AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 2006
Registration No. 333-131666
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. 2)
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
With a copy to:
Corporation Service Company
1201 Hays Street
Tallahassee, Florida 32301
800-342-8086
(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. []
<page>
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. []
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<caption>
CALCULATION OF REGISTRATION FEE
<s> <c> <c> <c> <c>
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(1)
- -------------------- ------------- -------------- ------------------ ------------------
Common stock,
par value $0.0005 24,583,450 $0.19 $4,670,856 $500 (6)
per share (2)
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
---------- ---
61,328,565
Registration Fee $1,409
======
</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 August 4, 2006.
(2) Includes 13,208,450 shares of common stock presently outstanding and
up to 11,375,000 shares of common stock issuable upon conversion of
the Series B 6% Cumulative Convertible Preferred Stock or as payment
for dividends thereon.
(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.
(6) Previously paid.
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 reclassifications, stock splits, stock dividends or similar events of the
Series B 6% Cumulative Convertible Preferred Stock and common stock purchase
warrants listed above. Rule 416, however, does not apply to additional shares
which may be issued as a result of the reset provisions in any of these
securities.
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 August 10, 2006
PROSPECTUS
LINKWELL CORPORATION
61,328,565 Shares of Common Stock
This prospectus covers the resale of a total of 61,328,565 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,
13,208,450 shares are presently outstanding, up to 11,375,000 shares of our
common stock which are issuable upon the conversion of shares of our Series B
6% Cumulative Convertible Preferred Stock or as payment for divdends ,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 75 of this prospectus.
Our common stock is traded on the OTC Bulletin Board under the trading
symbol "LWLL." On August 8, 2006 the last sale price for our common stock was
$0.18.
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 through our Likang subsidiary. 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. Recently we have made efforts to expand our customer base and
penetrate the civil disinfection, industrial disinfection, livestock and
agricultural disinfection markets of China. While we sell our products to
approximately 5,000 active and recurring customers including hospitals, medical
suppliers and distribution companies throughout China, two affiliated companies
represent approximately 36% and approximately 40% of our net revenues for the
fiscal 2005 and fiscal 2004, respectively, and approximately 67% of our net
revenues for the first quarter of fiscal 2006.
We regard Likang's operations as our primary business. We own 90% of
Likang, with the remaining 10% being owned by Shanghai Shanhai Group, an
unaffiliated third party. Shanghai Shanhai Group, which provides domestic
trading, storage and consulting services, is owned by Shanghai Shanhai Group
Employee Share-holding Committee (16.25%) and Shanghai Baoshan District Dachang
Town South Village Economic Cooperation Club (83.75%). Both of these entities
are owned by the employees of Shanghai Shanhai Group. Neither Shanghai Shanhai
Group or either of its two shareholders are involved in Likang's operations nor
do they exercise any management control.
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 61,328,565 shares of
our common stock by the selling security holders. Of the shares covered by this
prospectus, 13,208,450 shares are presently outstanding, up to 11,375,000
shares of our common stock which are issuable upon conversion of our Series B 6%
Cumulative Convertible Preferred Stock or as payment for dividends, and
36,745,115 shares are issuable upon exercise of warrants with exercise prices
ranging from $0.10 to $0.30 per share. As of the date of this prospectus there
are 650,000 shares of our Series B 6% Cumulative Convertible Preferred Stock
issued and outstanding which, based upon the current conversion price of $0.10
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per share, are convertible into an aggregate of 6,500,000 shares of our common
stock. We are contractually obligated, however, to register 175% of the number
of shares of our common stock which are issuable upon the conversion of the
Series B 6% Cumulative Convertible Preferred Stock. See "Description of
Securities - Preferred stock - Series B 6% Cumulative Convertible Preferred
Stock" beginning on page 65. Following the conversion of the remaining
outstanding shares of Series B 6% Cumulative Convertible Preferred Stock,
assuming such as conversion of which there are no assurances, we will file a
post-effective amendment to the registration statement of which this prospectus
is part deregistering any remaining shares of common stock not issued upon such
conversions.
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: 57,557,589 shares at August 4, 2006.
Outstanding After this Offering: 100,944,704 shares, including an aggregate
of 43,387,115 shares which are reserved
for possible issuance upon the conversion
of outstanding Series B Convertible
Preferred Stock assuming a conversion
price of $0.10 per share, exercise of
outstanding common stock purchase warrants
or exercise of options granted under our
stock option plans.
Common Stock Reserved: 48,262,115 shares, including:
o 11,375,000 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 36,887,115 shares upon the exercise of outstanding warrants with
exercise prices ranging from $0.10 to $1.00 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
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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 fiscal year ended
December 31, 2005 and the three months ended March 31, 2006 reflect the
operations of our company including Linkwell Tech and Likang for the periods
presented. The historical operating results for the fiscal year ended December
31, 2004 are those of Likang as a result of these transactions.
Statement of Operations Data:
<table>
<caption>
Three Months ended Year ended
March 31, December 31,
----------------------------------------------------------------------
2006 2005 2005 2004
(Restated) (Restated)
---------- ----------- -------- ----------------
<s> <c> <c> <c> <c>
Net revenues $1,868,526 $ 947,925 $5,465,933 $ 4,422,522
Total Operating Expense 368,175 177,191 1,210,188 684,680
Operating income 272,903 16,097 926,301 688,078
Total other (expense) ( 13,358) ( 11,117) ( 91,839) ( 19,782)
Income before discontinued
operations, income taxes and
minority interest 259,545 4,980 834,462 668,296
Net income $ 201,940 $ 3,221 $ 544,129 $ 502,708
Cumulative preferred stock dividend ( 26,634) 0 ( 11,240) 0
Deemed preferred stock dividends 0 0 (1,800,276) 0
Net income (loss) available to
common shareholders $ 175,306 $ 3,221 $(1,267,387) $ 502,708
Basic and dluted income
(loss) per common share $ 0.00 $ 0.00 $( 0.03) $ 0.02
</table>
Balance Sheet Data:
March 31, 2006 December 31, 2005
(unaudited) (restated)
(restated)
--------------- ------------------
Working capital $2,643,810 $2,412,757
Cash $ 879,920 $1,460,078
Total current assets $4,706,240 $4,839,541
Total assets $5,443,931 $5,526,509
Total current liabilities $2,062,430 $2,426,784
Total liabilities $2,062,430 $2,426,784
Total shareholders' equity $3,106,683 $2,850,555
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RISK FACTORS
Before you invest in our securities, you should be aware that there are
various risks. 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.
Risks Related to our Company
We engage in a number of material transactions with related parties which could
result in a conflict of interest involving our management.
We are materially dependent on certain related party transactions in
the ongoing conduct of our business. Sales to our affiliates Shanghai Likang
Pharmaceuticals Technology Company, Limited and Shanghai Likang Meirui
Pharmaceutical High-Tech Co., Ltd. represented approximately 36% of our total
net revenues in fiscal 2005 and approximately 44.5% of our accounts receivable
at December 31, 2005. For the three months ended March 31, 2006, sales to these
two related parties represented approximately 67% of our total net revenues and
approximately 62% of our accounts receivable at March 31, 2006. In addition, we
lease our principal executive officers from Shanghai Shanhai Group, the minority
shareholder of our Likang subsidiary, and Shanghai Likang Meirui Pharmaceutical
High-Tech Co., Ltd, an affiliated company of this minority shareholder, both
supplies us with raw materials and acts as a contract manufacturer for certain
of our products. We have also engaged in an number of other related party
transactions including extending a working capital loan to Shanghai Likang
Pharmaceuticals Technology Company, Limited and purchasing real property from
that entity. These affiliated transactions may from time to time result in a
conflict of interest for our management. Because these transactions are not
subject to the approval of our shareholders, investors in our company are wholly
reliant upon the judgment of our management in these related party transactions.
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. Although at March 31, 2006
we had cash on hand of approximately $880,000, these funds are not sufficient to
fund the additional line and upgrade our manufacturing facilities and
technologies as well as providing working capital necessary for our ongoing
operations and obligations. 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.
We may be unable to secure acceptable financing to fund this project on terms
which are suitable to us, 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 limiting our ability to increase
our revenues in the future.
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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
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 we may be unable to
prepare and file reports as required by the Securities Exchange Act of 1934 on a
timely basis which could lead to our common stock being removed from the OTCBB.
In this event, your ability to liquidate your investment would be negatively
impacted and you could lose your entire investment in our company.
We extend relatively long payment terms for accounts receivable, including on
sales to related parties, which can negatively impact our cash flows.
As is customary in the PRC, we extend relatively long payment terms to
our customers, including on sales to related parties. Our terms of sale
generally require payment within four to six months, which is considerably
longer than customary terms offered in the United States. For fiscal 2005, the
average turn on accounts receivable from non-related third parties was 127 days
and the average turn on accounts receivable from related parties as 106 days.
For the first quarter of fiscal 2006, the average turn on accounts receivable
from non-related third parties was 189 day and the average turn on accounts
receivable from related parties as 101 days. We also occasionally offer
established customers, including related parties, longer payment terms on new
products as an incentive to purchase these products, which has served to further
increase the average days outstanding for accounts receivable. In addition, we
maintain a relatively low reserve for doubtful accounts when compared to a
company operating in the U.S. Our payment terms can have the effect of adversely
impacting our cash flow and our ability to fund our operations out of our
operating cash flow. Our ability to continue to implement our growth strategy
could suffer if our cash flows are adversely impacted which will have the effect
of limiting our ability to increase our revenues in the future.
Certain agreements to which we are a party and 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
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contracts contain the basic business terms of the agreements between the
parties, these contracts do not contain certain provisions which are customarily
contained in similar contracts prepared in the U.S., such as representations and
warranties of the parties, confidentiality and non-compete clauses, provisions
outlining events of defaults, and termination and jurisdictional clauses.
Because our material contracts omit these types of clauses, notwithstanding the
differences in Chinese and U.S. laws we may not have the same legal protections
as we would if the contracts contained these additional provisions. We
anticipate that contracts we enter into in the future will likewise omit these
types of legal protections. While we have not been subject to any adverse
consequences as a result of the omission of these types of clauses, and we
consider the contracts to which we are a party to contain all the material terms
of our business arrangements with the other party, future events may occur which
lead to a dispute under agreements which could have been avoided if the
contracts were prepared in conformity with U.S. standards. Contractual disputes
which may arise from this lack of legal protections will divert management's
time from the operation of our business and require us to expend funds
attempting in settling a possible dispute. This possible diversion of management
time will limit the time our management would otherwise devote to the operation
of our business, and the diversion of capital could limit the funds we have
available to pay our ongoing operating expenses.
Each of our product groups operate in highly competitive businesses.
Each of our product groups is subject to competition from other manufacturers of
similar products. There are approximately 1,000 manufacturers of similar
disinfectant products in China, but only approximately 30 manufacturers,
including our company, operate on a continuous basis with the remainder of 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 may not be able to effectively compete in our
product segments which could have the effect of limiting our ability to sustain
our current level of operations or grow our revenues in future periods.
Because of the specialized, technical nature of the business, we are highly
dependent on certain members of management, as well as our marketing,
engineering and technical staff.
The loss of the services of our current management and skill employees could
have a material and negative effect on our ability to effectively pursue our
business strategy. In addition to manufacturing high volumes of our products and
developing new products, we must attract, recruit and retain a sizeable
workforce of technically competent employees, including additional skilled and
experienced managerial, marketing, engineering and technical personnel. If we
are unable to do so, our ability to grow our business and increase our revenues
could be limited.
If we experience customer concentration, we may be exposed to all of the risks
faced by our remaining material customers.
For the fiscal year ended December 31, 2005 and the three months ended March 31,
2006 revenues from one customer, Shanghai Likang Pharmaceuticals Technology
Company, Limited, an affiliate, represented approximately 36% and approximately
67%, respectively, of our total net revenues. Unless we maintain multiple
customer relationships, it is likely that we will experience periods during
which we will be highly dependent on a limited number of customers. Dependence
on a few customers could make it difficult to negotiate attractive prices for
our products and could expose us to the risk of substantial losses if a single
dominant customer stops conducting business with us. Moreover, to the extent
that we are dependent on any single customer, we are subject to the risks faced
by that customer to the extent that such risks impede the customer's ability to
stay in business and make timely payments to us.
