the exercise of outstanding common stock purchase warrants with an exercise
price of $0.10 per share. Professor Shan Ting Ting has voting and dispositive
control over securities held by CIIC Investment Banking Services Co. Ltd. The
number of shares beneficially owned by CIIC Investment Banking Services Co. Ltd.
excludes any shares owned individually by Professor Shan Ting Ting.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 150,000,000 shares of common
stock, $.0005 par value per share, and 10,000,000 shares of preferred stock, no
par value, of which 500,000 shares have been designated as Series A Convertible
Preferred Stock and 1,500,000 shares have been designated as Series B 6%
Cumulative Convertible Preferred Stock. As of December 31, 2005 there are
45,304,139 shares of common stock, 375,345 shares of Series A Convertible
Preferred Stock and 1,500,000 shares of our Series B 6% Cumulative Convertible
Preferred Stock issued and outstanding.
Common stock
Holders of common stock are entitled to one vote for each share on all
matters submitted to a shareholder vote. Holders of common stock do not have
cumulative voting rights. Holders of common stock are entitled to share in all
dividends that the Board of Directors, in its discretion, declares from legally
available funds. In the event of our liquidation, dissolution or winding up,
subject to the preferences of any shares of our preferred stock which may then
be outstanding, each outstanding share entitles its holder to participate in all
assets that remain after payment of liabilities and after providing for each
class of stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions for the common
stock. The rights of the holders of common stock are subject to any rights that
may be fixed for holders of preferred stock, when and if any preferred stock is
authorized and issued. All outstanding shares of common stock are duly
authorized, validly issued, fully paid and non-assessable.
Preferred stock
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Our Board of Directors, without further shareholder approval, may issue
preferred stock in one or more series from time to time and fix or alter the
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions of the shares of each series. The rights,
preferences, limitations and restrictions of different series of preferred stock
may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund provisions
and other matters. Our Board of Directors may authorize the issuance of
preferred stock, which ranks senior to our common stock for the payment of
dividends and the distribution of assets on liquidation. In addition, our Board
of Directors can fix limitations and restrictions, if any, upon the payment of
dividends on our common stock to be effective while any shares of preferred
stock are outstanding.
The rights granted to the holders of any series of preferred stock
could adversely affect the voting power of the holders of common stock and
issuance of preferred stock may delay, defer or prevent a change in our control.
Series A Convertible Preferred Stock
Our Board of Directors has created a series of 500,000 shares of
preferred stock designated as Series A Convertible Preferred Stock. The
designations, rights and preferences of the Series A Convertible Preferred Stock
provide:
o the stated value of the Series A Convertible Preferred Stock
is $0.80 per share,
o the Series A Convertible Preferred Stock is entitled to a
cumulative dividend of 6% per annum, when declared by our
Board of Directors, payable annually in arrears commencing May
31, 2006. The dividend is payable in cash or shares of our
common stock at our option. If we elect to pay dividends in
the form of shares of our common stock, for purposes of the
calculation the shares are valued at the average closing price
of our common stock for the 10 trading days preceding the date
of the dividend,
o the shares of Series A Convertible Preferred Stock do not have
any voting rights, except as may be provided under Florida
law,
o the shares are not redeemable by us nor are they subject to
any call option, and
o each share of Series A Convertible Preferred Stock is
convertible at the option of the holder into shares of our
common stock, subject to adjustment in the event of stock
splits and stock dividends, based upon a conversion value of
$0.08 per share which presently results in the issuance of 10
shares of common stock upon the conversion of each share of
Series A Convertible Preferred Stock; provided that no holder
has the right to converted his shares of Series A Convertible
Preferred Stock if by virtue of such conversion the holder
would become the beneficial owner of 5% or more of our common
stock.
Series B 6% Cumulative Convertible Preferred Stock
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Our Board of Directors has created a series of 1,500,000 shares of
preferred stock designated as Series B 6% Cumulative Convertible Preferred
Stock. The designations, rights and preferences of the Series B 6% Cumulative
Convertible Preferred Stock provide:
o the stated value of each share is $1.00,
o the shares pay cumulative dividends of 6% per annum beginning
on October 31, 2006, which increases to 20% per annum if an
"event of default" has occurred. For the purposes of the
dividends, an "event of default" means:
o if we fail to pay the dividend within seven days after written
notice from the holder,
o if any representation or warrant contained in the
subscription agreement for the sale of the security
proves to be false or misleading if we breach any
material covenant or term of the subscription
agreement or the designations of the Series B 6%
Cumulative Convertible Preferred Stock and we do not
cure the breach within seven days after notice from
the holder,
o if we default under a material term of a material
agreement, if a judgment should be entered against us
for more than $50,000 or if we declare bankruptcy or
we make an assignment for the benefit of our
creditors,
o if our common stock should be prevented from trading
by order of the SEC or the NASD or if our common
stock should no longer be quoted on the OTCBB, or any
exchange or automated quotations system, or
o if we fail to reserve a proper number of shares of
our common stock for issuance upon the possible
conversion of the Series B 6% Cumulative Convertible
Preferred Stock, or fail to timely deliver shares of
our common stock upon a possible conversion of our
Series B 6% Cumulative Convertible Preferred Stock of
if we fail to secure a timely effectiveness of the
registration statement of which this prospectus is a
part.
The dividends are payable in cash or at our options shares of
registered common stock. If we elect to pay dividends in the
form of shares of our common stock, for purposes of the
calculation the shares are valued at the average closing price
of our common stock for the 10 trading days preceding the date
of the dividend,
o the shares carry a liquidation preference equal to the stated
value plus any accrued but unpaid dividends,
o the shares of Series B 6% Cumulative Convertible Preferred
Stock do not have any voting rights except as may be provided
under Florida law,
o the shares are not redeemable by us nor are they subject to
any call option, and
o each shares of Series B 6% Cumulative Convertible Preferred
Stock, as well as the value of all accrued by unpaid
dividends, is convertible at the option of the holder into
shares of our common stock at an initial conversion price of
$0.10 per share, provided that no holder has the right to
converted his shares of Series B 6% Cumulative Convertible
Preferred Stock if by virtue of such conversion the holder
would become the beneficial owner of than 4.99% of our common
stock. This ownership limitation can be waived by the holder
upon 61 days notice to us. The conversion price is subject to
adjustment in the event of stock splits,reclassifications or
stock dividends. In addition, so long as the shares of Series
B 6% Cumulative Convertible Preferred Stock are outstanding,
if we should issue shares of common stock or securities
convertible or exchange for shares of our common stock at an
effective price less than the then conversion price of the
Series B shares, we are required to issue additional shares
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of our common stock so that the average per share purchase
price of the shares of common stock issued to the Subscriber
is equal to such other lower price per share and the
conversion price of the Series B 6% Cumulative Convertible
Preferred Stock will also be automatically be adjusted to
such other lower price.
Common Stock Purchase Warrants
At December 31, 2005 we had outstanding a common stock purchase
warrants to purchase an aggregate of 37,134,865 shares of our common stock as
follows:
Warrants issued in the Series A Convertible Preferred Stock transaction
In connection with the sale of shares of our Series A convertible
preferred stock in June 2005, we issued the purchasers five-year common stock
purchase warrants to purchase an aggregate of 3,753,450 shares of our common
stock with an exercise price of $0.10 per share. Other than the exercise price,
all other terms of the warrant issued to are identical to the common stock
purchase warrants issued to the purchasers in the offering.
The warrants contain a cashless exercise provision which permits the
holder, rather than paying the exercise price in cash, to surrender a number of
warrants equal to the exercise price of the warrants being exercised. The
exercise price of the warrants and the number of shares issuable upon the
exercise of the warrants is subject to adjustment in the event of stock splits,
stock dividends and reorganizations, or in the event we undertake an offering of
securities with an exercise price below the exercise price of these warrants in
which event the exercise price would be adjusted downward.
Warrants issued in the Series B 6% Cumulative Convertible Preferred
Stock transaction
In December 2005 we issued five year Class A Common Stock Purchase
Warrants to purchase 15,000,000 shares of our common stock at an exercise price
of $0.20 per share and five year Class B Common Stock Purchase Warrants to
purchase 15,866,665 shares of our common stock at an exercise price of $0.30 per
share in connection with the sale of our Series B 6% Cumulative Convertible
Preferred Stock. Other than the exercise price the terms of the warrants are
identical. These warrants are not exercisable to the extent that (a) the number
of shares of our common stock beneficially owned by the holder and (b) the
number of shares of our common stock issuable upon the exercise of the warrants
would result in the beneficial ownership by holder of more than 4.99% of our
then outstanding common stock. This ownership limitation can be waived by the
holder upon 61 days notice to us.
Until such time as the registration statement of which this prospectus
is a part is declared effective by the SEC, the exercise price of the warrants
is payable only in cash. Until such time, or if we should fail to maintain the
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effectiveness of the registration statement, the warrant holders can exercise
the warrants on a cashless basis which permits the holder, rather than paying
the exercise price in cash, to surrender a number of warrants equal to the
exercise price of the warrants being exercised. The exercise price of the
warrants and the number of shares issuable upon the exercise of the warrants is
subject to adjustment in the event of stock splits, stock dividends and
reorganizations. In addition, so long as the warrants are outstanding, if we
should issue shares of common stock or securities convertible or exchange for
shares of our common stock at an effective price less than the then conversion
price of the warrants the exercise price of the warrants will also be
automatically be adjusted to such other lower price.
Other Outstanding Warrants
In July 2003 in connection with a private offering of our securities we
issued the investors in the offering common stock purchase warrants to purchase
an aggregate of 247,750 shares of our common stock. The warrants, which expire
on May 15, 2006, have an exercise price $2.50 per share.
Between October 2002 and July 2004 we issued warrants to purchase an
aggregate of 142,000 shares of our common stock with exercise prices ranging
from $0.20 to $1.00 per share and expiring between July 2008 and October 2012 in
connection with services rendered to us.
In January 2006 we issued China Direct Investments, Inc. three year
common stock purchase warrants to purchase 2,125,000 shares of our common stock
at an exercise price of $0.20 per share as additional compensation. See
"Management - U.S. Advisor" appearing earlier in this prospectus. We have
included the shares of common stock issuable upon the exercise of this warrant
in the registration statement of which this prospectus is a part.
Transfer agent
The transfer agent for our common stock is Corporate Stock Transfer,
3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209, telephone
303-282-4800.
SELLING SECURITY HOLDERS
The Selling Security Holders
The following table sets forth
o the name of each selling security holder,
o the number of shares owned, and
o the number of shares being registered for resale by each
selling security holder.
The information presented herein is derived from a record list of our
shareholders and warrant holders. We may amend or supplement this prospectus
from time to time to update the disclosure set forth herein. All of the shares
owned by the selling security holders may be offered hereby. Because the selling
security holders may sell some or all of the shares owned by them, and because
there are currently no agreements, arrangements or understandings with respect
to the sale of any of the shares, no estimate can be given as to the number of
shares that will be held by the selling security holders upon termination of any
offering made hereby. If all the shares offered hereby are sold, the selling
security holders will not own any shares after the offering.