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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.
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
used in our products which are proprietary in nature. We are not a party to any
confidentiality or similar agreements with employees and third parties including
consultants, vendors and customers and it not likely that we will enter into
these type of agreements in the future. It is possible that our employees or a
third party could, without authorization, utilize our propriety technologies
without our consent. The unauthorized use of this proprietary information by
third parties could adversely affect our business and operations as well as any
competitive advantage we may have in our market segment. We may not have
adequate remedies for the protection of our proprietary technologies and these
proprietary technologies could become known or independently developed by
competitors, in which event our ability to effectively compete could be in
jeopardy.
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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 consider our current lack
of corporate governance measures in formulating their investment decisions.
The dividend rate of our Series B 6% Cumulative Convertible Preferred Stock
have increased to 20% per annum which reduces the amount of operating capital
available to us.
Under the terms of the subscription agreement for the sale of our
Series B 6% Cumulative Convertible Preferred Stock we agreed to use our best
efforts cause the registration statement of which this prospectus forms a part
registering shares of our common stock issuable upon the conversion of those
shares to be declared effective by the SEC by May 27, 2006 which was 150 days
following the closing date of that offering and that the failure of the
registration statement to be declared effective by that date would constitute an
event of default under the terms of the Series B 6% Cumulative Convertible
Preferred Stock. The designations, rights and preferences of our Series B 6%
Cumulative Convertible Preferred Stock provide that the annual dividend
increases from 6% to 20% if an event of default has occurred. As the
registration statement of which this prospectus is a part was not declared
effective by May 27, 2006, the annual dividend on the Series B 6% Cumulative
Convertible Preferred Stock has increased from $39,000 annually to $130,000
annually.. This increase reduces the amount of working capital we otherwise
might have available to pay our ongoing operating expenses and grow our company.
In the event we should issue shares of our common stock as payment of these
dividends, these issuances will be dilutive to our other stockholders.
Risks Related to Doing Business in China
Our operations are located in the PRC and are subject to changes resulting from
the political and economic policies of the Chinese government.
Our business operations could be restricted by the political
environment in the PRC. The PRC has operated as a socialist state since 1949 and
is controlled by the Communist Party of China. In recent years, however, the
government has introduced reforms aimed at creating a "socialist market economy"
and policies have been implemented to allow business enterprises greater
autonomy in their operations. Changes in the political leadership of the PRC may
have a significant effect on laws and policies related to the current economic
reforms program, other policies affecting business and the general political,
economic and social environment in the PRC, including the introduction of
measures to control inflation, changes in the rate or method of taxation, the
imposition of additional restrictions on currency conversion and remittances
abroad, and foreign investment. Moreover, economic reforms and growth in the PRC
have been more successful in certain provinces than in others, and the
continuation or increases of such disparities could affect the political or
social stability of the PRC.
Although we believe that the economic reform and the macroeconomic
measures adopted by the Chinese government have had a positive effect on the
economic development of China, the future direction of these economic reforms is
uncertain and the uncertainty may decrease the attractiveness of our company as
an investment, which may in turn result in a decline in the trading price of our
common stock.
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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. Any actions by the PRC government to regulate growth and
contain inflation could have the effect of limiting our ability to grow our
revenues in future periods.
Any recurrence of severe acute respiratory syndrome, or SARS, or another
widespread public health problem, could interrupt our operations.
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:
* quarantines or closures of some of our offices which would severely
disrupt our operations, ? the sickness or death of our key officers and
employees, or ? a general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public
health problems could result in a loss of revenues in future periods and could
impact our ability to conduct our operations as they are presently conducted. If
we were unable to continue our operations as they are now conducted, our
revenues in future periods would decline and our ability to continue as a going
concern could be in jeopardy. If we were unable to continue as a going concern,
you could lose your entire investment in our company.
-10-
<page>
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 limited which could result in a loss of
revenue in future periods which could impact our ability to continue as a going
concern.
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.
-11-
<page>
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:
* quarterly variations in operating results;
* changes in accounting treatments or principles;
* additions or departures of key personnel;
* stock market price and volume fluctuations of publicly-traded
companies in general and Chinese-based companies in
particular; and
* 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.
-12-
<page>
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 61,328,565 shares being offered by existing
shareholders, including 13,208,450 shares of common stock which are presently
outstanding, up to 11,375,000 shares which are issuable upon the conversion of
shares of Series B 6% Cumulative Convertible Preferred Stock and for the payment
of dividends, 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
Business Conduct and Ethics, our Board has not established Audit and
Compensation Committees and we have not 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.
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.
-13-
<page>
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. 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.
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
Fiscal 2006
First quarter ended March 31, 2006 $0.26 $0.151
Second quarter ended June 30, 2006 $0.36 $0.221
On August_8, 2006, the last sale price of our common stock as reported
on the OTCBB was $0.18 As of August 4, 2006, there were approximately 160 record
owners of our common stock.
-14-
<page>
Dividend Policy
We have never paid cash dividends on our common stock. Payment of
dividends will be within the sole discretion of our Board of Directors and will
depend, among other factors, upon our earnings, capital requirements and our
operating and financial condition. At the present time, our anticipated
financial capital requirements are such that we intend to follow a policy of
retaining earnings in order to finance the development of our business.
While we have no current intention of paying dividends on our common
stock, should we decide in the future to do so, as a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiaries. In addition, our
operating subsidiaries, from time to time, may be subject to restrictions on
their ability to make distributions to us, including as a result of restrictive
covenants in loan agreements, restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory restrictions.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under
our 2001 Equity Compensation Plan, our 2005 Equity Compensation Plan and any
compensation plan not approved by our shareholders as of December 31, 2005.
<table>
<s> <c> <c> <c>
Number of Weighted Number of
securities to be average securities remaining
issued upon exercise available for future
exercise of price of issuance under equity
outstanding outstanding compensation plans
options, warrants options, (excluding securities
and rights (a) warrants reflected in column
and rights(b) (a))
Plan category
2005 Equity Compensation Plan 0 n/a 3,000,000
Equity compensation plans
not approved by shareholders 0 n/a n/a
</table>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2006.
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 should be read in conjunction with the financial statements and related
notes included elsewhere in this prospectus.
March 31, 2006
Long-term liabilities $ 0
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 277,276
-15-
<page>
Series B 6% Cumulative Convertible
Preferred Stock, 1,500,000 shares authorized,
1,500,000 shares issued and outstanding 1,395,000
Common stock, $0.0005 par value,
150,000,000 shares authorized,
45,304,139 shares issued and outstanding 22,652
Additional paid-in capital 2,912,442
Accumulated deficit ( 1,167,630)
Deferred compensation ( 367,223)
Other comprehensive gain - foreign currency 34,166
Total shareholders' equity $ 3,106,683
Total capitalization $ 3,106,683
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 Likang
Pharmaceuticals Technology Company, Limited is owned by Messrs. Xuelian Bian and
Wei Guan, our officer, directors and principal shareholders. Shanghai Shanhai
-16-
<page>
Group, an unaffiliated third party, owns the remaining 10% of Likang. The
transaction in which Linkwell Tech acquired the 90% interest in Likang resulted
in the formation of a U.S. holding company by Messrs. Bian and Guan as it did
not result in a change in the underlying ownership interests of Likang. For
financial accounting purposes, the reverse merger 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 three months
ended March 31, 2006 and the fiscal year ended December 30, 2005 reflect the
operations of our company including Linkwell Tech and Likang for the periods
presented while the results of operations for the fiscal year ended December 31,
2004 are those of Likang.
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.
-17-
<page>
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. In this regard, we have
allocated approximately $300,000 from our recent private offering to be used
towards expanded marketing of our products in the PRC and approximately $400,000
for costs associated with investigating the feasibility of expanding our sales
outside the PRC to the U.S. In addition, we may also consider the possible
acquisition of independent sales networks which could be used to increase our
product distribution as well as smaller, regional companies in our industry.
While we have allocated approximately $400,000 of proceeds from our recent
private offering, we have not identified any potential acquisition targets.
Sale of Aerisys Incorporated
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 year ended December 31, 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
Three months ended March 31, 2006 as compared to the three months ended March
31, 2005
Results of Operations
<table>
<caption>
Three Months Ended March 31, $ %
---------------------- ---------------------
2006 2005 Change Change
(unaudited) (unaudited)
(restated)
---------------------- --------------------- -------------- -------------
<s> <c> <c> <c> <c>
Net revenues $ 1,868,526 $ 947,925 $920,601 97.1%
Cost of sales 1,227,448 754,637 472,811 62.7%
Selling expenses 105,559 44,734 60,825 136.0%
G&A expenses 262,616 132,457 130,159 98.3%
Total operating expenses 368,175 177,191 190,984 107.8%
Operating income 272,903 16,097 256,806 1,595.4%
Total other (expense) (13,358) (11,117) (2,241) 20.2%
-18-
<page>
Gain from discontinued operations 12,794 - 12,794 100.0%
Income taxes (47,124) (1,401) (45,723) 3,263.6%
Minority interest (23,275) (358) (29,917) 6,401.4%
Net income $ 201,940 $ 3,221 $198,719 6,169.5%
====================== ===================== ============== =============
Net income attributable to
common shareholders $ 175,306 $ 3,221 $172,085 NM
====================== ===================== ============== =============
</table>
NM = not material
Other key indicators:
<table>
<caption>
Three Months Ended March 31,
---------------------------
2006 2005 % of change
(unaudited) (unaudited)
<s> <c> <c> <c>
Cost of sales as a percentage of revenues 65.7% 79.6% -13.9%
Gross profit margin 34.3% 20.4% +13.9%
Selling expenses as a percentage of revenues 5.6% 4.7% + 0.9%
G&A expenses as a percentage of revenues 14.1% 14.0% + 0.1%
Total operating expenses as a
percentage of revenues 19.7% 18.7% + 1.0%
</table>
Net revenues
Net revenues for the three months ended March 31, 2006 were $1,868,526
as compared to net revenues of $947,925 for the three months ended March 31,
2005, an increase of $920,601 or approximately 97.1%. We believe our increase in
our net revenues in the three months ended March 31, 2006 was attributable to a
recent surge in demand for disinfectant products stemming from health scares
such as SARS and the avian flu which have increased the public awareness of
health standards in China. As a result, public demand for disinfectant products
has increased. While we reported a increase in sales for fiscal 2005 from fiscal
2004 which as continued into the first quarter of fiscal 2006 when compared to
the first quarter of fiscal 2005, we cannot be assured that demand will continue
to increase or that the initial demand for new products which introduced in
fiscal 2005, including Jifro 4% Chlorhexidine Gluconate, Dianerkang, 2%
glutaraldehyde disinfectant, and the revised 84' disinfectant, will continue.
Of our total net revenues for the three months ended March 31, 2006,
approximately 67% were attributable to sales to related parties and
approximately 33% were attributable to sales to third parties, as compared to
approximately 38% and approximately 62%, respectively, for the three months
ended March 31, 2005. Included in our net revenues for the three months ended
March 31, 2006 were revenues of $1,260,211 from sales of our products to
Shanghai Likang Pharmaceuticals Technology Company, Limited, an affiliated
entity, an increase of $906,237, or approximately 259%, from the three months
ended March 31, 2005. Also included in our net revenues for the three months
ended March 31, 2006 were revenues of $4,044 from sales of our products to
Shanghai Likang Meirui Pharmaceuticals High-Tech Co., Ltd., an affiliate, a
decrease of $3,969 or approximately 49.5%, from the three months ended March 31,
2005. While we increased sales to non-related parties approximately 3% for the
three months ended March 31, 2006 from the comparable period in fiscal 2005,
sales to related parties increased $902,269, or approximately 252%, which
accounts for our significant increase in revenues in the first quarter of fiscal
2006 from the first quarter of fiscal 2005. Shanghai Likang Pharmaceuticals
Technology Company, Limited, sells our products using 72 independent sales
representatives in other provinces of China. We primarily attribute this
increase in related party sales to the effects of the overall demand for
disinfectant products which has increased orders from Shanghai Likang
Pharmaceuticals Technology Company, Limited's customers for our products.