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<table>
<caption>
Number Percentage Shares Shares to Percentage
Name of selling of shares owned before to be be owned owned after
security holder owned offering offered after offering offering
- --------------- ----- -------- ------- -------------- --------
<s> <c> <c> <c> <c> <c>
Alpha Capital
Aktiengesellschaft (1) 2,892,743 4.99% 12,266,666 0 n/a
Alvin Siegel (2) 750,000 1.6% 750,000 0 n/a
China Direct
Investments, Inc. (3) 3,080,000 6.5% 3,080,000 0 n/a
CIIC Investment Banking
Services Co., Ltd. (4) 2,715,260 5.8% 2,715,260 0 n/a
David A. Stein (5) 750,000 1.6% 750,000 0 n/a
Edge Capital Partners, Ltd. (6) 2,422,552 4.99% 3,250,000 0 n/a
Edge, LLC (7) 750,000 1.6% 750,000 0 n/a
George Williams I.R.A. (8) 1,500,000 3.2% 1,500,000 0 n/a
Hong Zhou (9) 91,360 * 91,360 0 n/a
Huiging Qian (10) 151,640 * 151,640 0 n/a
Jia Gu (11) 121,020 * 121,020 0 n/a
Utica Advisors, LLC (12) 266,666 * 266,666 0 n/a
Monarch Capital Fund, Ltd. (13) 2,859,477 4.99% 12,000,000 0 n/a
Osher Capital, Inc. (14) 2,423,683 4.99% 3,266,666 0 n/a
Quingxuan Jiang (15) 125,000 * 125,000 0 n/a
Shaoyin Wang (16) 75,000 * 75,000 0 n/a
Sharon Standowski (17) 750,000 1.6% 750,000 0 n/a
Shenya Gong (18) 351,260 * 351,260 0 n/a
Tingting Shan (19) 60,000 * 60,000 0 n/a
Weiling Feng (20) 91,360 * 91,360 0 n/a
Whalehaven Capital Fund
Limited (21) 2,709,777 4.99% 9,000,000 0 n/a
Yewen Xi (22) 1,875,000 4.0% 1,875,000 0 n/a
Yonghua Cai (23) 1,000,000 2.2% 1,000,000 0 n/a
Ellis International, Ltd. (24) 2,413,703 4.99% 3,066,667 0 n/a
-----------
57,353,565
</table>
* less than 1%
(1) Alpha Capital Aktiengesellschaft holds 400,000 shares of our Series B 6%
Cumulative Convertible Preferred Stock and common stock purchase warrants to
purchase an aggregate of 8,266,666 shares at exercise prices ranging from $0.20
to $0.30 per share. The number of shares offered includes 4,000,000 shares
issuable upon the conversion of shares of our Series B 6% Cumulative Convertible
Preferred Stock and 8,266,666 shares issuable upon the exercise of outstanding
common stock purchase warrants with exercise prices ranging from $0.20 to $0.30
per share. Alpha Capital Aktiengesellschaft received warrants to purchase
266,666 shares of our common stock at an exercise price of $0.20 per share as a
due diligence fee in connection with the sale of our Series B 6% Cumulative
Convertible Preferred Stock in December 2005. The Series B 6% Cumulative
Convertible Preferred Stock and associated common stock purchase warrants are
not convertible or exercisable to the extent that (a) the number of shares of
our common stock beneficially owned by the holder and (b) the number of shares
of our common stock issuable upon the exercise of the warrants would result in
the beneficial ownership by holder of more than 4.99% of our then outstanding
common stock. This ownership limitation can be waived by the holder upon 61 days
notice to us. Messrs. Konrad Ackerman and Rainer Posch have voting and
dispositive control over securities held by Alpha Capital Aktiengesellschaft.
(2) The number of shares owned and offered includes 250,000 shares issuable upon
the conversion of shares of our Series B 6% Cumulative Convertible Preferred
Stock and 500,000 shares issuable upon the exercise of outstanding common stock
purchase warrants with exercise prices ranging from $0.20 to $0.30 per share.
The Series B 6% Cumulative Convertible Preferred Stock and associated common
stock purchase warrants are not convertible or exercisable to the extent that
(a) the number of shares of our common stock beneficially owned by the holder
and (b) the number of shares of our common stock issuable upon the exercise of
the warrants would result in the beneficial ownership by holder of more than
4.99% of our then outstanding common stock. This ownership limitation can be
waived by the holder upon 61 days notice to us.
(3) The number of shares owned and offered includes 955,000 shares of common
stock presently outstanding and 2,125,000 shares of common stock issuable upon
the exercise of outstanding common stock purchase warrants with an exercise
price of $0.20 per share. Messrs. James Wang, David Stein and Marc Siegel have
voting and dispositive control over securities held by China Direct Investments,
Inc. China Direct Investments, Inc. serves as the U.S. advisor to our company.
See "Management - U.S. Advisor" appearing on page 42 of this prospectus. The
number of shares beneficially owned by China Direct Investments, Inc. excludes
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any shares owned individually by Mr. Siegel or the holdings of Edge LLC or Edge
Capital Partners, Ltd., entities over which he holds voting and dispositive
power, or any shares owned individually by Mr. Stein. See footnotes 5, 6 and 7
to this table.
(4) The number of shares owned and offered includes 900,000 shares of common
stock which are presently outstanding, 907,630 shares of common stock issuable
upon the conversion of shares of our Series A Convertible Preferred Stock and
907,630 shares issuable upon the exercise of outstanding common stock purchase
warrants with an exercise price of $0.10 per share. Professor Shan Ting Ting has
voting and dispositive control over securities held by CIIC Investment Banking
Services Co. Ltd. The number of shares beneficially owned by CIIC Investment
Banking Services Co. Ltd. excludes any shares owned individually by Professor
Shan Ting Ting. See footnote 19 to this table.
(5) The number of shares owned and offered includes250,000 shares issuable upon
the conversion of shares of our Series B 6% Cumulative Convertible Preferred
Stock and 500,000 shares issuable upon the exercise of outstanding common stock
purchase warrants with exercise prices ranging from $0.20 to $0.30 per share.
The Series B 6% Cumulative Convertible Preferred Stock and associated common
stock purchase warrants are not convertible or exercisable to the extent that
(a) the number of shares of our common stock beneficially owned by the holder
and (b) the number of shares of our common stock issuable upon the exercise of
the warrants would result in the beneficial ownership by holder of more than
4.99% of our then outstanding common stock. This ownership limitation can be
waived by the holder upon 61 days notice to us. Mr. Stein is a principal of
China Direct Investments, Inc. which acts as an advisor to our company. The
number of shares beneficially owned by Mr. Stein excludes any shares owned by
China Direct Investments, Inc., an entity over which he holds voting and
dispositive control. See footnote 3 to this table.
(6) Edge Capital Partners, Ltd. holds 87,500 shares of our Series A Convertible
Preferred Stock, 50,000 shares of our Series B 6% Cumulative Convertible
Preferred Stock and common stock purchase warrants to purchase 1,875,000 shares
of our common stock at exercise prices ranging from $0.10 to $0.30 per share.
The number of shares offered includes 875,000 shares issuable upon the
conversion of shares of Series A Convertible Preferred Stock, 500,000 shares
issuable upon the conversion of shares of Series B 6% Cumulative Convertible
Preferred Stock and 1,875,000 shares issuable upon the exercise of outstanding
common stock purchase warrants with exercise prices ranging from $0.10 to $0.30
per share. Mr. Marc Siegel has voting and dispositive control over securities
held by Edge Capital Partners, Ltd. Mr. Siegel is a principal of China Direct
Investments, Inc. which acts as an advisor to our company. The number of shares
beneficially owned by Edge Capital Partners, Ltd. excludes any shares owned
individually by Mr. Siegel or the holdings of Edge LLC or China Direct
Investments, Inc., entities over which he holds voting and dispositive power.
See footnotes 3 and 7 to this table. The Series B 6% Cumulative Convertible
Preferred Stock and associated common stock purchase warrants are not
convertible or exercisable to the extent that (a) the number of shares of our
common stock beneficially owned by the holder and (b) the number of shares of
our common stock issuable upon the exercise of the warrants would result in the
beneficial ownership by holder of more than 4.99% of our then outstanding common
stock. This ownership limitation can be waived by the holder upon 61 days notice
to us.
(7) The number of shares owned and offered includes 250,000 shares issuable upon
the conversion of shares of our Series B 6% Cumulative Convertible Preferred
Stock and 500,000 shares issuable upon the exercise of outstanding common stock
purchase warrants with exercise prices ranging from $0.20 to $0.30 per share.
Mr. Marc Siegel has voting and dispositive control over securities held by Edge
LLC. Mr. Siegel is a principal of China Direct Investments, Inc. which acts as
an advisor to our company. The number of shares beneficially owned by Edge LLC
excludes any shares owned by individually Mr. Siegel or the holdings of Edge
Capital Partners, Ltd. or China Direct Investments, Inc., entities over which he
holds voting and dispositive power. See footnotes 3 and 6 to this table. The
Series B 6% Cumulative Convertible Preferred Stock and associated common stock
purchase warrants are not convertible or exercisable to the extent that (a) the
number of shares of our common stock beneficially owned by the holder and (b)
the number of shares of our common stock issuable upon the exercise of the
warrants would result in the beneficial ownership by holder of more than 4.99%
of our then outstanding common stock. This ownership limitation can be waived by
the holder upon 61 days notice to us.
(8) The number of shares owned and offered includes 500,000 shares issuable upon
the conversion of shares of our Series B 6% Cumulative Convertible Preferred
Stock and 1,000,000 shares issuable upon the exercise of outstanding common
stock purchase warrants with exercise prices ranging from $0.20 to $0.30 per
share. Mr. George Williams has voting and dispositive control over securities
held by George Williams I.R.A. The Series B 6% Cumulative Convertible Preferred
Stock and associated common stock purchase warrants are not convertible or
exercisable to the extent that (a) the number of shares of our common stock
beneficially owned by the holder and (b) the number of shares of our common
stock issuable upon the exercise of the warrants would result in the beneficial
ownership by holder of more than 4.99% of our then outstanding common stock.
This ownership limitation can be waived by the holder upon 61 days notice to us.
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(9) The number of shares owned and offered includes 45,680 shares issuable upon
the conversion of shares of our Series A Convertible Preferred Stock and 45,680
shares issuable upon the exercise of outstanding common stock purchase warrants
with an exercise price of $0.10 per share.
(10) The number of shares owned and offered includes 75,820 shares issuable upon
the conversion of shares of our Series A Convertible Preferred Stock and 75,820
shares issuable upon the exercise of outstanding common stock purchase warrants
with an exercise price of $0.10 per share.
(11) The number of shares owned and offered includes 60,510 shares issuable upon
the conversion of shares of our Series A Convertible Preferred Stock and 60,510
shares issuable upon the exercise of outstanding common stock purchase warrants
with an exercise price of $0.10 per share.
(12) The number of shares owned and offered includes 266,666 shares issuable
upon the exercise of outstanding common stock purchase warrants with an exercise
price of $0.20 per share. Utica Advisors, LLC received warrants to purchase
266,666 shares of common stock at an exercise price of $0.20 per share as a due
diligence fee in connection with the sale of our Series B 6% Cumulative
Convertible Preferred Stock in December 2005. Mr. Solomon Eisenberg has voting
and dispositive control over securities held by Utica Advisors, LLC.
(13) Monarch Capital Fund, Ltd. holds 400,000 shares of our Series B 6%
Cumulative Convertible Preferred Stock and common stock purchase warrants
exercisable into 8,000,000 shares of our common stock with exercise prices
ranging from $0.20 to $0.30 per share. The number of shares offered includes
4,000,000 shares issuable upon the conversion of shares of our Series B 6%
Cumulative Convertible Preferred Stock and 8,000,000 shares issuable upon the
exercise of outstanding common stock purchase warrants with exercise prices
ranging from $0.20 to $0.30 per share. Mr. Joseph Franck has voting and
dispositive control over securities held by Monarch Capital Fund, Ltd. The
Series B 6% Cumulative Convertible Preferred Stock and associated common stock
purchase warrants are not convertible or exercisable to the extent that (a) the
number of shares of our common stock beneficially owned by the holder and (b)
the number of shares of our common stock issuable upon the exercise of the
warrants would result in the beneficial ownership by holder of more than 4.99%
of our then outstanding common stock. This ownership limitation can be waived by
the holder upon 61 days notice to us.