-19-
<page>
Cost of sales
Cost of sales includes raw materials and manufacturing costs, which
includes labor, rent and an allocated portion of overhead expenses such as
utilities directly related to product production. For the three months ended
March 31, 2006, cost of sales amounted to $1,227,448 or approximately 65.7% of
net revenues as compared to cost of sales of $754,637 or approximately 79.6% of
net revenues for the three months ended March 31, 2005. Historically, our costs
of sales is attributable approximately 65% to raw material costs and
approximately 35% to manufacturing costs. 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 of raw materials. We also purchase raw
materials and finished product from Shanghai Likang Meirui Pharmaceutical
High-Tech Co. Ltd., an affiliate. These purchases totaled $0 and $0 for the
three months ended March 31, 2006 and the three months ended March 31, 2005,
respectively. We have not historically experienced a fluctuation in raw material
prices and do not anticipate that the prices will vary much during fiscal 2006.
The decrease in cost of sales as a percentage of net revenues for the
three months ended March 31, 2006 as compared to the three months ended March
31, 2005 is attributable to the effect of price increases during the later part
of fiscal 2005. Included in our overhead costs are rent on our manufacturing
facilities which included a building we leased from Shanghai Likang
Pharmaceuticals Technology Company, Limited, an affiliate, for approximately
$11,500 annually, which we purchased during the later part of fiscal 2005 which
served to reduce certain of our overhead expenses through the elimination of
this rent expense; however, during the later part of fiscal 2005 we leased
additional warehouse facilities under agreements which provide for annual rental
of approximately $37,000 which are reflected in our overhead expenses for the
first quarter of fiscal 2006. We experienced an increase in overhead costs such
as utilities and rent during the three months ended March 31, 2006 as compared
to the three months ended March 31, 2005.
Gross profit
Gross profit for the three months ended March 31, 2006 was $641,078 or
approximately 34.3% of net revenues, as compared to $193,288 or approximately
20.4% of revenues for the three months ended March 31, 2005. The gross profit
reflects an overall increase in our sales prices as we expand into new markets.
For example, our Ai'ershi disinfectant tablets are sold in Shanghai for
approximately $.83 per bottle. However in newer markets such as DongBei
Province, Ai'ershi disinfectant tablets are sold at approximately $1.64 per
bottle. An'erdian skin disinfectant sold for approximately $.36 per bottle in
BeiJing and Shanghai. We currently sell this product in western cities such as
ChongQing and XiAn at approximately $.49 per bottle, an increase of 36%. The
trend of increase in our gross profit margins reported in fiscal 2005 has
continued into the first quarter of fiscal 2006. While we believe that we will
continue to report increased gross profit margins during the balance of fiscal
2006 from the comparable periods in fiscal 2005, if sales of our products do not
continue to increase or if we report a drop in sales of products such as our
An'erdian Skin Disinfectant line, it is likely that our gross profit margins
would decline in future periods.
-20-
<page>
Operating expenses
Total operating expenses for the three months ended March 31, 2006 were
$368,175, an increase of $190,984, or approximately 107.8%, from total operating
expenses in the three months ended March 31, 2005 of $177,191. This increase
included the following:
* For the three months ended March 31, 2006, selling expenses amounted
to $105,559 as compared to $44,734 for the three months ended March 31, 2005, an
increase of $60,825 or approximately 136%. This increase is attributable to
increased local sales tax costs and commissions associated with our increased
revenues of approximately $20,000. We pay local sales tax to local authorities
upon sale of product to customers. Similar to the U.S., each Chinese province
has its own tax authorities. As we expand our sales into new territories, we
will be subject to various taxes. Additionally, during the three months ended
March 31, 2006, we incurred additional costs of approximately $18,000 in
connection with increased shipping costs to customers, increased advertising
costs of approximately $12,000, and increased sales-related consulting expenses
of approximately $21,000 related to business development into new territories.
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. During fiscal 2006 we intend to expand our marketing efforts and
have set aside approximately $300,000 of the proceeds from our recent private
placement for increased marketing of our products in the PRC during fiscal 2006.
* For the three months ended March 31, 2006, general and administrative
expenses were $262,616 as compared to $132,457 for the three months ended
March 31, 2005, an increase of $130,159, or approximately 98.3% and
included the following:
* We incurred consulting fees during the three months ended March 31, 2006 of
$67,323 substantially related to the issuance of common stock for business
development and management services related to our administrative
operations in the United States. We did not incur such costs during the
three months ended March 31, 2005. We expect these costs to increase in
2006 due to our business development efforts in the United States.
* For the three months ended March 31, 2006, salaries and wages and related
benefits increased by approximately $36,000 to $74,519 for the three months
ended March 31, 2006 from $38,275 in the 2005 period due to the hiring of
additional employees.
* We incurred additional operating expenses associated with overall price
increases, increased telephone and communications usage, and increase
travel and entertainment.
Included in our general and administrative expenses is rent expense
that we pay on our principal executive offices and warehouse space which we
lease from Shanghai Shanhai Group, an affiliate, for approximately $36,000 a
year. We anticipate that general and administrative expenses will continue to
increase during fiscal 2006 as a result of increased professional fees related
to audit costs and our registration statement. In addition, we have allocated
$400,000 from the proceeds of our recent private placement for costs, including
market research, related to the possible expansion of the market for our
products into the U.S.
-21-
<page>
Income from operations
We reported income from operations of $272,903 for the three months
ended March 31, 2006 as compared to income from operations of $16,097 for the
three months ended March 31, 2005, an increase of $256,806 or approximately
1,595%.
Other income (expense)
For the three months ended March 31, 2006 total other expenses amounted
to $13,358 as compared to $11,117 for the three months ended March 31, 2005, an
increase of $2,241. This change is primarily attributable to:
* Interest expense - related party of $4,145 represents interest due Shanghai
Shanhai Company, Likang's minority shareholder, on a demand loan in the
principal amount of $161,533 made to Likang for working capital, and
* Interest expense was $10,770 as compared to $11,299 for the three months
ended March 31, 2005, a decrease of $529 due to decreased borrowings during
the three months ended March 31, 2006.
Income before discontinued operations, income taxes and minority interest
Our income before discontinued operations, income taxes and minority
interest increased by $254,565 for the three months ended March 31, 2006 as
compared to the comparable 2005 primarily as a result of increased net revenues.
Discontinued operations
In January 2006, we sold 100% of the capital stock of our Aerisys
subsidiary to its former CEO in exchange for an assumption of all liabilities
related to it. The gain from discontinued operations in the three months ended
March 31, 2006 represents the gain on disposal of this subsidiary.
Minority interest
For the three months ended March 31, 2006, we reported a minority
interest in income of $23,275 as compared to $358 for the three months ended
March 31, 2005. The minority interest is attributable to Likang's minority
shareholder, and had the effect of reducing our net income.
Net income
As a result of these factors, we reported net income of $201,940 for
the three months ended March 31, 2006 as compared to net income of $3,221 for
the three months ended March 31, 2005.
-22-
<page>
Cumulative Preferred Stock Dividends and Net Income Attributable to Common
Shareholders
For the three months ended March 31, 2006 we accrued dividends in the amount of
$26,634 related to our Series A Convertible Preferred Stock and our Series B 6%
Cumulative Convertible Preferred Stock. We did not have comparable expenses in
fiscal 2005.
We reported net income attributable to our common shareholders of $175,305 for
the first quarter of fiscal 2006, an increase of $172,085 from the comparable
period in fiscal 2005. This translates to an overall per-share income available
to shareholders of $.00 for the three months ended March 31, 2006 compared to
per-share income of $.00 for the three months ended March 31, 2005.
Fiscal year ended December 31, 2005 ("Fiscal 2005") as compared to the fiscal
year ended December 31, 2004 ("Fiscal 2004")
<table>
<s> <c> <c> <c> <c>
Fiscal Fiscal $ %
2005 2004 Change Change
(restated)
----------- ------------ ----------- -----------
Net revenues $ 5,465,933 $4,422,522 $ 1,043,411 23.6%
Cost of sales 3,329,444 3,049,764 $ 279,680 9.2%
Selling expenses 331,258 258,148 $ 73,110 28.3%
G&A expenses 878,930 426,532 $ 452,398 106%
Total operating expenses 1,210,188 684,680 $ 525,508 76.7%
Operating income 926,301 688,078 $ 238,223 34.7%
Total other (expense) ( 91,839) ( 19,782) $ 72,057 NM
Net income 544,129 502,708 $ 41,121 8.4%
Cumulative and
deemed preferred stock
dividends (1,811,516) 0 $ 1,811,516 100%
Net income (loss) to
common shareholders $ (1,267,387) $ 502,708 $(1,770,095) NM
</table>
NM = not meaningful
Other key indicators:
<table>
<s> <c> <c> <c>
Fiscal 2005 Fiscal 2004 % of change
----------- ----------- -----------
Cost of sales as a percentage of revenues 60.9% 69.0% - 8.1%
Gross profit margin 39.1% 31.0% +8.1%
Selling expenses as a percentage of revenues 6.1% 5.8% +0.3%
G&A expenses as a percentage of revenues 16.1% 9.6% +6.5%
Total operating expenses as a
percentage of revenues 22.1% 15.5% +6.6%
</table>
Net revenues
Net revenues for fiscal 2005 were $5,465,933 as compared to net
revenues of $4,422,522 for fiscal 2004, an increase of $1,043,411 or
approximately 24%. Included in our net revenues for fiscal 2005 were revenues of
$1,933,043 from sales of our products to Shanghai Likang Pharmaceuticals
Technology Company, Limited, an affiliated entity, an increase of $234,120, or
approximately 14%, from fiscal 2004. Also included in our net revenues for
fiscal 2005 were revenues of $23,987 from sales of our products to Shanghai
Likang Meirui Pharmaceuticals High-Tech Co., Ltd., an affiliate, a decrease of
-23-
<page>
$43,469, or approximately 64%, from fiscal 2004. We believe our increase in our
net revenues in fiscal 2005 was attributable to a recent surge in demand for
disinfectant products coupled with a modest increase in the sales prices of our
products as we expand into new areas. Recent health scares such as SARS and the
avian flu have increased the public awareness of health standards in China and
in response the Chinese government 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. Approximately 98% of the increase in revenues we reported from fiscal
2004 to fiscal 2005 is attributable to an increase in the volume of products
sold, which includes both new products introduced during fiscal 2005 as well as
increased sales of other products, and approximately 2% of the increase in
revenues is attributable to the increase in average selling prices. New products
introduced in fiscal 2005 which helped to increase our revenues included 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, however, that these products will continue
to witness increased public demand.
Cost of sales
Cost of sales includes raw materials and manufacturing costs, which
includes labor, rent and an allocated portion of overhead expenses such as
utilities directly related to product production. For fiscal 2005, cost of sales
amounted to $3,329,444 or approximately 61% of net revenues as compared to cost
of sales of $3,049,764 or approximately 69% of net revenues for fiscal 2004.
Historically, our costs of sales is attributable approximately 65% to raw
material costs and approximately 35% to manufacturing costs. 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 of raw materials. We also
purchase raw materials and finished product from Shanghai Likang Meirui
Pharmaceutical High-Tech Co. Ltd., an affiliate. These purchases totaled $48,489
and $389,400 for fiscal 2005 and fiscal 2004, respectively. We have not
historically experienced a fluctuation in raw material prices and do not
anticipate that the prices will vary much during fiscal 2006. Included in our
overhead costs are rent on our manufacturing facilities which included a
building we leased from Shanghai Likang Pharmaceuticals Technology Company,
Limited, an affiliate, for approximately $11,500 annually. We experienced an
increase in overhead costs such as utilities and rent during fiscal 2005 as
compared to fiscal 2004. As a result of our purchase in fiscal 2005 of facility
we leased from an affiliate we expect rent expense to decrease, but we are
unable to anticipate if the balance of these overhead costs will continue to
increase in fiscal 2006.
Gross profit
Gross profit for fiscal 2005 was $2,136,489 or approximately 39% of net
revenues, as compared to $1,372,758 or approximately 31% of revenues for the
fiscal 2004. The increase in our gross profit margin reflects an overall
increase in sales prices of our products as we expand into new markets, coupled
with increased sales of our An'erdian Skin Disinfectants which have higher gross
profit margins and greater efficiencies of scale resulting from our overall
revenue increase which help to reduce on a per item basis the amount of our
fixed manufacturing costs included in our cost of sales. Three of our An'erdian
Skin Disinfectant products represented approximately 54% of our total revenues
for fiscal 2005, with an average gross profit margin of 55%, up from 47% of our
total revenues for fiscal 2004 with an average gross profit margin of 42%.
-24-
<page>
Operating expenses
Total operating expenses for fiscal 2005 were $1,210,188, an increase
of $525,508, or approximately 77%, from total operating expenses in fiscal 2004
of $684,680. This increase included the following:
* For fiscal 2005, selling expenses amounted to $331,258 as compared to
$258,148 for fiscal 2004, an increase of $73,110 or approximately 23%. This
increase is attributable to increased local tax costs and commissions
associated with our increased revenues. We pay local sales tax upon the
sales of our products. Additionally, in 2005, we incurred costs of
approximately $14,000 in connection with sales training conferences.
Selling expenses as a percentage of revenues remained relatively constant
at approximately 6%. We expect our selling expenses to increase as our
revenues increase and expect to spend increased funds on advertising and
promotion of our products as well as sales training. We have set aside
approximately $300,000 of the proceeds from our recent private placement
for increased marketing of our products in the PRC during fiscal 2006.
* For fiscal 2005, general and administrative expenses were $878,930 as
compared to $426,532 for fiscal 2004, an increase of $452,398, or
approximately 106% and included the following:
* We incurred professional fees of approximately $67,000 in connection with
the audit of our financials statements. Additionally, we experienced an
increase in professional fees related to our corporate SEC filings, ? We
incurred consulting fees of approximately $153,000 in fiscal 2005 which
were substantially related to the issuance of shares of our common stock as
compensation for business development and management services related to
our administrative operations in the United States. We expect these costs
to increase in fiscal 2006 as we have allocated approximately $400,000 from
the proceeds of our recent private offering for costs, including market
research, related to the possible expansion of the market for our products
into the U.S.,
* In 2005, salaries and wages and related benefits increased by approximately
$48,000 to $191,935 from $144,227 in fiscal 2004 due to the hiring of
additional employees, and
* We incurred additional operating expenses including increased telephone and
communications usage, and increase travel and entertainment.
Included in our general and administrative expenses is rent expense we
paid on our principal executive offices and warehouse space which we leased from
Shanghai Shanhai Group, an affiliate, of approximately $32,000 a year. We
anticipate that general and administrative expenses will continue to increase
during fiscal 2006 in part as a result of increased professional fees related to
audit costs. In addition, we have allocated $400,000 from the proceeds of our
recent private placement for costs, including market research, related to the
possible expansion of the market for our products into the U.S.
-25-
<page>
Income from operations
We reported income from operations of $926,301 for fiscal 2005 as
compared to income from operations of $688,078 for fiscal 2004, an increase of
$238,223 or approximately 35%.
Other income (expense)
For fiscal 2005 total other expenses amounted to $91,839 as compared to
$19,782 for fiscal 2004, an increase of $72,057. This change is primarily
attributable to:
* We recognized a registration rights penalty in fiscal 2005 of $44,000 for
which we did not have a comparable expense in fiscal 2004. In the terms of
our sale of shares of our Series B 6% Cumulative Convertible Preferred
Stock and common stock purchase warrants in fiscal 2005 we agreed to file a
registration statement covering the shares of our common stock underlying
those securities. This non-cash expense represents the possible payment of
liquidated damages if the registration statement of which this prospectus
is a part is not declared effective by May 27, 2006,
* Interest expense, related party, represents interest due Shanghai Shanhai
Company, Likang's minority shareholder, on a demand loan in the principal
amount of $161,533 made to Likang for working capital, and
* Interest expense was $42,720 as compared to $29,359 for fiscal 2004, an
increase of $13,361 due to increased borrowings during fiscal 2005.
Income before discontinued operations, income taxes and minority interest
Our income before discontinued operations, income taxes and minority
interest increased by $166,166 for fiscal 2005 as compared to fiscal primarily
as a result of increased net revenues.
Discontinued operations
In January 2006 we sold 100% of the capital stock of our Aerisys
subsidiary to its former CEO in exchange for an assumption of all liabilities
related to it. The loss from discontinued operations in fiscal 2005 represents
the revenues from that subsidiary less the operating and non-operating expenses
related to it.
Minority interest
For fiscal 2005, we reported a minority interest in income of $92,339
as compared to $55,856 for fiscal 2004. The minority interest is attributable to
Likang's minority shareholder, and had the effect of reducing our net income.
-26-
<page>
Net income
As a result of these factors, we reported net income of $544,129 for
fiscal 2005 as compared to net income of $502,708 for fiscal 2004.
Deemed and cumulative preferred stock dividends
During fiscal 2005, we recorded a deemed preferred stock dividend of
$1,800,276 which relates to our Series A Convertible Preferred Stock ($300,276)
and our Series B 6% Cumulative Convertible Preferred Stock ($1,500,000). This
non-cash expense related to the beneficial conversion features of those
securities and is recorded with a corresponding credit to paid in capital.
Additionally, for fiscal 2005 we recorded a preferred stock dividend of $11,240
which represents accrued but undeclared and unpaid dividends on our Series A
Convertible Preferred Stock and our Series B 6% Cumulative Convertible Preferred
Stock.
Net income (loss) attributable to common shareholders
We reported a net loss attributable to common shareholders of
$(1,267,387) for fiscal 2005 as compared to net income attributable to common
shareholders of $502,078 in fiscal 2004. This translates to an overall per-share
loss available to shareholders of ($.03) for fiscal 2005 compared to per-share
income of $.02 for fiscal 2004.
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 March 312, 2006 (unaudited) and December 31, 2005:
<table>
<caption>
March 31 December 31, $ of % of
2006 2005 Change Change
----------------------------------------------------------
(unaudited) (restated)
(restated)
<s> <c> <c> <c> <c>
Working capital $ 2,643,810 $2,412,757 $ 231,053 + 9.6%
Cash $ 879,920 $1,460,078 $( 580,158) - 39.7%
Accounts receivable, net $ 1,201,964 $1,347,163 $( 145,199) - 10.8%
Accounts receivable related $1,952,525 $ 872,370 $1,080,155 + 124%
Inventories $ 479,295 $ 968,224 $( 488,929) - 50.5%
Prepaid expenses $ 92,536 $ 81,750 $ 10,786 + 13.2%
Loan receivable related $ 100,000 $ 100,000 $ - none
Total current assets $ 4,706,240 $4,839,541 $( 133,301) - 2.8%
Property and equipment, net $ 737,691 $ 686,234 $ 51,457 + 7.5%
Loans payable $ 535,145 $ 628,869 $( 93,724) - 14.9%
Loans payable - related $ 163,033 $ 161,533 $ 1,500 + 0.01%
Accounts payable and
accrued expenses $ 923,571 $1,400,704 $(477,133) - 34.1%
Advances from customers $ 355,563 $ 126,199 $ 229,364 + 182%
Total liabilities $ 2,062,430 $2,426,784 $(364,354) - 15.0%
</table>
-27-
<page>
At March 31, 2006, we had a cash balance of $879,920. As of March 31,
2006, our cash position by geographic area is as follows:
United States $ 2,335
China 877,585
--------------
$ 879,920
Our working capital position increased $231,053 to $2,643,810 at March
31, 2006 from $2,412,757 at December 31, 2005. This increase in working capital
is primarily attributable to an increase of approximately $1.1 million in
accounts receivable due us from related parties as discussed below, which was
offset by decreases in cash (approximately $580,000), accounts receivable due
from third parties (approximately $146,000) and inventories (approximately
$489,000). The increase in accounts receivable - related parties and
corresponding decreases in cash and inventories reflects the effects of
increased sales during the first quarter of fiscal 2006 and the corresponding
receivables generated by those sales.
The decrease in our current assets of $133,301 at March 31, 2006 as
compared to December 31, 2005 was offset by an decrease in our current
liabilities of $364,354 at March 31, 2006 as compared to December 31, 2005. The
decrease in our current liabilities is primarily attributable to decreased
borrowings and lower payable and accrued expenses which were offset by an
increase in advances from customers.
At March 31, 2006, our inventories of raw materials, work in process
and finished goods, before a reserve for obsolete inventory totaled $479,295, a
decrease of $489,000, or approximately 51%, from December 31, 2005. At March 31,
2006 we have reserved $123,715 for possible obsolescence of inventories which
represents a minimal increase from inventory reserves at December 31, 2005. Our
management determined the reserve was appropriate based upon its internal
analysis of our sales and anticipated customer demand. During fiscal 2005 we
introduced several new products which had been in development for a period of
time and reformulated several existing products; these new and reformulated
products were partially attributable for our increased sales in fiscal 2005. Our
management considered the initial market impact from the introduction of the new
and reformulated products when it calculated the reserve for possible obsolete
inventory for both fiscal 2005 and the first quarter of fiscal 2006. We expect
to maintain higher inventory levels to accommodate for anticipated future sales
growth as well as a wider variety of products. As of March 31, 2006, our
inventory levels decreased due to a surge in revenues. Subsequent to the period,
our inventory quantities returned to normal levels as due to increased
production.
At March 31, 2006 our accounts receivable, allowance for doubtful
accounts from third parties was $32,929 as compared to $13,343 at December 31,
2005 and reflects our best estimate of probable losses. In determining the
allowance for doubtful accounts, our management reviews our accounts receivable
aging as well as the facts and circumstances of specific customers which may
indicate the collection of specific amounts are at risk. As is customary in the
PRC, we extend relatively long payment terms to our customers. Our terms of sale
generally require payment within four to six months, which is considerably
longer than customary terms offered in the United States, however, we believe
that our terms of sale are customary amongst our competitors for our a company
our size within our industry. For fiscal 2005, the average turn on accounts
receivable from non-related third parties was 127 days and the average turn on
accounts receivable from related parties as 106 days. For the first quarter of
fiscal 2006, the average turn on accounts receivable from non-related third
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<page>
parties was 189 day and the average turn on accounts receivable from related
parties as 101 days. We also occasionally offer established customers, including
related parties, longer payment terms on new products as an incentive to
purchase these products, which has served to further increase the average days
outstanding for accounts receivable. As the market for these new products is
established, we will discontinue offering this sales incentive. Occasionally we
will request a customer prepaid an order prior to shipment. At March 31, 2006
our balance sheet reflected advances from customers of $355,563, an increase of
$229,364, or approximately 182%, from December 31, 2005.
At March 31, 2006 related parties owed us $2,052,525 which included:
* $1,949,092 in accounts receivable due from to Shanghai Likang
Pharmaceuticals Technology Company, Limited for the purchase of products
from us,
* $3,433 accounts receivable due from Shanghai Likang Meirui Pharmaceutical
High-Tech Co. Ltd.for the purchase of products from us, and
* $100,000 due from Shanghai Likang Pharmaceuticals Technology Company,
Limited which represents a working capital loan to that entity. This loan
was repaid in April 2006.
As described elsewhere in this prospectus, we sell products to these
two affiliated entities. Our terms of sale and settlement on sales to Shanghai
Likang Meirui Pharmaceutical High-Tech Co. Ltd. are the same as we offer our
third party customers. Shanghai Likang Pharmaceuticals Technology Company,
Limited purchase products from us on an as needed basis in order to fill
customer orders they have received and do not maintain an inventory of our
products. They tender payment to us upon receipt of payment from their customer.
The accounts receivable from Shanghai Likang Pharmaceuticals Technology Company,
Limited are historically paid in less time than the accounts receivable of our
third party customers.
Our balance sheet at March 31, 2006 also reflects a loan payable to a
related party of $163,033 which is a working capital loan made to us by Shanghai
Shanhai Group in January 2005. This loan bears interest at 10% per annum and is
due on demand.