(14) Osher Capital Inc. holds 100,000 shares of our Series B 6% Cumulative
Convertible Preferred Stock and common stock purchase warrants exercisable into
2,000,000 shares of our common stock with exercise prices ranging from $0.20 to
$0.30 per share. The number of shares owned and offered includes 1,000,000
shares issuable upon the conversion of shares of our Series B 6% Cumulative
Convertible Preferred Stock and 2,000,000 shares issuable upon the exercise of
outstanding common stock purchase warrants with exercise prices ranging from
$0.20 to $0.30 per share. Osher Capital, Inc. received warrants to purchase
266,666 shares of our common stock at an exercise price of $0.20 per share as a
due diligence fee in connection with the sale of our Series B 6% Cumulative
Convertible Preferred Stock in December 2005. Mr. Yisroel Kluger has voting and
dispositive control over securities held by Osher Capital, Inc. The Series B 6%
Cumulative Convertible Preferred Stock and associated common stock purchase
warrants are not convertible or exercisable to the extent that (a) the number of
shares of our common stock beneficially owned by the holder and (b) the number
of shares of our common stock issuable upon the exercise of the warrants would
result in the beneficial ownership by holder of more than 4.99% of our then
outstanding common stock. This ownership limitation can be waived by the holder
upon 61 days notice to us.
(15) The number of shares owned and offered includes 62,500 shares issuable upon
the conversion of shares of our Series A Convertible Preferred Stock and 62,500
shares issuable upon the exercise of outstanding common stock purchase warrants
with an exercise price of $0.10 per share.
(16) [The number of shares owned and offered includes 37,500 shares issuable
upon the conversion of shares of our Series A Convertible Preferred Stock and
37,500 shares issuable upon the exercise of outstanding common stock purchase
warrants with an exercise price of $0.10 per share.
(17) The number of shares owned and offered includes 250,000 shares issuable
upon the conversion of shares of our Series B 6% Cumulative Convertible
Preferred Stock and 500,000 shares issuable upon the exercise of outstanding
common stock purchase warrants with exercise prices ranging from $0.20 to $0.30
per share. The Series B 6% Cumulative Convertible Preferred Stock and associated
common stock purchase warrants are not convertible or exercisable to the extent
that (a) the number of shares of our common stock beneficially owned by the
holder and (b) the number of shares of our common stock issuable upon the
exercise of the warrants would result in the beneficial ownership by holder of
more than 4.99% of our then outstanding common stock. This ownership limitation
can be waived by the holder upon 61 days notice to us.
(18) The number of shares owned and offered includes 175,630 shares issuable
upon the conversion of shares of our Series A Convertible Preferred Stock and
175,630 shares issuable upon the exercise of outstanding common stock purchase
warrants with an exercise price of $0.10 per share.
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(19) The number of shares owned and offered includes 30,000 shares issuable upon
the conversion of shares of our Series A Convertible Preferred Stock and 30,000
shares issuable upon the exercise of outstanding common stock purchase warrants
with an exercise price of $0.10 per share. The number of shares beneficially
owned by Professor Shan Ting Ting excludes any shares owned by CIIC Investment
Banking Services Co., Ltd. over which Professor Shan Ting Ting has voting and
dispositive control. See footnote 4 to this table.
(20) The number of shares owned and offered includes 45,680 shares issuable upon
the conversion of shares of our Series A Convertible Preferred Stock and 45,680
shares issuable upon the exercise of outstanding common stock purchase warrants
with an exercise price of $0.10 per share.
(21) Whalehaven Capital Fund Limited holds 300,000 shares of our Series B 6%
Cumulative Convertible Preferred Stock and common stock purchase warrants
exercisable into 6,000,000 shares of our common stock with exercise prices
ranging from $0.20 to $0.30 per share. The number of shares offered includes
3,000,000 shares issuable upon the conversion of shares of our Series B 6%
Cumulative Convertible Preferred Stock and 6,000,000 shares issuable upon the
exercise of outstanding common stock purchase warrants with exercise prices
ranging from $0.20 to $0.30 per share. Mr. Michael Finkelstein has voting and
dispositive control over securities held by Whalehaven Capital Fund Limited. The
Series B 6% Cumulative Convertible Preferred Stock and associated common stock
purchase warrants are not convertible or exercisable to the extent that (a) the
number of shares of our common stock beneficially owned by the holder and (b)
the number of shares of our common stock issuable upon the exercise of the
warrants would result in the beneficial ownership by holder of more than 4.99%
of our then outstanding common stock. This ownership limitation can be waived by
the holder upon 61 days notice to us.
(22) The number of shares owned and offered includes 937,500 shares issuable
upon the conversion of shares of our Series A Convertible Preferred Stock and
937,500 shares issuable upon the exercise of outstanding common stock purchase
warrants with an exercise price of $0.10 per share.
(23) The number of shares owned and offered includes 500,000 shares issuable
upon the conversion of shares of our Series A Convertible Preferred Stock and
500,000 shares issuable upon the exercise of outstanding common stock purchase
warrants with an exercise price of $0.10 per share.
(24) Ellis International, Ltd. holds 100,000 shares of our Series B 6%
Cumulative Convertible Preferred Stock and common stock purchase warrants
exercisable into 2,066,667 shares of our common stock with exercise prices
ranging from $0.20 to $0.30 per share. The number of shares offered includes
1,000,000 shares issuable upon the conversion of shares of our Series B 6%
Cumulative Convertible Preferred Stock and 2,066,667 shares issuable upon the
exercise of outstanding common stock purchase warrants with exercise prices
ranging from $0.20 to $0.30 per share. Ellis International Ltd. received
warrants to purchase 66,667 shares of common stock at an exercise price of $0.20
per share as a due diligence fee in connection with the sale of our Series B 6%
Cumulative Convertible Preferred Stock in December 2005.Mr. Wilhelm Unger has
voting and dispositive control over securities held by Ellis International, Ltd.
The Series B 6% Cumulative Convertible Preferred Stock and associated common
stock purchase warrants are not convertible or exercisable to the extent that
(a) the number of shares of our common stock beneficially owned by the holder
and (b) the number of shares of our common stock issuable upon the exercise of
the warrants would result in the beneficial ownership by holder of more than
4.99% of our then outstanding common stock. This ownership limitation can be
waived by the holder upon 61 days notice to us.
None of the selling security holders are broker-dealers or affiliates
of broker-dealers. None of the selling security holders has, or within the past
three years has had, any position, office or other material relationship with us
or any of our predecessors or affiliates, other than as described previously in
this section. We are required to pay all fees and expenses incident to the
registration of the shares. We have agreed to indemnify the selling security
holders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act of 1933. We will not pay selling
commissions and expenses associated with any sale by the selling security
holders.
PLAN OF DISTRIBUTION
The selling security holders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling security holders may use any one or more of the
following methods when selling shares:
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o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker-dealers may agree with the selling security holders to
sell a specified number of such shares at a stipulated price
per share;
o a combination of any such methods of sale; or
o any other method permitted pursuant to applicable law.
The selling security holders may also sell shares under Rule 144 under
the Securities Act of 1933, if available, rather than under this prospectus.
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The selling security holders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
Broker-dealers may agree to sell a specified number of such shares at a
stipulated price per share, and, to the extent such broker-dealer is unable to
do so acting as agent for us or a selling shareholder, to purchase as principal
any unsold shares at the price required to fulfill the broker-dealer commitment.
Broker-dealers who acquire shares as principal may thereafter resell such shares
from time to time in transactions, which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above, in the over-the-counter markets or otherwise at prices and on
terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions. In connection with such
resales, broker-dealers may pay to or receive from the purchasers of such
shares, commissions as described above. In the event that shares are resold to
any broker-dealer, as principal, who is acting as an underwriter, we will file a
post-effective amendment to the registration statement of which this prospectus
forms a part, identifying the broker-dealer(s), providing required information
relating to the plan of distribution and filing any agreement(s) with such
broker-dealer(s) as an exhibit. The involvement of a broker-dealer as an
underwriter in the offering will require prior clearance of the terms of
underwriting compensation and arrangements from the Corporate Finance Department
of the National Association of Securities Dealers, Inc.
The selling security holder and these broker-dealers and agents and any
other participating broker-dealers, or agents may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933, in connection with the sales.
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<page>
The selling security holders may, from time to time, pledge or grant a
security interest in some or all of the shares or common stock or warrants owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock,
from time to time, under this prospectus, or under a supplement to this
prospectus under Rule 424 (b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling security holders to include the
pledgee, transferee or other successors-in-interest as selling security holders
under this prospectus.
The selling security holders also may transfer the shares of common
stock in other circumstances, in which case the transferees, pledgees or other
successors-in-interest will be the selling beneficial owners for purposes of
this prospectus.
Special considerations related to penny stock rules
Shares of our common stock may be subject to rules adopted by the SEC
that regulate broker-dealer practices in connection with transactions in "penny
stocks". Penny stocks are generally equity securities with a price of less than
$5.00 (other than securities registered on certain national securities exchanges
or quoted on the Nasdaq Stock Market, provided that current price and volume
information with respect to transactions in those securities is provided by the
exchange or system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from those rules, to deliver a
standardized risk disclosure document which contains the following:
o a description of the nature and level of risk in the market
for penny stocks in both public offerings and secondary
trading;
o a description of the broker's or dealer's duties to the
customer and of the rights and remedies available to the
customer with respect to violation to these duties or other
requirements of securities laws;
o a brief, clear, narrative description of a dealer market,
including "bid" and "ask" prices for penny stocks and the
significance of the spread between the "bid" and "ask" price;
o a toll-free telephone number for inquiries on disciplinary
actions;
o definitions of significant terms in the disclosure document or
in the conduct of trading in penny stocks; and
o other information as the SEC may require by rule or regulation.
Prior to effecting any transaction in a penny stock, the broker-dealer
also must provide the customer the following:
o the bid and offer quotations for the penny stock;
o the compensation of the broker-dealer and its salesperson in the
transaction;
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o the number of shares to which such bid and ask prices apply, or
other comparable information relating to the depth and liquidity
of the market for such stock; and
o monthly account statements showing the market value of each
penny stock held in the customer's account.
In addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from those rules, the broker-dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written acknowledgment
of the receipt of a risk disclosure statement, a written agreement to
transactions involving penny stocks, and a signed and dated copy of a written
statement. These disclosure requirements may have the effect of reducing the
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. Holders of shares of our common stock may have difficulty
selling those shares because our common stock may be subject to the penny stock
rules.
SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 2005, we had 45,304,139 shares of common stock
issued and outstanding. Of the issued and outstanding shares, approximately
39,673,470 shares of our common stock are "restricted securities". We have
included 1,855,000 shares, which are considered restricted securities in the
registration statement of which this prospectus is a part. These shares may be
resold by their holders as long as they are covered by a current registration
statement or under an available exemption from registration.
In general, Rule 144 permits a shareholder who has owned restricted
shares for at least one year, to sell without registration, within a three-month
period, up to one percent of our then outstanding common stock. In addition,
shareholders other than our officers, directors or 5% or greater shareholders
who have owned their shares for at least two years, may sell them without volume
limitation or the need for our reports to be current.
We cannot predict the effect, if any, that market sales of common stock
or the availability of these shares for sale will have on the market price of
the shares from time to time. Nevertheless, the possibility that substantial
amounts of common stock may be sold in the public market could adversely affect
market prices for the common stock and could damage our ability to raise capital
through the sale of our equity securities.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be
passed upon for us by Schneider Weinberger & Beilly LLP.
EXPERTS
The consolidated financial statements as of and for the years ended
December 31, 2004 and 2003 of Linkwell Tech Group, Inc. and subsidiary and
included in this prospectus have been audited by Sherb & Co. LLP, independent
registered public accounting firm, as indicated in their report with respect
thereto, and have been so included in reliance upon the report of such firm
given on their authority as experts in accounting and auditing.
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<page>
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on Form SB-2
under the Securities Act for the common stock offered by this prospectus. This
prospectus, which is a part of the registration statement, does not contain all
of the information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily complete. In each
instance, we refer you to the copy of the contracts and/or other documents filed
as exhibits to the registration statement.
We file annual and special reports and other information with the SEC.
Certain of our SEC filings are available over the Internet at the SEC's web site
at http://www.sec.gov. You may also read and copy any document we file with the
SEC at its public reference facilities:
Public Reference Room Office
100 F Street, N.E.
Room 1580
Washington, D.C. 20549
You may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at 100 F Street, N.E., Room
1580, Washington, D.C. 20549. Callers in the United States can also call
1-202-551-8090 for further information on the operations of the public reference
facilities.
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No dealer, sales representative or any other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the company or any of the
underwriters. This prospectus does not constitute an offer of any securities
other than those to which it relates or an offer to sell, or a solicitation of
any offer to buy, to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
the information set forth herein is correct as of any time subsequent to the
date hereof.
TABLE OF CONTENTS
Page
Prospectus Summary.......................... 2
Cautionary Statements Regarding
Forward-Looking Information ......................4
Risk Factors................................ 4
Market for Common Equity and Related
Shareholder Matters......................... 13 LINKWELL CORPRATION
Capitalization.............................. 14
Use of Proceeds............................. 15
Management's Discussion and
Analysis or Plan of Operation............. 15
Our Business................................ 26 PROSPECTUS
Management.................................. 42
Certain Relationships and
Related Transactions.................... 50
Principal Shareholders...................... 51
Description of Securities................... 52 ________________, 2006
Selling Security Holders.................... 56
Plan of Distribution ....................... 60
Shares Eligible for Future Sale............. 63
Legal Matters............................... 63 57,353,565 SHARES
Experts..................................... 63
Additional Information...................... 64
Financial Statements........................ F-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act allows us to indemnify each of our
officers and directors who are made a party to a proceeding if:
(a) the officer or director conducted himself or herself in good faith;
(b) his or her conduct was in our best interests, or if the conduct was not
in an official capacity, that the conduct was not opposed to our best interests;
and
(c) in the case of a criminal proceeding, he or she had no
reasonable cause to believe that his or her conduct was unlawful. We may not
indemnify our officers or directors in connection with a proceeding by or in our
right, where the officer or director was adjudged liable to us, or in any other
proceeding, where our officer or director are found to have derived an improper
personal benefit.
Our by-laws require us to indemnify directors and officers against, to the
fullest extent permitted by law, liabilities which they may incur under the
circumstances described above.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the registrant has been informed that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as express in the act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by us in connection with the distribution of
the securities being registered are as follows:
SEC Registration and Filing Fee........................................$ 1,328
Legal Fees and Expenses*............................................... 25,000
Accounting Fees and Expenses*.......................................... 10,000
Financial Printing*.................................................... 5,000
Transfer Agent Fees*................................................... 1,000
Blue Sky Fees and Expenses*............................................ 1,500
Miscellaneous*......................................................... 172
------
TOTAL........................................................ $44,000
======
* Estimated
None of the foregoing expenses are being paid by the selling security holders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Following are all issuances of securities by the small business issuer
during the past three years which were not registered under the Securities Act
of 1933, as amended (the "Securities Act"). In each of these issuances the
<page>
recipient represented that he was acquiring the shares for investment purposes
only, and not with a view towards distribution or resale except in compliance
with applicable securities laws. No general solicitation or advertising was used
in connection with any transaction, and the certificate evidencing the
securities that were issued contained a legend restricting their transferability
absent registration under the Securities Act or the availability of an
applicable exemption therefrom. Unless specifically set forth below, underwriter
participated in the transaction and no commissions were paid in connection with
the transactions.
In July 2003 we sold 247,500 shares of our common stock to nine
investors in a private offering at an offering price of $1.00 per share. The
recipients were either accredited investors or sophisticated investors who had
such knowledge and experience in financial, investment and business matters that
they were capable of evaluating the merits and risks of the prospective
investment in our securities. The participants had access to business and
financial information concerning our company. We also issued one warrant for
each share purchased in the offering, an aggregate of 247,500 warrants. The
exercise price of the warrants is $2.50 per share and the warrants expire on May
15, 2006. We issued these shares and the warrants to the investors in reliance
upon Section 4(2) of the Securities Act.
In September 2003, we sold approximately 135,135 shares of our common
stock to five investors in a private offering at a price of $.74 per share. The
recipients were either accredited investors or sophisticated investors who had
such knowledge and experience in financial, investment and business matters that
they were capable of evaluating the merits and risks of the prospective
investment in our securities. The participants had access to business and
financial information concerning our company. We issued these shares to the
investors in reliance upon Section 4(2) of the Securities Act.
In February 2003 we sold 60,000 shares of our common stock at a
purchase price of $1.00 per share to one investor. The recipient was an
accredited investor and had access to business and financial information
concerning our company. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of that act.
During fiscal 2003 we issued 205,000 shares of our common stock to
three consultants as compensation for consulting services valued at $237,000.
The recipients were either accredited investors or sophisticated investors who
had such knowledge and experience in financial, investment and business matters
that they were capable of evaluating the merits and risks of the prospective
investment in our securities. The participants had access to business and
financial information concerning our company. The issuances were exempt from
registration under the Securities Act in reliance on an exemption provided by
Section 4(2) of that act.
In October 2004 we sold 10,000 shares of our common stock to one
investor at a purchase price of $1.00 per share. The recipient was an accredited
investor and had access to business and financial information concerning our
company. The issuance was exempt from registration under the Securities Act in
reliance on an exemption provided by Section 4(2) of that act.
In April 2005, we issued 150,000 shares of common stock to a former
employee for services rendered which were valued at $15,000. The recipient was a
sophisticated investor who had such knowledge and experience in financial,
investment and business matters that they were capable of evaluating the merits
and risks of the prospective investment in our securities.
<page>
In May 2005, we issued 36,273,470 shares of our common stock to two
individuals under the terms of a Share Exchange Agreement dated May 2, 2005.
This transaction, which resulted in Linkwell Tech becoming a wholly owned
subsidiary of our company, was exempt from registration under the Securities Act
in reliance on an exemption provided by Section 4(2) of that Act. The
participants were either accredited investors or non-accredited investors who
had such knowledge and experience in financial, investment and business matters
that they were capable of evaluating the merits and risks of the prospective
investment in our securities. Additionally, in connection with the share
exchange agreement, we issued an aggregate of 1,855,000 shares of common stock
to China Direct Investments, Inc. and CIIC Investment Banking Services Co.,
Ltd., accredited investors, for services related to the share exchange agreement
in a transaction exempt from registration under the Securities Act in reliance
on an exemption provided by Section 4(2) of that act.
In connection with the share exchange agreement, we also issued our
former CEO 1,400,000 shares of our common stock. The recipient was an accredited
investor and the securities were issued in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act.
In June 2005, we sold 375,345 shares of our Series A Convertible
Preferred Stock, and common stock purchase warrants to purchase an additional
3,753,450 shares to a total of 12 investors, two of whom were accredited
investors and 10 who were "sophisticated" within the meaning of federal
securities laws. Each warrant entitles the holder to purchase one share of
common stock for a period of five years, at an exercise price of $.10 per share,
subject to adjustment. We received proceeds of approximately $234,240 (net of
costs of $65,760). The issuance of the shares and warrants was exempt from the
registration requirements of the Securities Act by reason of Section 4(2) of the
Securities Act and the rules and regulations, including Regulation D thereunder,
and Regulation S, as transactions by an issuer not involving a public offering.
Each of the transactions exempt by Regulation S was an "offshore" transaction to
a non-U.S. person, as that term is defined in Rule 902 of Regulation S.
On December 28, 2005, we completed a $1,500,000 financing of units of
our securities to 11 accredited investors in a transaction exempt from
registration under the Securities Act in reliance on exemptions provided by
Section 4(2) of that act and Regulation D resulting in gross proceeds to us of
$1,500,000. The offering consisted of 1,500,000 shares of our Series B 6%
Convertible Preferred Stock, Class A Common Stock Purchase Warrants to purchase
15,000,000 shares of common stock and Class B Common Stock Purchase Warrants to
purchase 15,000,000 shares of common stock. The Class A Warrants are exercisable
at $0.20 per share, and the Class B Warrants are exercisable at $0.30 per share,
and both warrants are for a term of five years. We paid certain of the purchases
and their advisors an aggregate of $65,000 in cash and issued those entities
Class A Warrants to purchase 866,665 shares of our common stock as due diligence
fees.
<page>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No Description of Document
2.1 Acquisition Agreement between the Company and HBOA.Com, Inc., dated
November 17, 1999 (1)
2.2 Amendment to the Acquisition Agreement between the Company and
HBOA.Com, Inc. dated December 28, 1999 (1)
2.3 Stock Exchange Agreement dated May 2, 2005 by and among Kirshner
Entertainment & Technologies, Inc., Gary Verdier, Linkwell Tech Group,
Inc. and the shareholders of Linkwell (2)
3.1 Articles of Incorporation (3)
3.2 Articles of Amendment to Articles of Incorporation (4)
3.3 Articles of Amendment to Articles of Incorporation (5)
3.4 Articles of Amendment to Articles of Incorporation (6)
3.5 Articles of Amendment to the Articles of Incorporation (11)
3.6 Bylaws (3)
3.7 Articles of Amendment to the Articles of Incorporation (12)
4.1 Form of common stock purchase warrant (7)
4.2 Form of Class A and Class B Common Stock Purchase Warrants (12)
5.1 Opinion of Schneider Weinberger & Beilly LLP *
10.1 Kirshner Entertainment & Technologies, Inc. - Year 2000 Equity
Compensation Plan (8)
10.2 HBOA Holdings, Inc. - Non Qualified Stock Option Plan (9)
10.3 2005 Equity Compensation Plan (10)
10.4 Consulting Agreement with China Direct Investments, Inc. *
10.5 Subscription Agreement for $1,500,000 unit offering (11)
10.6 Form of agreement between Shanghai Likang Disinfectant High-Tech
Company, Limited and its customers (12)
10.7 Form of agreement between Shanghai Likang Disinfectant High-Tech
Company, Limited and its suppliers (12)
10.8 Sales Agreement with Shanghai Likang Meirui Pharmaceutical High-Tech
Co., Ltd. Z*
10.9 Lease Agreement with Shanghai Shanhai Group for principal executive
offices*
10.10 Lease Agreement with Shanghai Likang Pharmaceuticals Co., Ltd.*
10.11 Lease with Shanghai Jinshan Zhuhang Plastic Lamp Factory, Ltd
10.12 Manufacturing Agreement with Shanghai Likang Meirui Pharmaceutical
High-Tech Co., Ltd.*
10.13 Stock Purchase Agreement for Aerisys Incorporated (13)
10.14 Asset Purchase Agreement dated February 6, 2006 with Shanghai Likang
Pharmaceuticals Technology Company, Limited (14)
14.1 Code of Business Conduct and Ethics*
16.1 Letter from Berkovits, Lago & Company LLP to the SEC dated May 13,
2005 (15)
21.1 Subsidiaries of the small business issuer *
23.1 Consent of Schneider Weinberger & Beilly LLP (contained in such firm's
opinion filed as Exhibit 5.1) *
23.2 Consent of Sherb & Co., LLP*
* filed herewith
(1) Incorporated by reference to the Current Report Form 8-K dated
December 28, 1999.