Net cash used in continuing operating activities for the three months
ended March 31, 2006 was $411,230 as compared to $163,257 for the three months
ended March 31, 2005. For the three months ended March 31, 2006, we used cash in
operations to fund a net increase in accounts receivable of $932,631, including
an increase of $1,070,531 in accounts receivables from related parties, and a
decrease in accounts payable and accrued expenses of $485,651. These increases
were offset by our net income, a decrease in inventory and an increase in
advances from customers, together with an add back of non-cash items of $131,783
For the three months ended March 31, 2005, we used cash to fund a net increase
in accounts receivable of $186,738, including an increase in accounts receivable
- - related parties of $128,986, an increase in inventory of $89,438 and a
reduction in accounts payable - related parties of $36,583 which were offset by
our net income, increases in prepaid and other current assets and accounts
payable and accrued expenses together with an add back of non-cash items of
$9,082.
Net cash used in investing activities for the three months ended March
31, 2006 was $66,842 as compared to $0 for the three months ended March 31,
2005, which reflected the purchase of additional manufacturing equipment in the
first quarter of fiscal 2006.
-29-
<page>
Net cash used by financing activities was $99,307 for the three months
ended March 31, 2006 as compared to $0 for the three months ended March 31, 2005
and reflects the repayment of a loan from a financial institution which became
due in March 2006.
We reported a net decrease in cash for the three months ended March 31,
2006 of $580,158 as compared to a net decrease in cash of $163,257 for the three
months ended March 31, 2005.
We currently have no material commitments for capital expenditures. As
of March 31, 2006, we had approximately $535,000 in short term loans maturing
during fiscal 2006. We plan on renewing these loans when they become due at term
comparable to current terms. Other than working capital and loans, we presently
have no other alternative source of working capital. 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 $1 million. We do not have sufficient working capital to fund the
additional line and upgrade our manufacturing facilities and technologies as
well as providing working capital necessary for our ongoing operations and
obligations. We will need to raise additional working capital to complete this
project. We may 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.
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 approximately $277,000 are being used for
general working capital purposes. In June 2006 the holders of the Series A
Convertible Preferred Stock converted those shares into an aggregate of
3,753,450 shares of our common stock.
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.
-30-
<page>
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 and an advisor to
one of the investors. We agreed to the payment of these due diligence fees,
which are meant to offset the costs certain of the investors incur in making the
decision to invest in an offering, as a term of the transaction. The recipients
of the due diligence fee are as set forth below:
Name Cash Fee Warrant Fee
of Recipient Received Received
Alpha Capital Aktiengesellschaft (1) $20,000 266,666
Ellis International Ltd. (1) 5,000 66,667
Osher Capital Inc. (1) 20,000 266,666
Utica Advisors, LLC (2) 20,000 266,666
Totals $65,000 866,665
(1) Investor in the offering.
(2) Advisor to Monarch Capital Fund, Ltd., an investor in the offering.
We intend to use the net proceeds from the transaction as follows: o
approximately $300,000 will be used for marketing of our products in
the PRC, o approximately $400,000 has been earmarked for costs,
including market research, related to the
o possible expansion of the market for our products into the U.S.,
approximately $400,000 has been allocated for expansion of our
operations in the PRC, including the possible acquisitions of
additional sales networks or other companies similar to ours,
and
o the balance will be used for general working capital.
We have not identified any potential acquisition targets and may never
close such a transaction. In that event, those funds will be used for general
working capital.
In July 2006 the holders of an aggregate of 850,000 shares of our
Series B 6% Cumulative Convertible Preferred Stock converted those shares into
an aggregate of 8,500,000 shares of our common stock. As of the date of this
prospectus 650,000 shares of Series B 6% Cumulative Convertible Preferred Stock
remain outstanding.
We agreed to file a registration statement covering the shares of
common stock underlying the the Series B 6% Cumulative Convertible Preferred
Stock and the exercise of the warrants. This prospectus is part of that
registration statement. In the event the registration statement was not filed by
February 13, 2006 or did not become effective by May 27, 2006, we are required
to pay liquidated damages in the amount of $30,000 per month until the
deficiency is cured. We filed the registration statement on February 8, 2006,
however, asthe registration statement was not declared effective prior to May
27, 2006 we are subject to payment of these liquidated damages. As of July 31,
2006 the amount of the liquidated damages is approximately $60,000. 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.
-31-
<page>
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:
* 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.
* Our revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
* Revenues from the sale of products to related parties are recorded when the
goods are shipped which correlates with the shipment by the related parties
to its customers, at which time title passes and collectibility is
reasonably assured. We receive sales orders on a just-in-time basis from
related parties. Generally, the related party does not hold our inventory.
If the related party has inventory on hand at the end of a financial
reporting period, the sale is reversed and the inventory is included on our
balance sheet.
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.
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<page>
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 believe the adoption of this pronouncement could have a
material effect on our financial position in future periods in the event we
grant stock options and other equity-based compensation to our employees.
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.
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
-33-
<page>
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.
On June 29, 2005, the Emerging Issues Task Force (EITF) of FASB
ratified Issue No. 05-2, "The Meaning of `Conventional Convertible Debt
Instrument' in EITF Issue No. 00-19, `Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.'"
EITF Issue 05-2 provides guidance on determining whether a convertible debt
instrument is "conventional" for the purpose of determining when an issuer is
required to bifurcate a conversion option that is embedded in convertible debt
in accordance with SFAS 133. Issue No. 05-2 is effective for new instruments
entered into and instruments modified in reporting periods beginning after June
29, 2005. The adoption of this pronouncement did not have a material effect on
our financial statements.
In September 2005, the EITF issued EITF Issue No. 05-4, "The Effect of
a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to
EITF Issue No. 00-19, `Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock.'" EITF 05-4 provides
guidance to issuers as to how to account for registration rights agreements that
require an issuer to use its "best efforts" to file a registration statement for
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<page>
the resale of equity instruments and have it declared effective by the end of a
specified grace period and, if applicable, maintain the effectiveness of the
registration statement for a period of time or pay a liquidated damage penalty
to the investor. We adopted View C of this pronouncement. Accordingly, we
bifurcated registration rights of our Series B 6% Cumulative Convertible
Preferred Stock from their related free standing financial instruments and
recorded them at fair value as reflected in the financial statements included
elsewhere herein.
In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting
for Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues," which addresses whether a modification to a conversion option that
changes its fair value affects the recognition of interest expense for the
associated debt instrument after the modification and whether a borrower should
recognize a beneficial conversion feature, not a debt extinguishment if a debt
modification increases the intrinsic value of the debt (for example, the
modification reduces the conversion price of the debt). This issue is effective
for future modifications of debt instruments beginning in the first interim or
annual reporting period beginning after December 15, 2005. We are currently in
the process of evaluating the effect that the adoption of this pronouncement may
have on our financial statements.
In September 2005, the FASB also ratified the EITF's Issue No. 05-8,
"Income Tax Consequences of Issuing Convertible Debt with a Beneficial
Conversion Feature," which discusses whether the issuance of convertible debt
with a beneficial conversion feature results in a basis difference arising from
the intrinsic value of the beneficial conversion feature on the commitment date
(which is recorded in the shareholder's equity for book purposes, but as a
liability for income tax purposes), and, if so, whether that basis difference is
a temporary difference under FASB Statement No. 109, "Accounting for Income
Taxes." This Issue should be applied by retrospective application pursuant to
Statement 154 to all instruments with a beneficial conversion feature accounted
for under Issue 00-27 included in financial statements for reporting periods
beginning after December 15, 2005. We are currently in the process of evaluating
the effect that the adoption of this pronouncement may have on our 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.
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).
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<page>
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 and we believe that these ties provide us
with certain marketing advantages. Recently we have made efforts to expand our
customer base and 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:
o Skin and mucous membrane disinfection
o Hand disinfectants (external)
o Environment and surface disinfectants
o Medical devices and equipment disinfectants
o 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. Products which we manufacture account for approximately 95% of our
total net revenues for each of the fiscal year ended December 31, 2005 and the
three months ended March 31, 2006.
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 other provinces of China.
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).
While the disinfectant industry in China is an emerging industry, and the
industry is populated with small regional players, we estimate that there are
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over 1,000 manufacturers and distributors of disinfectant products in China and
certain of our major competitors distribute products similar to ours, including
those which also prevent the spread of airborne viruses such as avian flu and
SARS. 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 eventually 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 two priorities on the
Hepatitis B infectious disease list in China
- ----------------------- ----------------------- --------------------- -----------------------------------------
June, 2005 Tibet Bubonic plague Five infected cases reported, two
deaths
- ----------------------- ----------------------- --------------------- -----------------------------------------
July-September 2005 Hunan, Fujian, Cholera 638 cases reported, two deaths
Zhejiang provinces
- ----------------------- ----------------------- --------------------- -----------------------------------------
August, 2005 Guizhou, Ningxia, Anthrax 140 cases reported, one death
Liaoning, Jilin
- ----------------------- ----------------------- --------------------- -----------------------------------------
October, 2005 Inner Mongolia , Avian Flu Three confirmed cases reported, two
Hunan , Anhui , deaths
Liaoning , and Hubei
provinces
- ----------------------- ----------------------- --------------------- -----------------------------------------
</table>
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<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 and most have been in Asia. Humans were infected
when they came into contact with sick birds or contaminated surfaces. In most
cases, infected persons reported flu-like symptoms, but some had more serious
complications, including pneumonia and acute respiratory distress. The avian flu
has led to increased concerns for improved health conditions.
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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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.
<table>
<s> <c> <c>
- ----------- ------------------------------------------------------------------------------- ----------------
# 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 steam pressure sterilization chemical indicator 2005.3.30
- ----------- ------------------------------------------------------------------------------- ----------------
23 Likang 132 steam pressure sterilization chemical indicator 2005.3.30
- ----------- ------------------------------------------------------------------------------- ----------------
24 Likang steam pressure sterilization chemical indicator 2005.4.1
- ----------- ------------------------------------------------------------------------------- ----------------
25 Likang 84 disinfectant 2005.6.27
- ----------- ------------------------------------------------------------------------------- ----------------
26 Likang Glutaraldehyde Monitors (Strip) 2005.12.14
- ----------- ------------------------------------------------------------------------------- ----------------
</table>
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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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.
<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>
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<page>
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
- --------------------------------------------- ------------------ -------------------------- -------------------------
Likang 121 steam pressure sterilization Indication oil Indication of Q/SUVE 16-2005
chemical indicator (card and adhesive tape) sterilization effect
- --------------------------------------------- ------------------ -------------------------- -------------------------
Likang 132 steam pressure sterilization Indication oil Indication of Q/SUVE 17-2005
chemical indicator (label) sterilization effect
- --------------------------------------------- ------------------ -------------------------- -------------------------
Likang steam pressure sterilization Indication oil Indication of Q/SUVE 18-2005
chemical indicator sterilization effect
- --------------------------------------------- ------------------ -------------------------- -------------------------
</table>
-41-
<page>
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 over 20 distribution contracts with wholesale dealers and
agents. We generally ffer payment terms of four to six months before payment
for the products is due. For fiscal years ended December 31, 2005 and 2004 two
affiliated entities which are our customers, Shanghai Likang Pharmaceutical
Technology Company, Limited and Shanghai Likang Meirui Pharmaceuticals High-Tech
Co. Ltd., represented approximately 36% and approximately 40% of our total net
revenues. For the three months ended March 31, 2006 approximately 67% of our
total net revenues were from sales to these affiliates. 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.
-42-
<page>
The Shanghai Jinshan district factory is approximately 4,300 square
feet and is used in the manufacture of the tablet and powder forms of
disinfectants. The manufacturing capacity is 300 metric tons of tablet and 180
metric tons of powder disinfectant annually. The average manufacturing cycle for
the tablets and powder, from formulation to finished product, is one day.