(2) Incorporated by reference to Current Report on For 8-K as filed on
May 6, 2005
<page>
(3) Incorporated by reference to the definitive Proxy Statement filed as
filed on October 24, 2000
(4) Incorporated by reference to the definitive Information Statement as
filed on June 23, 2003
(5) Incorporated by reference to the definitive Information Statement as
filed on March 3, 2005
(6) Incorporated by reference to the Current Report on Form 8-K as filed
on May 13, 2005.
(7) Incorporated by reference to the Current Report on Form 8-K as filed
on July 6, 2005
(8) Incorporated by reference to Post Effective Amendment No. 1 to the
Registration Statement on Form S-8 as filed on December 21, 2000.
(9) Incorporated by reference to the Registration Statement on Form S-8 as
filed on December 14, 2000.
(10) Incorporated by reference to the Current Report on Form 8-K as filed on
August 4, 2005.
(11) Incorporated by reference to the Current Report on Form 8-K as filed on
January 3, 2006.
(12) Incorporated by reference to the Current Report on Form 8-K/A as filed
on July 19, 2005.
(13) Incorporated by reference to the Current Report on Form 8-K as filed on
February 7, 2006
(14) Incorporated by reference to the Current Report on Form 8-K as filed on
February 7, 2006
(15) Incorporated by reference to the Current Report on Form 8-K as filed on
May 16, 2005.
ITEM 28. UNDERTAKINGS
The undersigned small business issuer will:
(1)File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospects filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) Include any additional or changed material information on the plan
of distribution.
(2)For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3)File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
<page>
(4)For determining liability of the undersigned small business
issuer under the Securities Act to any purchaser in the initial distribution of
the securities, the undersigned small business issuer undertakes that in a
primary offering of securities of the undersigned small business issuer pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the undersigned
small business issuer will be a seller to the purchaser and will be considered
to offer or sell such securities to such purchaser:
i. Any preliminary prospectus or prospectus of the undersigned
small business issuer relating to the offering required to be filed
pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned small business issuer or
used or referred to by the undersigned small business issuer;
iii. The portion of any other free writing prospectus relating
to the offering containing material information about the undersigned
small business issuer or its securities provided by or on behalf of the
undersigned small business issuer; and
iv. Any other communication that is an offer in the offering
made by the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or preceding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in City of Shanghai, China on February 7, 2006.
LINKWELL CORPROAITON
By: /s/ Xue Lian Bian
--------------------------------------
Xue Lian Bian, CEO, President,
Principal executive officer principal financial
and accounting officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
Signature Title Date
/s/ Xue Lian Bian. CEO, President, Chairman, February 7, 2006
- ------------------- principal executive officer
Xue Lian Bian and principal financial and
accounting officer
/s/ Wei Guan Vice President, Secretary February 7, 2006
- ------------------ and director
Wei Guan
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public Accounting Firm...............F-2
Consolidated Financial Statements:
Consolidated Balance Sheet........................................F-3
Consolidated Statements of Operations.............................F-4
Consolidated Statements of Stockholders' Equity...................F-5
Consolidated Statements of Cash Flows.............................F-6
Notes to Consolidated Financial Statements....................F-7 to F-17
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Linkwell Corporation (formerly Linkwell Tech Group, Inc.)
Shanghai, China
We have audited the accompanying consolidated balance sheet of Linkwell
Corporation and Subsidiary (formerly Linkwell Tech Group, Inc.) as of December
31, 2004, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 2004 and 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amount and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Linkwell
Corporation and Subsidiary(formerly Linkwell Tech Group, Inc.) as of December
31, 2004, and the results of their operations and their cash flows for the years
ended December 31, 2004 and 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/Sherb & Co., LLP
Certified Public Accountants
Boca Raton, FL
July 5, 2005
F-2
LINKWELL TECH GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 2004
<table>
ASSETS
<s> <c>
CURRENT ASSETS:
Cash $ 467,859
Accounts receivable, net of allowance for doubtful accounts of $37,050 1,099,154
Accounts receivable - related party 261,304
Inventories 941,311
Prepaid expenses and other 78,242
-------------------------
Total Current Assets 2,847,870
PROPERTY AND EQUIPMENT - Net 254,281
-------------------------
Total Assets $ 3,102,151
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of loans payable $ 301,933
Accounts payable and accrued expenses 1,191,554
Due to related party 258,242
Advances from customers 246,837
-------------------------
Total Current Liabilities 1,998,566
LOANS PAYABLE, less current portion 422,705
-------------------------
Total Liabilities 2,421,271
-------------------------
MINORITY INTEREST 152,564
-------------------------
STOCKHOLDERS' EQUITY:
Common stock ($.0005 Par Value; 150,000,000 Shares Authorized;
36,273,470 shares issued and outstanding) 18,138
Additional paid-in capital 585,727
Retained earnings (75,549)
-------------------------
Total Stockholders' Equity 528,316
-------------------------
Total Liabilities and Stockholders' Equity $ 3,102,151
=========================
</table>
See notes to consolidated financial statements
F-3
<page>
LINKWELL TECH GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<table>
<caption>
For the Years Ended December 31,
--------------------------------------------
2004 2003
-------------------- --------------------
<s> <c> <c>
NET REVENUES $ 4,422,522 $ 3,680,679
COST OF SALES 3,049,764 2,956,806
-------------------- --------------------
GROSS PROFIT 1,372,758 723,873
-------------------- --------------------
OPERATING EXPENSES:
Selling expenses 258,148 204,281
General and administrative 426,532 227,226
-------------------- --------------------
Total Operating Expenses 684,680 431,507
-------------------- --------------------
INCOME FROM OPERATIONS 688,078 292,366
OTHER INCOME (EXPENSE):
Other income 8,101 -
Interest income 1,476 1,854
Interest expense (29,359) (25,474)
-------------------- --------------------
Total Other Expense (19,782) (23,620)
-------------------- --------------------
INCOME BEFORE INCOME TAXES 668,296 268,746
INCOME TAXES (109,732) (29,803)
-------------------- --------------------
INCOME BEFORE MINORITY INTEREST 558,564 238,943
MINORITY INTEREST (55,856) (23,894)
-------------------- --------------------
NET INCOME $ 502,708 $ 215,049
==================== ====================
NET INCOME PER COMMON SHARE:
Basic and diluted $ 0.02 $ 0.01
==================== ====================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 36,273,470 36,273,470
==================== ====================
</table>
See notes to consolidated financial statements
F-4
<page>
LINKWELL TECH GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2004 and 2003
<table>
<caption>
Common Stock, $.0005 Par Value
----------------------------------
Additional Total
Number of Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
---------------------------------- ----------------- ----------------- -----------------
<s> <c> <c> <c> <c> <c>
Balance, December 31, 2002 36,273,470 $ 18,138 $ 585,727 $ 51,461 $ 655,326
Distributions - - - (285,134) (285,134)
Net income for the year - - - 215,049 215,049
---------------------------------- ----------------- ----------------- -----------------
Balance, December 31, 2003 36,273,470 18,138 585,727 (18,624) 585,241
Distributions - - - (559,633) (559,633)
Net income for the year - - - 502,708 502,708
---------------------------------- ----------------- ----------------- -----------------
Balance, December 31, 2004 36,273,470 $ 18,138 $ 585,727 $ (75,549) $ 528,316
================================== ================= ================= =================
</table>
See notes to consolidated financial statements
F-5
<page>
LINKWELL TECH GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<table>
<caption>
Years Ended December 31,
----------------------------------------
2004 2003
------------------ ------------------
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 502,708 $ 215,049
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 34,483 29,546
Loss on disposal of property and equipment 729 -
Allowance for doubtful accounts 1,067 4,702
Minority interest 55,856 23,894
Changes in assets and liabilities:
Accounts receivable (382,747) (102,879)
Accounts receivable related party (261,304)
Inventories (494,340) 166,330
Prepaid and other current assets 22,514 (51,109)
Accounts payable and accrued expenses 751,893 (76,786)
Due to related party 155,106 55,240
Advances to customers 106,528 64,170
------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 492,493 328,157
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (103,724) (47,102)
------------------ ------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (103,724) (47,102)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder distributions (559,633) (285,134)
Proceeds from loans payable 241,546 217,392
------------------ ------------------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (318,087) (67,742)
------------------ ------------------
NET INCREASE IN CASH 70,682 213,313
CASH - beginning of year 397,177 183,864
------------------ ------------------
CASH - end of year $ 467,859 $ 397,177
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 29,359 $ 25,474
================== ==================
Income taxes $ 91,146 $ 29,540
================== ==================
</table>
See notes to consolidated financial statements.
F-6
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Linkwell Corporation (formerly Linkwell Tech Group, Inc.) (the "Company" or
"Linkwell")) was founded on June 22, 2004, as a Florida corporation. On June 30,
2004, Linkwell acquired 90% of Shanghai Likang Disinfectant Co., Ltd. ("Likang")
through a stock exchange. The Stock Purchase Agreement has been accounted for as
a reverse acquisition under the purchase method for business combinations.
Accordingly, the combination of the two companies is recorded as a
recapitalization of Likang, pursuant to which Linkwell is treated as the
continuing entity. Likang is a science and technology enterprise founded in
1993. Likang is involved in the development, production, marketing and sale, and
distribution of disinfectant health care products. Likang's products are
utilized by the hospital and medical industry in China. Likang has developed a
line of disinfectant product offerings. Likang regards the hospital disinfecting
products as the primary segment of its business. Relying on the research and
development strength, unique technology and the competitive advantages of the
numerous professional staff rooms of Second Military Medical University, it has
developed and manufactured several dozen kinds of products in the field of skin
mucous disinfection, hand disinfection, surrounding articles disinfection,
medical instruments disinfection and air disinfection.
Basis of presentation
The consolidated statements include the accounts of Linkwell Tech Group, Inc.
and its 90% owned subsidiary. All significant inter-company balances and
transactions have been eliminated.
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.
Inventories
Inventories, consisting of raw materials and finished goods related to the
Company's products are stated at the lower of cost or market utilizing the
first-in, first-out method.
Fair value of financial instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses,
customer advances, loans and amounts due from related parties approximate their
fair market value based on the short-term maturity of these instruments.
F-7
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes
The Company files federal and state income tax returns in the United States for
its domestic operations, and files separate foreign tax returns for the
Company's Chinese subsidiaries. Income taxes are accounted for under Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
is an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated economic lives of the
assets, which are from five to ten years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred.
Foreign currency translation
Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in
determining net income or loss.
The functional and reporting currency is the U.S. dollar. The functional
currency of the Company's Chinese subsidiary is the local currency. The
financial statements of the subsidiary are translated into United States dollars
using year-end rates of exchange for assets and liabilities, and average rates
of exchange for the period for revenues, costs, and expenses. Net gains and
losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not material during the periods
presented because the Chinese dollar (RMB) fluctuates with the United States
dollar. Translation adjustments resulting from the process of translating the
local currency financial statements into U.S. dollars are included in
determining comprehensive income. The cumulative translation adjustment and
effect of exchange rate changes on cash at December 31, 2004 was not material
F-8
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Comprehensive income
The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
"Reporting Comprehensive Income". Comprehensive income is comprised of net
income and all changes to the statements of stockholders' equity, except those
due to investments by stockholders', changes in paid-in capital and
distributions to stockholders.
Concentration of 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. 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 is limited due to generally short payment terms. The
Company also performs ongoing credit evaluations of its customers to help
further reduce credit risk. For the year ended December 31, 2004, one customer
accounted for 40% of net revenues.
Research and development
Research and development costs are expensed as incurred.
F-9
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for the various revenues 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.
Advertising
Advertising is expensed as incurred. Advertising expenses for the years ended
December 31, 2004 and 2003 totaled approximately $54 and $13,340, respectively.
Minority Interest
Under generally accepted accounting principles when losses applicable to the
minority interest in a subsidiary exceed the minority interest in the equity
capital of the subsidiary, the excess is not charged to the majority interest
since there is no obligation of the minority interest to make good on such
losses. The Company, therefore, has included losses applicable to the minority
interest against its interest since the minority owners have no obligation to
make good on the losses. If future earnings do materialize, the Company shall be
credited to the extent of such losses previously absorbed.
Shipping and costs
Shipping costs are included in selling and marketing expenses and totaled
$76,908 and $79,617 for the years ended December 31, 2004 and 2003,
respectively.
F-10
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent accounting pronouncements
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires that if an entity
has a controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 requires
that its provisions are effective immediately for all arrangements entered into
after January 31, 2003. The Company does not have any variable interest entities
created after January 31, 2003. For those arrangements entered into prior to
January 31, 2003, the FIN 46 provisions are required to be adopted at the
beginning of the first interim or annual period beginning after June 15, 2003.
The Company has not identified any variable interest entities to date and will
continue to evaluate whether it has variable interest entities that will have a
significant impact on its consolidated balance sheet and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective for the first interim period beginning
after June 15, 2003, with certain exceptions. The adoption of SFAS No. 150 did
not have a significant impact on our consolidated financial position or results
of operations.
Reclassifications
Certain amounts in the 2004 and 2003 consolidated financial statements have been
reclassified to conform to subsequent consolidated financial statement
presentation. These reclassifications had no impact on previously reported net
results of operations or cash flows and related to the recapitalization of the
Company due to reverse merger accounting.
NOTE 2 - INVENTORIES
At December 31, 2004, inventories consisted of the following:
Raw materials $ 172,102
769,209
Finished goods --------------
$ 941,311
==============
F-11
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 3 - PROPERTY AND EQUIPMENT
At December 31, 2004, property and equipment consisted of the following:
Estimated Life
Office Equipment 5-7 Years $ 58,357
Auto and Truck 10 Years 131,081
Manufacturing Equipment 7 Years 66,769
Building and Land 20 Years 105,889
Leasehold Improvements 5 Years 3,280
--------
365,376
Less: Accumulated Depreciation (111,095)
--------------------
$ 254,281
For the years ended December 31, 2004 and 2003, depreciation expense amounted to
$34.483 and $29.546, respectively.
NOTE 4 - LOANS PAYABLE
Loans payable consisted of the following at December 31, 2004:
Note to De Chang Credit Union due on March 12, 2006 with
interest at 6.37% per annum. Secured by equipment $ 96,618
Note to De Chang Credit Union due on April 24, 2006 with
interest 6.37% per annum. Secured by equipment 108,696
Note to De Chang Credit Union due on May 18, 2006 with
interest at 6.37% per annum. Secured by equipment 217,391
Note to De Chang Credit Union due on September 16, 2005
with interest at 6.37% per annum. Secured by equipment 60,386
Note to De Chang Credit Union due on December 16, 2005
with interest at 6.96% per annum. Secured by equipment 241,547
------------------
Total 724,638
Less: current portion of loans payable (301,933)
-------------------
Loans payable, long-term $ 422,705
====================
F-12
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 4 - LOANS PAYABLE (continued)
At December 31, 2004, annual future maturities of loans payable were as follows:
2005 $ 301,933
2006 422,705
----------------
$ 724,638
NOTE 5 - RELATED PARTY TRANSACTIONS
The consolidated financial statements include balances and transactions with
related parties.
At December 31, 2004, the Company had an accounts receivable from a related
party entity of $261,304 related to the sale of merchandise.
At December 31, 2004, the Company had an accounts payable to a related party
entity amounting to $258,242 related to the manufacture of certain products. The
accounts payable bears no interest and ia payable on demand.
NOTE 6 - INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" "SFAS 109". SFAS 109 requires
the recognition of deferred tax assets and liabilities for both the expected
impact of differences between the financial statements and the tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax losses and tax credit carryforwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets. The Company's subsidiaries in China are governed by the
Income Tax Law of the People's Republic of China concerning Foreign Investment
Enterprises and Foreign Enterprises and local income tax laws (the "PRC Income
Tax Law").
Internal Revenue Code Section 382 places a limitation on the amount of taxable
income that can be offset by carryforwards after a change in control (generally
greater than a 50% change in ownership).
The table below summarizes the differences between the Company's effective tax
rate and the statutory federal rate as follows for years ended December 31,
2004:
2004 2003
------------------- ----------------
Computed "expected" tax expense 34.0 % 34.0 %
State income taxes 5.0 % 5.0 %
Other permanent differences (39.0)% (39.0)%
Foreign income taxes 16.0% 11.0%
------------------- ----------------
Effective tax rate 16.0% 11.0%
=================== ===============
F-13
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 7 - COMMITMENTS
Operating Leases
The Company leases office and manufacturing space under leases in Shanghai,
China that expire through March 2007. Future minimum rental payments required
under these operating leases are as follows:
Period Ended December 31, 2005 $ 44,671
Period Ended December 31, 2006 $ 36,253
Period Ended December 31, 2007 $ 9,063
For the years ended December 31, 2004 and 2003, rent expense amounted to $46,535
and $9,300, respectively.
NOTE 8 - LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding. No federal, state or
local governmental agency is presently contemplating any proceeding against the
Company. No director, executive officer or affiliate of the Company or owner of
record or beneficially of more than five percent of the Company's common stock
is a party adverse to the company or has a material interest adverse to the
Company in any proceeding.
NOTE 9 - OPERATING RISK
(a) Country risk
Currently, the Company's revenues are mainly derived from sale of herbs, beet
sugar and veterinary products in the Peoples Republic of China (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 companies, the Company could have to compete
with larger international companies who have greater funds available for
expansion, marketing, research and development and the ability to attract more
qualified personnel if access is allowed into the PRC market. If international
companies do gain access to the PRC markets, they may be able to offer products
at a lower price. There can be no assurance that the Company will remain
competitive should this occur.
F-14
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 9 - OPERATING RISK (continued)
(c) Exchange risk
The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Remnibi converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.
(d) Political risk
Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.
(e) Key personnel risk
The Company's future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
(f) Performance of subsidiaries risk
Currently, a majority of the Company's revenues are derived via the operations
of the subsidiaries. Economic, governmental, political, industry and internal
company factors outside of the Company's control affect each of the
subsidiaries. If the subsidiaries do not succeed, the value of the assets and
the price of our common stock could decline. Some of the material risks relating
to the partner companies include the fact that three of the subsidiaries are
located in China and have specific risks associated with that and the
intensifying competition for the Company's products and services and those of
the subsidiaries
NOTE 10 - SUBSEQUENT EVENTS
On May 2, 2005 the Company entered into and consummated a share exchange with
Kirshner Entertainment & Technologies, Inc. ("Kirshner"). Pursuant to the share
exchange, 100% of the Company's common stock was acquired in exchange for
36,273,470 shares of Kirshner's common stock, which at closing represented
approximately 87.5% of the issued and outstanding shares of Kirshner's common
stock. As a result of the transaction, the Company became a wholly-owned
subsidiary of Kirshner.
F-15
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 10 - SUBSEQUENT EVENTS (continued)
On May 11, 2005, the Company's Board of Directors approved the creation of
Series of 500,000 shares of Series A Convertible Preferred Stock having the
following rights, preferences and limitations: (a) each share has a stated value
of $.80 per share and no par value; (b) each share ranks equally with any other
series of preferred stock designated by the Company and not designated as senior
securities or subordinate to the Series A Convertible Preferred Stock,; (c) each
share entitles the holder to receive a six percent (6%) per annum cumulative
dividend when, as and if, declared by the Board of Directors of the Company; (d)
these shares are convertible into shares of the company's Common Stock at a per
share value of $.08 per share,; (e) the shares have no voting rights, and (f)
the shares are not subject to redemption.
On June 30, 2005, the Company completed an approximate $234,240 (net of costs of
$65,760) financing consisting of 375,345 shares of its 6% Series A Preferred
Stock, and common stock purchase warrants to purchase an additional 3,753,450
shares. Each warrant entitles the holder to purchase one share of common stock
for a period of five years, at an exercise price of $.10 per share, subject to
adjustment. The net proceeds from the transaction will be used for general
working capital purposes.
To the extent that the investors continue to own the 6% Series A Preferred Stock
or warrants, the Company has agreed to issue the investors additional shares
and/or warrants to protect against the Company's future issuance of common stock
or securities convertible into common stock at less than the $.08 per share
conversion price of the preferred stock and/or $.10 per share exercise price of
the warrants, respectively. In addition, the Company also granted the holders
piggy-back registration rights covering the shares of its common stock
underlying the preferred stock and warrants.
On the date of issuance of the Series A Preferred Stock, the effective
conversion price was at a discount to the price of the common stock into which
it was convertible. The Company recorded a $300,276 preferred stock dividend
related to the beneficial conversion feature and the fair value of the warrants
granted in connection with the preferred stock.
In January 2006 the Company sold 100% of the stock of its subsidiary, Aerisys
Incorporated to Mr. Gary Verdier, the Company's former CEO, in exchange for
assumption of all liabilities and obligation of Aerisys Incorporated.
On December 28, 2005, the Company completed a $1,500,000 financing of units of
its securities in a transaction exempt from registration under the Securities
Act in reliance on exemptions provided by Section 4(2) of that act and
Regulation D resulting in gross proceeds to the Company of $1,500,000. The
offering consisted of 1,500,000 shares of our Series B 6% Cumulative Convertible
Preferred Stock, Class A Common Stock Purchase Warrants to purchase 15,000,000
shares of common stock and Class B Common Stock Purchase Warrants to purchase
15,000,000 shares of common stock. The Class A Warrants are exercisable at $0.20
per share, and the Class B Warrants are exercisable at $0.30 per share, and both
warrants are for a term of five years.
F-16
<page>
LINKWELL CORPORATION AND SUBSIDIARY
(FORMERLY LINKWELL TECH GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 10 - SUBSEQUENT EVENTS (continued)
The purchasers of the units were certain accredited institutional and individual
investors. Conversion of the preferred shares and exercise of the warrants are
also subject to a 4.99% cap on the beneficial ownership that each investor may
have at any point in time while the securities are outstanding. The Company paid
a due diligence fee of $65,000 in cash and Class B Warrants to purchase 866,665
shares of our common stock to certain of the investors. The net proceeds from
the transaction will be used for working capital purposes.
The Company agreed to file a registration statement covering the shares of
common stock underlying the securities issued. In the event the registration
statement is not filed by February 13, 2006 or does not become effective by June
28, 2006, the Company is required to pay liquidated damages in the amount of
$30,000 per month until the deficiency is cured. The transaction documents also
provide for the payment of liquidated damages to the investors in certain
events, including our failure to maintain an effective registration statement
covering the resale of the common shares issuable upon conversion or exercise of
the securities.