Products which represent the remaining approximate 5% of our revenues
are manufactured by third parties as set forth below:
<table>
<s> <c> <c>
- ------------------------------- ----------------------------------------------------------- ---------------------------
PRODUCT MANUFACTURER % OF REVENUE
- ------------------------------- ----------------------------------------------------------- ---------------------------
Lvshaxing Air Disinfectant Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. 2%
Machine
- ------------------------------- ----------------------------------------------------------- ---------------------------
Likang Surgery hand-washing Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd.
Table
- ------------------------------- ----------------------------------------------------------- ---------------------------
Junle disinfectant Shanghai JunLe Daily Chemicals Co., Ltd. 3%
- ------------------------------- ----------------------------------------------------------- ---------------------------
Jiewang disinfectant Hangzhou JieWang Disinfectant Co., Ltd
- ------------------------------- ----------------------------------------------------------- ---------------------------
Shenle disinfectant Shanghai ShenLe Daily Chemicals Co., Ltd.
- ------------------------------- ----------------------------------------------------------- ---------------------------
Sterilized Q-tip (very small Shanghai DiCheng Health Products Manufacturing Co., Ltd
quantity)
- ------------------------------- ----------------------------------------------------------- ---------------------------
</table>
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.
-43-
<page>
Raw Materials
We purchase raw materials from six primary suppliers, including a
related party, and we have signed purchase contracts with these suppliers in an
effort to ensure a steady supply of raw materials. We have maintained stable
business relations with these suppliers for over 10 years, and 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. Some of the suppliers import from foreign countries, as listed below,
and we purchase directly from these suppliers.
The table below details the supply relationships for raw materials
<table>
<s> <c> <c>
- ---------------------------------- --------------------------------------------------------------- -----------------
RAW MATERIALS SUPPLIERS ORIGIN
- ---------------------------------- --------------------------------------------------------------- -----------------
Iodine Shanghai Wenshui Chemical Co., Ltd USA
- ---------------------------------- --------------------------------------------------------------- -----------------
Potassium iodide Shanghai Wenshui Chemical Co., Ltd Holland
- ---------------------------------- --------------------------------------------------------------- -----------------
Glutaraldehyde Shanghai Jin an tang Hygienical Product Factory Germany
- ---------------------------------- --------------------------------------------------------------- -----------------
Triclosan Ciba Specialty Chemicals (China)LTD Domestic
- ---------------------------------- --------------------------------------------------------------- -----------------
Alcohol Shanghai Jangbo Chemical Co., L td Domestic
- ---------------------------------- --------------------------------------------------------------- -----------------
Trichloroisocyanuric acid Xuzhou Keweisi Disinfectant Co., Ltd Domestic
- ---------------------------------- --------------------------------------------------------------- -----------------
Ozone producing device equipment Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. Domestic
- ---------------------------------- --------------------------------------------------------------- -----------------
Ultraviolet radiation lamp light Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. Domestic
- ---------------------------------- --------------------------------------------------------------- -----------------
</table>
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 develop our products internally and own all
rights associated with these products.
-44-
<page>
We have recently developed two new disinfectant products. Our 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 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 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' similar
products which have a limited shelf life of 90 days.
In addition, 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 are unable to predict at this time if our research will result in the
introduction of new products.
We previously announced we had begun the initial development of a new
series of disinfectants employing Hypericin, a major compound found in St. Johns
Wort, a Chinese herb. The new series of disinfectants was designed to target the
H5N1 and H9N2 strains of avian flu. In recent laboratory tests, Hypericin had
proven effective in preventing the spread of strands of the avian flu in
poultry. In the course of our development efforts we determined products
designed with Hypericin as a major component caused several side effects in
humans including nausea, irritation, rash, fatigue, restlessness and
photosensitivity. These toxic side effects have proven to be an obstacle for the
use of Hypericin as a main component in various treatments and, as a result, in
January 2006 we abandoned efforts related to the development of Hypericin based
products.
For the fiscal years ended December 31, 2005 and 2004, we spent
approximately $36,000 and approximately $76,000, respectively, on research and
development.
Marketing and Sales
We were formed in 1988 as a research and development organization by
the Second Military Medical University of the Chinese Army. Our CEO, Mr. Xue
Lian Bian, was a member of the staff of the university. We believe that these
ties provide us with certain marketing advantages. The university is a well
recognized, prestigious institution in China and many of its graduates work at
hospitals, medical suppliers and distribution companies throughout China in
senior positions which place them in the decision making process when it comes
to purchasing products such as ours. In addition, the students and faculty at
the university provide a pool of talent from which we draw, both as potential
employees or summer interns who go on to work at other companies, many of whom
are customers or potential customers for our products. In marketing our
products, we seek to leverage these relationships.
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 other 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.
-45-
<page>
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
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.
During fiscal 2006 we will seek to expand our distribution capability
in the PRC through the possible purchase of independent sales networks. While we
have allocated a portion of the proceeds from our recent private offering for
such as use, we have not identified any potential targets and we may inevitably
choose not to pursue this strategy.
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 Improved bottle ZL 03 2 29616.9 Approved, expires
March 2013
- ------------------------- -------------------------------------- ------------------------------ -------------------
Appearance design Bottle (with the wing stretch) ZL 00 3 14391.0 Approved, expires
April 2010
- ------------------------- -------------------------------------- ------------------------------ -------------------
Appearance design Packaging bottle ZL 2003 3 0108274.5 Approved, expires
November 2013
- ------------------------- -------------------------------------- ------------------------------ -------------------
Appearance design Test paper box of chlorine ZL 2004 3 0022740.2 Approved, expires
May 2014
- ------------------------- -------------------------------------- ------------------------------ -------------------
Product Improvement High strength water sterilizer with ZL 03 2 10513.4 Approved, expires
Model H ultraviolet lamp September 2013
- ------------------------- -------------------------------------- ------------------------------ -------------------
Product Improvement Sewage application ZL 2004 2 0037013.8 Approved, expires
June 2014
- ------------------------- -------------------------------------- ------------------------------ -------------------
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>
-46-
<page>
We have four registered trademarks with the China State Administration
for industry and commerce trademark office for An'erdian, Jifro, Dian'erkang and
Lvshaxing.
We are not a party to any confidentiality or similar agreement with any
of our employees or any third parties regarding our intellectual property. It is
possible that a third party could, without authorization, utilize our propriety
technologies without our consent. We can give no assurance that our proprietary
technologies will not otherwise become known or independently developed by
competitors.
Competition
We operate in a highly fragmented, competitive national market for
healthcare disinfectant products. According to a survey conducted in 2004 by the
China Federation of Industrial Economics (CFIC), the disinfectant market in the
PRC was approximately $6.25 billion (U.S.) While the disinfectant industry in
China is an emerging industry, and the industry is populated with small regional
players, we estimate that there are over 1,000 manufacturers and distributors of
disinfectant products in China and certain of our major competitors distribute
products similar to ours, including those which also prevent the spread of
airborne viruses such as avian flu and SARS. We compete with foreign companies,
including 3M, who are distributing a full line of disinfectant products in
China, as well as smaller, domestic manufacturers. Most of these domestic
competitors, however, offer a limited line of products and there are few
domestic companies with a nationwide presence. We believe that our national
marketing and sales presence throughout all 22 provinces, as well as four
autonomous regions, and four municipalities of China gives us a competitive
advantage over many other disinfectant companies in China. In addition, prior to
the adoption of industry standards in July 2002 by the central government of
China, disinfectant products were generally marketed and sold based on pricing
factors. We believe the recent standards implemented by the government 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 majority of our competition:
* Product selection and availability. A number of our
competitors are smaller, regional companies with a limited
number of product offerings. We offer our customers a wide
variety of disinfectant products and ability to ship products
to our customers on a timely basis throughout the PRC.
-47-
<page>
* Research and development. Our efforts to respond to market
demand for new products have resulted in the issuance to us of
26 hygiene licenses by the Ministry of Public Health of the
central government of China. Based upon our knowledge of our
competitors, we do not believe the majority of our competitors
have received as many license since the enactment of the
licensing standards in July 2002.
* Manufacturing capacity. Our Shanghai Jiading district factory,
which is devoted to liquid and index disinfectant devices, has
the capacity to produce 9 million liters of disinfectant
annually. Our Shanghai Jinshan district factory, which is
devoted to tablet and powder form disinfectants, has the
capacity to manufacture 300 metric tons of tablet and 180
metric tons of powder annually. Both of our factories have
production cycles from formulation to finished product of one
day.
* Trained service personnel. We believe our sales personnel are
thoroughly educated in our product lines which enable them to
better meet the needs of our customers.
* Reliability and speed of delivery. We believe our products
have developed a reputation of good quality and effectiveness
and our manufacturing capabilities enable us to product and
ship products to our customers promptly thus allowing our
customers the ability to better manage their purchasing
dollars.
* Customer service . Our customer service representatives
participate in ongoing product training programs and we strive
to respond to all customer inquiries within 24 hours.
* Price. We have developed relationships with a number of raw
material suppliers which enables us to keep our costs low and
thereby offer prices to our customers which are very
competitive.
Our primary competitors in the sale of chemical disinfectants are 3M
and Ace Disinfection Factory Co., Ltd. The primary competitors for instrument
disinfectants are Chengdu Kangaking Instrument Co., Ltd. and Hangzhou Yangchi
Medicine Article Co., Ltd. and the primary competitors for chemical indicators
are 3M and Shandong Xinhua Medical Instrument Co., Ltd. Domestic competition
comes from regional companies which tend to offer products in small geographic
areas and do not distribute their product lines throughout China.
Our primary 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
-48-
<page>
Our primary foreign competitor is 3M Company which has had a presence
in China for more than 20 years. 3M Company entered the hand disinfection market
at the end of 2004 and primarily offers products in the areas of index and
control devices and disinfectant machines. At present, 3M Company has five
products for use in operating rooms and its products are found in provincial
capital cities of China such as Shanghai, Beijing, Guangzhou, Hangzhou, Nanjin,
Chengdu and Xi'an. 3M Company's product line in China is very narrow, with 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 pricing 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 disinfectants. We are also licensed by the Shanghai City
Government to manufacture and distribute disinfectants. We are in substantial
compliance with all provisions of those licenses and have no reason to believe
that they will not be renewed as required by the applicable rules of Shanghai.
In addition, our operations must conform to general governmental regulations and
rules for private companies conducting business in China.
Pursuant to the July 2002 Ministry of Public Health 27th Order of
Ministry of Health of the People's Republic of China, all disinfectant
manufacturers in China must obtain a license to manufacture hygiene
disinfectants. Prior to release, all disinfectant instruments must obtain the
official hygiene permit document of Ministry of Public Health and the approval
of the provincial hygiene administrative department. The implementation of these
improved production standards and licenses has effectively decreased the
competitiveness of small to mid size manufacturers with single product and
inferior technical content. Presently we meet all standards initiated by this
ordinance and we have been granted 26 hygiene licenses by the Ministry of Public
Health. We have filed applications for two additional products.
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.
-49-
<page>
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 limiting 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
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.
-50-
<page>
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,
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 Shanghai Shanhai
Group Employee Share-holding Committee (16.25%) and Shanghai 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. The transaction in which Linkwell Tech acquired the 90%
interest in Likang resulted in the formation of a U.S. holding company by
Messrs. Bian and Guan as it did not result in a change in the underlying
ownership interests of Likang.
-51-
<page>
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 and to satisfy all outstanding obligations
and indebtedness owed by our company to our former CEO and certain third
parties, Linkwell Tech provided us $175,000 which we provided to our former CEO
to be used by him to satisfy these obligations. We also issued our former CEO
1,400,000 shares of our common stock.
In July 2005, we changed our name to Linkwell Corporation. 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.
In February 2006, we sold 100% of the stock of Aerisys to Mr. Gary
Verdier, our former CEO, in exchange for the assumption of all liabilities and
obligation of Aerisys. Prior to the share exchange agreement with Linkwell Tech
in May 2005, Aerisys had represented our sole operations. Aerisys marketed and
sold the Aerisys Intelligent Community (TM), a web-based software program and
private, browser-based intranet product that allows schools to collaborate with
parents and faculty each day on classroom homework, assignments, critical dates,
team priorities and school news in a private forum, primarily to K through 12
private schools. We had not been able to improve sales or business opportunities
for Aerisys since May 2005.
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
factories. We lease our principal executive office building and warehouse space,
which consists of approximately 22,800 square feet, from Shanghai Shanhai Group,
an unaffiliated third party, under leases expiring in December 2010 for an
annual rental of approximately $32,000, increasing during the lease years
beginning in 2008 in amounts ranging from 8% to 10% annually.
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<page>
Until August 2005 we leased approximately 21,500 square feet of
manufacturing space from Shanghai Likang Pharmaceutical Technology Company,
Limited, an affiliate, under a lease originally expiring December 2006 for an
annual rent of approximately $11,500. In August 2005 we purchased this building,
which includes an assignment of the land use permit, for $333,675. See "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. We also lease an additional approximate 1,480 square feet of warehouse
space from Shanghai Henglian Industrial Co. Limited, an unaffiliated third
party, under two leases which expire between September and October 2007 for an
annual rental of approximately $37,410.
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.
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<page>
Key Employees
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. Xuejian
(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
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<page>
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
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:
* understands generally accepted accounting principles and financial
statements,
* is able to assess the general application of such principles in
connection with accounting for estimates, accruals and reserves,
* has experience preparing, auditing, analyzing or evaluating financial
statements comparable to the breadth and complexity to our financial
statements,
* understands internal controls over financial reporting, and
* understands audit committee functions.
Code of Business Conduct and Ethics
In December 2005, we adopted a Code of Business Conduct and Ethics
applicable to our Chief Executive Officer, principal financial and accounting
officers and persons performing similar functions. A Code of Business Conduct
and Ethics is a written standard designed to deter wrongdoing and to promote:
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 Business Conduct and 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 Business Conduct and Ethics, by written request to us at our principal
offices.
Executive compensation
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<page>
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 $100,000.
<table>
<caption>
Long-Term
Annual Compensation Compensation
- - -------------------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying
Principal Fiscal Salary Bonus Compensation Awards Options All Other
Position Year ($) ($) ($) ($) SAR (#) Compensation
- - -------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c> <c>
Xue Lian Bian(1) 2005 $10,250 $0 $0 $0 0 0
Gary Verdier(1) 2004 $0 $0 $0 $0 20,000 0
2003 $0 $0 $0 $0 0 0
Daniel Zipkin(2) 2004 $0 $0 $0 $0 0 0
2003 $7,500 $0 $0 $0 0 0
</table>
(1) Mr. Bian has served as our Chief Executive Officer, President and
director since May 2, 2005.
(2) Gary Verdier 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 $1.00 per share.
(3) Mr. Zipkin served as Chief Executive Officer from September 19, 2003 to
October 30, 2003.
Option/SAR Grants in Last Fiscal Year
The following table sets forth information concerning individual grants
of options made during Fiscal 2005 to the named executive officers.
% of Total
Number of Shares Options Granted Exercise or
Underlying Options to Employees in Base Price Expiration
Granted (#) Fiscal Year
($/Sh) Date
- - ------------------------------------------------------------------------------
Xue Lian Bian 0 n/a n/a n/a
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<page>
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>
Xue Lian Bian 0 n/a 0 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,
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 July 31, 2006 we did not had any options to purchase
shares of our common stock outstanding under the plan.
-57-
<page>
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
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 July 31, 2006 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.
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<page>
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 July
31, 2006 we had no outstanding options or stock grants under the plan and there
were 3,000,000 shares available for issuance under the 2005 Equity Compensation
Plan.
Our Board of Directors, or a committee of the Board, administers the
2005 Equity Compensation Plan including, without limitation, the selection of
the persons who will be awarded stock grants and granted options, the type of
options to be granted, the number of shares subject to each option and the
exercise price. Plan options may either be options qualifying as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified options. In addition, the plan allows for the inclusion of a
reload option provision, which permits an eligible person to pay the exercise
price of the option with shares of common stock owned by the eligible person and
receive a new option to purchase shares of common stock equal in number to the
tendered shares. Any incentive option granted under the Plan must provide for an
exercise price of not less than 100% of the fair market value of the underlying
shares on the date of grant, but the exercise price of any incentive option
granted to an eligible employee owning more than 10% of our outstanding common
stock must not be less than 110% of fair market value on the date of the grant.
The exercise price of non-qualified options shall be determined by the Board of
Directors, but shall not be less than the par value of our common stock on the
date the option is granted.
The term of each plan option and the manner in which it may be
exercised is determined by the Board of Directors or the committee, provided
that no option may be exercisable more than 10 years after the date of its grant
and, in the case of an incentive option granted to an eligible employee owning
more than 10% of the common stock, no more than five years after the date of the
grant. The plan provides that, with respect to incentive stock options, the
aggregate fair market value (determined as of the time the option is granted) of
the shares of common stock, with respect to which incentive stock options are
first exercisable by any option holder during any calendar year shall not exceed
$1,000,000. Unless the plan is approved by our shareholders within one year of
the effective date, no incentive stock options may be granted and all incentive
stock options that may have been previously granted shall automatically be
converted into non-qualified stock options. As of the date of this prospectus we
have not submitted the 2005 Equity Compensation Plan to our shareholders for
approval.
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<page>
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
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.
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<page>
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.
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 three related parties:
Shanghai Likang Pharmaceuticals Technology Company, Limited
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 fiscal 2005 we entered into an agreement with Shanghai Likang Pharmaceuticals
Technology Company, Limited and Mr. Bian under which we purchased this
previously leased building for $333,675. We paid for this purchase through a
reduction in accounts receivable owed us by Shanghai Likang Pharmaceuticals
Technology Company, Limited.
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<page>
Shanghai Likang Pharmaceuticals Technology Company, Limited also
distributes our products to the commercial medical industry. For the fiscal
years ended December 31, 2005 and 2004 we recorded net revenues of $1,933,043
and $1,698,923, respectively, from sales to that related party and for the three
months ended March 31, 2006 we recorded net revenues of $1,256,211 from sales to
this company. At December 31, 2005 and March 312, 2006 Shanghai Likang
Pharmaceuticals Technology Company, Limited owed us $870,652 and $1,949,092,
respectively, as a related party receivable for products purchased from us.
In December 2005 we loaned Shanghai Likang Pharmaceuticals Technology
Company, Limited $100,000 for working capital purposes. The loan bears interest
at the rate of 3% per annum. The principal and interest were paid in April 2006.
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 and it purchases products
from us which it resells to the retail/consumer market in the PRC. Shanghai
Shanhai Group is the majority owner of Shanghai Likang Meirui Pharmaceutical
High-Tech Co., Ltd., owning a 68% interest.
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. For the years ended December 31, 2005 and 2004 we
purchased products from this affiliate totaling $48,489 and $389,400,
respectively. We did not purchase any products from this affiliate during the
three months ended March 31, 2006 and we did not owe Shanghai Likang Meirui
Pharmaceutical High-Tech Co., Ltd. any monies at December 31, 2005 or march 31,
2006.
In January 2005 Likang signed a two year agreement with Shanghai Likang
Meirui Pharmaceutical High-Tech Co., Ltd. to market its products to the
retail/consumer market using Shanghai Likang Meirui Pharmaceutical High-Tech Co.
Ltd.'s proprietary sales network which caters to the retail/consumer market in
China. For the fiscal years ended December 31, 2005 and 2004, respectively, we
recorded net revenues on sales to this affiliate of $23,987 and $67,356,
respectively, and for the three months ended March 312, 2006 we reported net
revenues from sales to this company of $4,044. At December 31, 2005 and March
31, 2006, Shanghai Likang Meirui Pharmaceuticals High-Tech Company owed us
$1,718 and $3,433, respectively.
Shanghai Shanhai Group.
Shanghai Shanhai Group, which is the minority shareholder of our Likang
subsidiary, is owned by Shanghai Shanhai Group Employee Share-holding Committee
(16.25%) and Shanghai Baoshan District Dachang Town South Village Economic
Cooperation Club (83.75%). These two entities are owned by the employees of
Shanghai Shanhai Group. We lease our principal executive offices and warehouse
space from Shanghai Shanhai Group for approximately $32,000 a year.
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<page>
In January 2005 Likang borrowed $161,533 from Shanghai Shanhai Group
for working capital purposes. The loan bears interest at 10% per annum and is
payable on demand. For the year ended December 31, 2005 and the three months
ended March 31, 2006, interest expense related to this note amounted to $16,282
and $4,145, respectively.
In January 2005 Likang also entered into a five year agreement with
Shanghai Shanhai Group whereby it agreed to pay Shanghai Shanhai Group a fixed
amount of $9,375 annually as additional rent which represents a return on its
original investment in Likang of RMB 500,000 (approximately $62,500 U.S.). Under
the terms of the agreement this amount is paid as additional rent and included
in the approximate $40,500 in annual rent discussed earlier in this section.
For the fiscal year ended December 31, 2004, prior to our acquisition
of Linkwell, Likang made distributions to its shareholders, Shanghai Likang
Pharmaceuticals Technology Company, Limited and Shanghai Shanhai Group, in the
aggregate amount of $559,633. The shareholder distribution was paid on a
pro-rata basis to these shareholders. The amount of the distribution was
determined by the shareholders and was equal to Likang's retained earnings prior
to the distribution. The distribution was made as a return on each of the
shareholders' respective initial investments. Shanghai Likang Pharmaceuticals
Technology Company, Limited is owned by Messrs. Bian and Guan, our officers and
directors.
Other related party transactions
In May 2005 in connection with our acquisition of Linkwell Tech, we
issued an aggregate of 1,855,000 shares of common stock for services related to
share exchange agreement. China Direct Investments, Inc. received 955,000 shares
of our common stock as compensation for their services in negotiating the terms
of the share exchange and it assigned CIIC Investment Banking Services
(Shanghai) Company, Limited the remaining 900,000 shares of our common stock as
a finder's fee for the identification of Linkwell Tech. China Direct
Investments, Inc. and CIIC Investment Banking Services (Shanghai) Company,
Limited are affiliates. These shares were valued at $240,000 based upon the fair
market value of our common stock which was approximately $0.13 per share..
In August 2005, we engaged China Direct Investments, Inc. 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 to
providing 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.
At December 31, 2005, we owed $15,000 to Mr. Gary Verdier, a
shareholder and our former CEO, for working capital advanced to our subsidiary,
Aerisys. The advances were non-interest bearing and were payable on demand.
Subsequent to December 31, 2005, this liability was assumed by Mr. Verdier under
the terms of his purchase of the stock of Aerisys as described earlier in this
prospectus under "Our Business - History of our company."
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<page>
PRINCIPAL SHAREHOLDERS
At August 4, 2006, there were 57,557,589 shares of our common stock
issued and outstanding which is our only outstanding class of voting securities.
The following table sets forth, as of that date, 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 August 4, 2006 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 August 4, 2006, have been exercised or converted. Unless otherwise noted, the
address of each of these principal shareholders is our principal executive
offices.
Name of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
Xue Lian Bian 22,670,919 39.4%
Wei Guan 13,802,551 24.0%
All officers and directors
as a group (two persons) 36,473,470 63.4%
Marc Siegel 1 3,071,052 5.2%
(1) Mr. Siegel's address is 5301 North Federal Highway, Suite 120, Boca Raton,
Florida 33487. The number of securities beneficially owned by Mr. Siegel
includes:
* a 40% interest (2,000 shares) of 5,000 shares of our common stock
which are presently outstanding and a 40% interest (850,000 shares) in common
stock purchase warrants to purchase 2,125,000 shares of common stock with an
exercise price of $0.20 per share owned of record by China Direct Investments,
Inc., a company of which Mr. Siegel is a 40% shareholder. Dr. Xuejian (James)
Wang, as CEO of China Direct Investments, Inc., has the sole voting and
dispositive control over securities held by China Direct Investments, Inc.