The securities are subject to anti-dilution protections afforded to the
investors. In addition, to the extent that the investors continue to own shares
of our common stock received upon conversion or exercise of the securities, the
Company has agreed to issue the investors additional shares to protect against
our future issuances of common stock or derivative securities at less than the
price of the common shares underlying the securities.
In January 2006 the Company entered into an asset purchase agreement with
Shanghai Likang Pharmaceuticals Technology Company, Limited, an affiliated
entity, and Xuelian Bian, the Company's officer and shareholder, under which the
Company purchased a previously leased building for $333,675. The funds
representing the consideration had previously been advanced to Shanghai Likang
Pharmaceuticals Technology Company, Limited.
F-17
<page>
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
(FORMERLY KIRSHNER ENTERTAINMENT & TECHNOLOGIES, INC.)
CONSOLIDATED BALANCE SHEET
September 30, 2005
(Unaudited)
<table>
<caption>
ASSETS
<s> <c>
CURRENT ASSETS:
Cash $ 257,590
Accounts receivable, net of allowance for doubtful accounts of $155,670 1,496,832
Inventories 761,183
Prepaid expenses and other 85,270
Due from related party 1,011,920
--------------------
Total Current Assets 3,612,795
PROPERTY AND EQUIPMENT - Net 338,506
--------------------
Total Assets $ 3,951,301
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans Payable $ 628,853
Accounts payable and accrued expenses 1,036,203
Deferred revenues 16,334
Due to related party 19,667
Income Tax Payable 105,362
Advances from customers 644,203
--------------------
Total Current Liabilities 2,450,622
OTHER PAYABLE 225,850
--------------------
Total Liabilities 2,676,472
--------------------
MINORITY INTEREST 194,013
--------------------
STOCKHOLDERS' EQUITY:
Preferred stock (No Par Value; 10,000,000 Shares Authorized;
No shares issued and outstanding) -
Series A convertible preferred stock (No Par Value; 500,000 Shares Authorized;
375,345 shares issued and outstanding) 234,240
Common Stock ($0.0005 Par Value; 150,000,000 Shares Authorized;
45,304,139 shares issued and outstanding) 22,652
Additional paid-in capital 1,072,062
Retained earnings (117,977)
Deferred compensation (146,667)
Other comprehensive gain - foreign currency 16,506
--------------------
Total Stockholders' Equity 1,080,816
--------------------
Total Liabilities and Stockholders' Equity $ 3,951,301
====================
</table>
See notes to unaudited consolidated financial statements
F-18
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
(FORMERLY KIRSHNER ENTERTAINMENT & TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<table>
<caption>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
<s> <c> <c> <c> <c>
NET REVENUES $ 1,690,922 $ 1,202,497 $ 3,826,067 $ 3,300,022
COST OF SALES 1,057,987 919,235 2,553,646 2,266,392
--------------- --------------- --------------- ---------------
GROSS PROFIT 632,935 283,262 1,272,421 1,033,630
--------------- --------------- --------------- ---------------
OPERATING EXPENSES:
Selling expenses 82,625 66,596 191,144 165,442
General and administrative 249,739 232,792 670,004 401,141
--------------- --------------- --------------- ---------------
Total Operating Expenses 332,364 299,388 861,148 566,583
--------------- --------------- --------------- ---------------
INCOME (LOSS) FROM OPERATIONS 300,571 (16,126) 411,273 467,047
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Other income (expense) - 7,608 (1,805) 7,608
Interest income 350 380 789 1,029
Interest expense (10,592) (7,988) (32,046) (21,827)
--------------- --------------- --------------- ---------------
Total Other Expense (10,242) - (33,062) (20,798)
--------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES 290,329 (16,126) 378,211 453,857
INCOME TAXES (52,316) (3,173) (82,716) (80,729)
--------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE MINORITY INTEREST 238,013 (19,299) 295,495 373,128
MINORITY INTEREST (19,518) 9,685 (37,647) (37,313)
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) 218,495 (9,614) 257,848 335,815
BENEFICIAL CONVERSION FEATURE - PREFERRED STOCK (300,276) - (300,276) -
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (81,781) $ (9,614) $ (42,428) $ 335,815
=============== =============== =============== ===============
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.00 $ 0.00 $ 0.00 $ 0.01
=============== =============== =============== ===============
Diluted $ 0.00 $ 0.00 $ 0.00 $ 0.01
=============== =============== =============== ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 43,934,574 36,273,470 40,374,683 36,273,470
=============== =============== =============== ===============
Diluted 43,934,574 36,273,470 40,374,683 36,273,470
=============== =============== =============== ===============
</table>
See notes to unaudited consolidated financial statements
F-19
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
(FORMERLY KIRSHNER ENTERTAINMENT & TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<table>
<caption>
For the Nine Months
Ended September 30,
-------------------------------------
2005 2004
----------------- -----------------
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 257,848 $ 335,815
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 20,083 26,187
Minority interest 41,449 37,313
Allowance for doubtful accounts 118,620 -
Stock-based compensation 13,333 -
Changes in assets and liabilities:
Accounts receivable (510,867) (739,759)
Inventories 180,128 (172,705)
Prepaid and other current assets (7,028) 70,603
Accounts payable and accrued expenses (117,801) 812,164
Due to related party (238,575) (103,136)
Deferred revenues 1,466 -
Tax Payable 105,362 29,977
Advances from customers 397,366 (140,309)
Other payables (196,855) -
----------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 64,529 156,150
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisition 2,460 -
Purchase of property, plant and equipment (104,308) (96,086)
----------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (101,848) (96,086)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on loans payable 326,920 -
Proceeds from sale of preferred stock 234,240 -
Increase in amount due from related party (750,616) (283,206)
----------------- -----------------
NET CASH USED IN FINANCING ACTIVITIES (189,456) (283,206)
----------------- -----------------
EFFECT OF EXCHANGE RATE ON CASH 16,506 -
----------------- -----------------
NET DECREASE IN CASH (210,269) (223,142)
CASH - beginning of year 467,859 397,177
----------------- -----------------
CASH - end of period $ 257,590 $ 174,035
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 32,046 $ 21,827
================= =================
Income taxes $ 82,716 $ 80,729
================= =================
</table>
See notes to unaudited consolidated financial statements.
F-20
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
(FORMERLY KIRSHNER ENTERTAINMENT & TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, the consolidated financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments have been included and all adjustments considered
necessary for a fair presentation have been included and such adjustments are of
a normal recurring nature. These consolidated financial statements should be
read in conjunction with the financial statements for the year ended December
31, 2004 and notes thereto contained in the Report on Form 10-KSB of Kirshner
Entertainment & Technologies, Inc. and with the financial statements for the
year ended December 31, 2004 and notes thereto contained in the Report on Form
8-K of Linkwell Tech Group, Inc. and Subsidiary as filed with the Securities and
Exchange Commission (the "Commission"). The results of operations for the nine
months ended September 30, 2005 are not necessarily indicative of the results
for the full fiscal year ending December 31, 2005.
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP"). The
consolidated financials statements of the Company include the accounts of its
wholly-owned subsidiary, Linkwell Tech Group, Inc., and its 90% owned
subsidiary. All significant inter-company balances and transactions have been
eliminated.
Organization
Kirshner Entertainment & Technologies, Inc. (the Company) was incorporated in
the state of Colorado on December 11, 1996. On May 31, 2000, the Company
acquired 100% of HBOA.Com, Inc. The Company focused on development of an
Internet portal through which home based business owners, as well as commercial
private label businesses, obtain the products, services, and information
necessary to start, expand and profitably run their businesses. On December 28,
2000, the Company formed a new subsidiary, Aerisys Incorporated ("Aerisys"), a
Florida corporation, to handle commercial private business. In March 2003, the
Company formed its entertainment division and changed its name to reflect this
new division. Effective as of March 31, 2003, we decided to discontinue our
entertainment division and our technology division, except for the Aerisys
operations that continue on a limited basis.
On May 2, 2005, the Company entered into and consummated a share exchange with
all of the shareholders of Linkwell Tech Group, Inc. ("Linkwell"). Pursuant to
the share exchange, the Company acquired 100% of the issued and outstanding
shares of Linkwell's common stock, in exchange for 36,273,470 shares of our
common stock, which at closing represented approximately 87.5% of the issued and
outstanding shares of our common stock. As a result of the transaction, Linkwell
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 3,775,669 or approximately 12.5% of the
outstanding stock. The consolidated financials statements reflect the change in
the capital structure of the Company due to the recapitalization and the
consolidated financial statements reflect the operations of the Company and its
subsidiaries for the periods presented.
Linkwell was founded on June 22, 2004, as a Florida corporation. On June 30,
2004, Linkwell acquired 90% of Shanghai Likang Disinfectant Co., Ltd. ("Likang")
through a stock exchange. Likang is a science and technology enterprise founded
in 1993. Likang is involved in the development, production, marketing and sale,
and distribution of disinfectant health care products.
F-21
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
(FORMERLY KIRSHNER ENTERTAINMENT & TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Organization (continued)
Likang's products are utilized by the hospital and medical industry in China.
Likang has developed a line of disinfectant product offerings. Likang regards
the hospital disinfecting products as the primary segment of its business.
Relying on the research and development strength, unique technology and the
competitive advantages of the numerous professional staff rooms of Second
Military Medical University, Likang has developed and manufactured multiple
products series in the field of skin mucous disinfection, hand disinfection,
surrounding articles disinfection, medical instruments disinfection and air
disinfection.
The Aerisys Intelligent Community(TM ) is a web-based software program and
private, browser-based intranet that allows schools to collaborate with parents
and faculty each day on classroom homework, assignments, critical dates, team
priorities and school news in a private forum. The network is branded to a
private logo and color scheme for each school and Aerisys hosts the community
for the schools. Parents can receive private or group messages from teachers and
administrators, and schools are able to reduce paper costs.
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.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 2005 and 2004
include the allowance for doubtful accounts.
Inventories
Inventories, consisting of raw materials and finished goods related to the
Company's products are stated at the lower of cost or market utilizing the
first-in, first-out method.
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectibility is reasonably assured. The
following policies reflect specific criteria for the various revenues streams of
the Company:
Revenues of Aerisys Inc. are recognized at the time the services are rendered to
customers. Services are rendered when the Company's representatives receive the
customers' requests and complete the customers' orders. For contacts over a
period of time, Aerisys recognizes the revenue on a straight-line basis over the
period that the services are provided.
The Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
F-22
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
(FORMERLY KIRSHNER ENTERTAINMENT & TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Loss per common share
Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted income per share is computed by dividing net income by the weighted
average number of shares of common stock, common stock equivalents and
potentially dilutive securities outstanding during each period. Not included in
basic shares are 3,753,450 common shares issuable upon conversion of preferred
stock and 3,753,450 stock warrants because they are anti-dilutive in 2005. In
the 2004 period, the Company did not have any common stock equivalents.
Stock-based compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts are amortized over the respective vesting periods of the
option grant. The Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
Foreign currency translation
Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in
determining net income or loss.
The functional and reporting currency is the U.S. dollar. The functional
currency of the Company's Chinese subsidiary is the local currency. The
financial statements of the subsidiary are translated into United States dollars
using year-end rates of exchange for assets and liabilities, and average rates
of exchange for the period for revenues, costs, and expenses. Net gains and
losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not material during the periods
presented because the Chinese dollar (RMB) fluctuates with the United States
dollar. Translation adjustments resulting from the process of translating the
local currency financial statements into U.S. dollars are included in
determining comprehensive income. The cumulative translation adjustment and
effect of exchange rate changes on cash at September 30, 2005 was not material.
On July 21, 2005, China allowed the Chinese RMB to fluctuate, ending its
decade-old valuation peg to the U.S. dollar. The new RMB rate reflects an
approximately 2% increase in value against the U.S. dollar. Historically, the
Chinese government has benchmarked the RMB exchange ratio against the U.S.
dollar, thereby mitigating the associated foreign currency exchange rate
fluctuation risk. The Company does not believe that its foreign currency
exchange rate fluctuation risk is significant, especially if the Chinese
government continues to benchmark the RMB against the U.S. dollar.
F-23
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
(FORMERLY KIRSHNER ENTERTAINMENT & TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Recent accounting pronouncements (continued)
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R
requires companies to recognize in the statement of operations the grant- date
fair value of stock options and other equity-based compensation issued to
employees. FAS No. 123R is effective for the first fiscal year beginning after
December 15, 2005. The Company is in process of evaluating the impact of this
pronouncement on its financial position.
In April 2005, the Securities and Exchange Commission's Office of the Chief
Accountant and its Division of Corporation Finance has released Staff Accounting
Bulletin (SAB) No.107 to provide guidance regarding the application of FASB
Statement No.123 (revised 2004), Share-Based Payment. Statement No. 123(R)
covers a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SAB 107 provides interpretative
guidance related to the interaction between Statement No. 123R and certain SEC
rules and regulations, as well as the staff's views regarding the valuation of
share-based payment arrangements for public companies. SAB 107 also reminds
public companies of the importance of including disclosures within filings made
with the SEC relating to the accounting for share-based payment transactions,
particularly during the transition to Statement No. 123R.
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS
154"). This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
APB Opinion No. 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, this Statement requires that the new
accounting principle be applied as if it were adopted prospectively from the
earliest date practicable. This Statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not believe that the adoption of SFAS 154 will have a
significant effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
F-24
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
(FORMERLY KIRSHNER ENTERTAINMENT & TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 2 - INVENTORIES
At September 30, 2005, inventories consisted of the following:
Raw materials $ 210,816
Finished goods 672,941
--------------
883,757
Les: reserve for obsolescence (122,574)
--------------
$ 761,183
==============
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company's 90% owned subsidiary, Likang, is engaged in business activities
with two affiliated entities. Shanghai Likang Machinery and Medicine Company,
Limited, which is owned by Messrs. Xuelian Bian and Wei Guan, our officers and
directors, sells our products to third parties. Additionally, Shanghai Likang
Machinery and Medicine Company, Limited advanced the Company funds for working
capital purposes. At September 30, 2005, the amount owed to the Company by
Shanghai Likang Machinery and Medicine Company Limited was $1,011,920.
Shanghai Likang Meirui Pharmaceuticals High-Tech Company, a company of which
Shanghai Shanhai Group, Likang's minority shareholder, owns 68%, provides
certain contract manufacturing of two products for Likang. At September 30,
2005, Likang owed Shanghai Likang Meirui Pharmaceuticals High-Tech Company
$4,667.
At September 30, 2005, the Company owed $15,000 to a shareholder of the Company
for working capital advanced to the Company's subsidiary, Aerisys, The advanced
are non-interest bearing and are payable on demand.
NOTE 4 - STOCKHOLDERS' EQUITY
Preferred Stock
On May 11, 2005, the Company's Board of Directors approved the creation of
500,000 shares of Series A Convertible Preferred Stock having the following
rights, preferences and limitations: (a) each share has a stated value of $.80
per share and no par value; (b) each share ranks equally with any other series
of preferred stock designated by the Company and not designated as senior
securities or subordinate to the Series A Convertible Preferred Stock,; (c) each
share entitles the holder to receive a six percent (6%) per annum cumulative
dividend when, as and if, declared by the Board of Directors of the Company; (d)
these shares are convertible into shares of the company's Common Stock at a per
share value of $.08 per share,; (e) the shares have no voting rights, and (f)
the shares are not subject to redemption.
On June 30, 2005, the Company completed an approximate $234,240 (net of costs of
$65,760) financing consisting of 375,345 shares of its 6% Series A Preferred
Stock, and common stock purchase warrants to purchase an additional 3,753,450
shares. Each warrant entitles the holder to purchase one share of common stock
for a period of five years, at an exercise price of $.10 per share, subject to
adjustment. The net proceeds from the transaction will be used for general
working capital purposes.
F-25
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
(FORMERLY KIRSHNER ENTERTAINMENT & TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 3 - STOCKHOLDERS' EQUITY (continued)
Preferred Stock (continued)
To the extent that the investors continue to own the 6% Series A Preferred Stock
or warrants, the Company has agreed to issue the investors additional shares
and/or warrants to protect against the Company's future issuance of common stock
or securities convertible into common stock at less than the $.08 per share
conversion price of the preferred stock and/or $.10 per share exercise price of
the warrants, respectively. In addition, the Company also granted the holders
piggy-back registration rights covering the shares of its common stock
underlying the preferred stock and warrants.
On the date of issuance of the Series A Preferred Stock, the effective
conversion price was at a discount to the price of the common stock into which
it was convertible. The Company recorded a $300,276 preferred stock dividend
related to the beneficial conversion feature and the fair value of the warrants
granted in connection with the preferred stock.
Common Stock
On March 24, 2005, the Company effected a 1 for 10 reverse split of its issued
and outstanding shares of common stock resulting in a decrease in the number of
shares outstanding as a result of such split from 36,256,669 to 3,625,669. In
addition the Company amended its Articles of Incorporation to provide that any
division or combination of the Company's capital stock shall not result in a
change, reduction or increase in the authorized capital stock of the Company.
The Articles were amended on March 23, 2005. All share and per-shares
information has been restated to reflect this reverse stock split.
In April 2005, the Company issued 150,000 shares of common stock to a former
employee for services rendered.
In connection with the share exchange agreement, in order to satisfy all
outstanding obligations and indebtedness owed by the Company to Mr. Verdier and
certain third parties, certain parties related to Linkwell provided the Company
with cash of $175,000 which the Company provided to Verdier to be used by
Verdier to pay the Company's third party creditors (including Mr. Verdier), and
the Company issued to Mr. Verdier 1,400,000 shares of our common stock.
On May 2, 2005, the Company issued 36,273,470 shares of its common stock to two
individuals under the terms of a Share Exchange Agreement dated May 2, 2005.
This transaction, which resulted in Linkwell becoming a wholly owned subsidiary
of the Company, was exempt from registration under the Securities Act of 1933,
as amended in reliance on an exemption provided by Section 4(2) of that Act. The
participants were either accredited investors or non-accredited investors who
had such knowledge and experience in financial, investment and business matters
that they were capable of evaluating the merits and risks of the prospective
investment in our securities. Additionally, in connection with the share
exchange agreement, the Company issued 1,855,000 shares of common stock to a
China Direct Investments, Inc. for services related to the share exchange
agreement.
On August 24, 2005 and effective September 1, 2005, the Company entered into a
one-year agreement with China Direct Investments, Inc. to provide business
development and management services. In connection with this agreement, the
Company issued 2,000,000 shares of the Company's common stock. The Company
valued these services using the air value of common shares on grant date at $.08
per share and recorded deferred consulting expense of $160,000 to be amortized
over the service period. For the nine months ended September 30, 2005,
amortization of deferred consulting expense amounted to $13,333.
F-26
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
(FORMERLY KIRSHNER ENTERTAINMENT & TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 3 - STOCKHOLDERS' EQUITY (continued)
Common Stock Warrants
In connection with the preferred stock funding, the Company granted warrants to
purchase 731,034 shares of its common stock at $0.3045. The Warrants shall be
exercisable for five years after the issue dates of the Warrants.
Stock warrant activity for the nine months ended September 30, 2005 is
summarized as follows:
Number of Weighted average
shares exercise price
------------ ----------------
Outstanding at December 31, 2004 - $ -
Granted 3,753,450 .10
Exercised - -
----------- ---------------
Outstanding at September 30, 2005 3,753,450 $ 0.10
============ ==============
The following table summarizes the Company's stock warrants outstanding at
September 30, 2005:
Options outstanding and exercisable
--------------------------------------------------
Weighted Weighted
average average
Range of remaining exercise
exercise price Number life price
---------------- ----------- --------- --------
$ 0.10 3,753,450 4.75 0.10
Stock Option Plan
Effective June 28, 2005, the Company's Board of Directors authorized, approved
and adopted its 2005 Equity Compensation Plan. The purpose of the plan is to
encourage stock ownership by our officers, directors, key employees and
consultants, and to give these persons a greater personal interest in the
success of our business and an added incentive to continue to advance and
contribute to us. The Company has currently reserved 5,000,000 of its authorized
but unissued shares of common stock for issuance under the plan, and a maximum
of 5,000,000 shares may be issued, unless the plan is subsequently amended
(subject to adjustment in the event of certain changes in our capitalization),
without further action by its Board of Directors and stockholders, as required.
Subject to the limitation on the aggregate number of shares issuable under the
plan, there is no maximum or minimum number of shares as to which a stock grant
or plan option may be granted to any person. Shares used for stock grants and
plan options may be authorized and unissued shares or shares reacquired by the
Company, including shares purchased in the open market. Shares covered by plan
options which terminate unexercised will again become available for grant as
additional options, without decreasing the maximum number of shares issuable
under the plan, although such shares may also be used by the Company for other
purposes.
The plan is administered by the Company's Board of Directors or an underlying
committee. The Board of Directors or the committee determines from time to time
those officers, directors, key employees and consultants to whom stock grants or
plan options are to be granted, the terms and provisions of the respective
option agreements, the time or times at which such options shall be granted, the
type of options to be granted, the dates such plan options become exercisable,
the number of shares subject to each option, the purchase price of such shares
and the form of payment of such purchase price. All other questions relating to
the administration of the plan, and the interpretation of the provisions thereof
and of the related option agreements, are resolved by the Board or committee.
F-27
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
(FORMERLY KIRSHNER ENTERTAINMENT & TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 3 - STOCKHOLDERS' EQUITY (continued)
Stock Option Plan (continued)
Plan options may either be options qualifying as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified
options. The Company's officers, directors, key employees and consultants are
eligible to receive stock grants and non-qualified options under the plan; only
the Company's employees are eligible to receive incentive options. In addition,
the plan allows for the inclusion of a reload option provision which permits an
eligible person to pay the exercise price of the option with shares of common
stock owned by the eligible person and receive a new option to purchase shares
of common stock equal in number to the tendered shares. Furthermore,
compensatory stock grants may also be issued.
Any incentive option granted under the plan must provide for an exercise price
of not less than 100% of the fair market value of the underlying shares on the
date of grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our outstanding common stock must not
be less than 110% of fair market value on the date of the grant. The term of
each plan option and the manner in which it may be exercised is determined by
the Board of Directors or the committee, provided that no option may be
exercisable more than ten years after the date of its grant and, in the case of
an incentive option granted to an eligible employee owning more than 10% of the
common stock, no more than five years after the date of the grant. The exercise
price of non-qualified options shall be determined by the Board of Directors or
the Committee, but shall not be less than the par value on the date the option
is granted. The per share purchase price of shares issuable upon exercise of a
Plan option may be adjusted in the event of certain changes in our
capitalization, but no such adjustment shall change the total purchase price
payable upon the exercise in full of options granted under the Plan.
Unless the plan has been previously suspended or terminated by the Board of
Directors, the plan, as it relates to grants of incentive stock options,
terminates on June 28, 2015.
F-28