* a 20% interest (362,526 shares) in 1,807,630 shares of common stock
which are presently outstanding, and a 20% interest (181,526 shares) in
907,630 shares of common stock issuable upon the exercise of outstanding common
stock purchase warrants with an exercise price of $0.10 per share, all of which
are owned of record by CIIC Investment Banking Services (Shanghai) Company,
Limited, a company of which Mr. Siegel is a 20% shareholder. Professor Ting Ting
Shan, the General Manager of CIIC Investment Banking Services (Shanghai)
Company, Limited, has sole voting and dispositive control over securities held
by CIIC Investment Banking Services (Shanghai) Company, Limited,
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* an aggregate of 2,550,000 shares of our common stock owned by
China Discovery Investors, Ltd. (formerly known as Edge Capital Partners,
Ltd.) including:
* 425,000 shares of our common stock and 875,000 shares of
common stock issuable upon the exercise of outstanding common stock purchase
warrants with an exercise price of $0.20 per share, and
* 250,000 shares of our common stock and 1,000,000 shares of
common stock issuable upon the exercise of outstanding common stock
purchase warrants with exercise prices ranging from $0.20 to $0.30 per share.
* an aggregate of 625,000 shares of our common stock held by Edge
LLC, including 125,000 shares of our common stock and 500,000 shares of common
stock 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 sole voting and dispositive control over securities
held by China Discovery Investors, Ltd. and Edge LLC.
The number of shares beneficially owned by Mr. Siegel excludes common
stock purchase warrants exercisable into an aggregate of 1,000,000 shares of our
common stock that 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.
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 1,500,000 shares have been designated as Series B 6%
Cumulative Convertible Preferred Stock. As of August 4, 2006 there are
57,557,589 shares of common stock and 650,000 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.
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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
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 B 6% Cumulative Convertible Preferred Stock
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. As of August 4, 2006 there were 650,000 shares of our Series B 6%
Cumulative Convertible Preferred Stock issued and outstanding. 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,
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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,
o if there is a "non-registration event" under the
terms of the subscription agreement for the sale of
the stock which includes if the registration
statement of which this prospectus is a part was not
declared effective by the SEC by May 27, 2006; 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 option 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 share 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 subject to
adjustment for stock splits, dividends and
reclassifications, 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 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.
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As described elsewhere herein, because the registration statement of
which this prospectus is a part was not declared effective by May 27, 2006, the
annual dividend rate on the outstanding shares of Series B 6% Cumulative
Convertible Preferred Stock has increased from 6% to 20%.
Common Stock Purchase Warrants
At August 4, 2006 we had outstanding a common stock purchase warrants
to purchase an aggregate of 36,887,115 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 15,866,665 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 15,000,000 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
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.
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Other Outstanding Warrants
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
This prospectus covers the resale by the selling security holders of an
aggregate of 56,353,565 shares of our common stock which includes:
* 3,303,450 shares of our common stock which are presently outstanding
that were issued upon the conversion of shares of our Series A Convertible
Preferred Stock and 3,753,450 shares of our common stock issuable upon the
exercise of common stock purchase warrants included with the shares of our
Series A Convertible Preferred Stock which were sold in our June 2005 private
placement ("June 2005 Private Placement") described earlier in this prospectus
under "Management's Discussion and Analysis or Plan of Operation - Recent
Capital Raising Transactions",
* up to 11,375,000 shares underlying 650,000 shares of our Series B 6%
Cumulative Convertible Preferred Stock which are presently outstanding,
8,500,000 shares of our common stock which have been issued on the conversion of
850,000 shares of our Series B 6% Cumulative Convertible Preferred Stock and
common stock purchase warrants sold in our December 2005 private placement
("December 2005 Private Placement") described earlier in this prospectus under
"Management's Discussion and Analysis or Plan of Operation - Recent Capital
Raising Transactions or underlying warrants issued as due diligence fees in that
offering,
* 1,405,000 shares of our common stock which are presently outstanding
which were issued to China Direct Investments, Inc. and CIIC Investment Banking
Services (Shanghai) Company, Limited as compensation for services rendered to us
in our May 2005 acquisition of Likang, and
* 2,125,000 shares underlying a warrant issued to China Direct
Investments, Inc. as compensation for consulting services.
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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.
At August 4, 2006 there were 57,557,589 shares of our common stock
issued and outstanding. 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.
<table>
<s> <c> <c> <c> <c> <c>
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
- --------------- ----- -------- ------- -------------- --------
Alpha Capital
Aktiengesellschaft (1) 3,384,430 4.99% 11,766,666 0 n/a
Alvin Siegel (2) 630,000 1.1% 625,000 5,000 *
China Direct
Investments, Inc. (3) 2,130,000 3.6% 2,130,000 0 n/a
CIIC Investment Banking
Services (Shanghai)
Company, Limited (4) 2,715,260 4.6% 2,715,260 0 n/a
David A. Stein (5) 625,000 1.1% 625,000 0 n/a
China Discovery
Investors, Ltd. (6) 2,550,000 4.3% 2,550,000 0 n/a
Edge, LLC (7) 625,000 1.1% 625,000 0 n/a
Pershing, LLC FBO
IRA George Williams (8) 1,500,000 2.6% 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) 3,372,122 4.99% 11,500,000 0 n/a
Osher Capital, Inc. (14) 3,010,180 4.99% 3,141,666 0 n/a
Quingxuan Jiang (15) 125,000 * 125,000 0 n/a
Lei Shen (16) 75,000 * 75,000 0 n/a
Sharon Standowski (17) 625,000 1.1% 625,000 0 n/a
Shenya Gong (18) 351,260 * 351,260 0 n/a
Ting Ting Shan (19) 60,000 * 60,000 0 n/a
Weiling Feng (20) 91,360 * 91,360 0 n/a
Whalehaven Capital
Fund Limited (21) 3,246,374 4.99% 8,625,000 0 n/a
Yewen Xi (22) 1,875,000 3.2% 1,875,000 0 n/a
Yonghua Cai (23) 1,000,000 1.7% 1,000,000 0 n/a
Ellis International, Ltd. (24) 3,000,200 4.99% 2,941,667 0 n/a
Li Yu 25, (26) 300,000 * 300,000 0 n/a
Zhiyan Shi (25,26) 500,000 * 500,000 0 n/a
Jie Sun 25, (26) 1,450,000 2.5% 1,450,000 0 n/a
Xiupin Lin (25) 100,000 * 100,000 0 n/a
Fangyun Wang (25) 300,000 * 300,000 0 n/a
Dejun Zhang (25) 200,000 * 200,000 0 n/a
Yulin Fang (25) 200,000 * 200,000 0 n/a
Yongbin Shi (25) 350,000 * 350,000 0 n/a
Lansheng Zhou (25) 500,000 * 500,000 0 n/a
Xiaofei Li (25) 450,000 * 450,000 0 n/a
Guiyang Zhu (25) 1,150,000 2.0% 1,150,000 0 n/a
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Xinming Zhuo(25) 1,000,000 1.7% 1,000,000 0 n/a
Zhixia Dou 25, (26) 500,000 * 500,000 0 n/a
Lijun Zhang 25, (26) 50,000 * 50,000 0 n/a
Bin Ge 25, (26) 200,000 * 200,000 0 n/a
Jue Wang (25) 50,000 * 50,000 0 n/a
Menglin Bian(25) 200,000 * 200,000 0 n/a
Wei Guan (27) 13,802,551 4.0% 200,000 13,602,551 23.6%
Liumei Chen 25, (26) 50,000 * 50,000 0 n/a
61,328,565
</table>
* less than 1%
(1) Alpha Capital Aktiengesellschaft holds 200,000 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 up to 3,500,000 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 purchased the shares of our Series
B 6% Cumulative Convertible Preferred Stock and warrants to purchase 8,000,000
shares of our common stock from us in the December 2005 Private Placement. It
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 the December 2005
Private Placement. 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 includes 130,000 shares of common stock which
are presently outstanding 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 which Mr. Siegel purchased from us in the December 2005
Private Placement. The number of shares offered includes 125,000 shares of
common stock which are presently outstanding 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 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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(3) The number of shares owned and offered by China Direct Investments, Inc.
includes 5,000 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. 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. Dr. Xuejian (James) Wang and Messrs.
Marc Siegel and David Stein are the shareholders of China Direct Investments,
Inc. Dr. Wang is CEO of China Direct Investments, Inc. and has sole voting and
dispositive control over securities held by China Direct Investments, Inc. The
number of shares beneficially owned by China Direct Investments, Inc. in this
table excludes (i) an aggregate of 2,715,260 shares owned by CIIC Investment
Banking Services (Shanghai) Company, Limited as described in footnote 4 to this
table, (ii) an aggregate of 750,000 shares owned by Edge LLC as described in
footnote 7 to the table, (iii) an aggregate of 750,000 shares owned by Mr.
Stein as described in footnote 5 to this table, and (iv) an aggregate of
3,250,000 shares owned by China Discovery Investors, Ltd. as described in
footnote 6 to this table. Mr. Marc Siegel is a minority shareholder of CIIC
Investment Banking Services (Shanghai) Company, Limited and holds voting and
dispositive control over securities owned by China Discovery Investors, Ltd. and
Edge LLC.
(4) The number of shares owned and offered by CIIC Investment Banking Services
(Shanghai) Company, Limited includes 1,807,630 shares of common stock which are
presently outstanding and 907,630 shares issuable upon the exercise of
outstanding common stock purchase warrants with an exercise price of $0.10 per
share. CIIC Investment Banking Services (Shanghai) Company, Limited received the
900,000 shares as a finder's fee in connection with our acquisition of Likang
and purchased the remaining securities in our June 2005 Private Placement.
Professor Ting Ting Shan, General Manager of CIIC Investment Banking Services
(Shanghai) Company, Ltd., has sole voting and dispositive control over
securities held by CIIC Investment Banking Services (Shanghai) Company, Limited.
The number of shares beneficially owned by CIIC Investment Banking Services
(Shanghai) Company, Limited excludes an aggregate of 60,000 shares owned by
Professor Shan as described in footnote 19 to this table. The number of shares
beneficially owned by CIIC Investment Banking Services (Shanghai) Company,
Limited also excludes (i) an aggregate of 2,550,000 shares owned by China
Discovery Investors, Ltd. as described in footnote 6 to this table and (ii) an
aggregate of 625,000 shares owned by Edge LLC as described in footnote 7 to this
table. Mr. Marc Siegel, a minority shareholder of CIIC Investment Banking
Services (Shanghai) Company Limited, has voting and dispositive control over
securities held by China Discovery Investors, Ltd. and Edge LLC.
(5) The number of shares owned and offered by Mr. Stein includes 125,000 shares
of common stock which are presently outstanding and 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 purchased by him in the December
2005 Private Placement. The 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.
The number of shares owned by Mr. Stein in this table excludes an aggregate of
2,130,000 shares owned by China Direct Investments, Inc. as described in
footnote 3 to this table. Mr. Stein is a minority shareholder of China Direct
Investments, Inc.
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(6) The number of shares owned and offered by China Discovery Investors, Ltd
(formerly known as Edge Capital Partners, Ltd.) includes 675,000 shares of our
common stock which are presently outstanding 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 These securities were purchased in the June 2005
Private Placement. Mr. Marc Siegel has voting and dispositive control over
securities held by China Discovery Investors, Ltd. Common stock purchase
warrants for an aggregate of 1,000,000 shares of common stock 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. The number of shares beneficially owned by China Discovery Investors,
Ltd. excludes (i) 2,130,000 shares of common stock owned by China Direct
Investors, Inc. (see footnote 3 above), (ii) 2,715,260 shares of common stock
owned by CIIC Investment Bank Services (Shanghai) Company, Limited (see footnote
4 above) and (iii) 625,000 shares of common stock owned by Edge LLC (see
footnote 7 below).
(7) The number of shares owned and offered by Edge LLC includes 125,000 shares
of common stock which are presently outstanding 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 purchased from us in the December
2005 Private Placement Mr. Marc Siegel has voting and dispositive control over
securities held by Edge LLC. The 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. The number of shares beneficially owned by Edge LLC excludes (i)
2,130,000 shares of common stock owned by China Direct Investors, Inc. (see
footnote 3 above), (ii) 2,715,260 shares of common stock owned by CIIC
Investment Bank Services (Shanghai) Company, Limited (see footnote 4 above) and
(iii) 2,550,000 shares of common stock owned by China Discovery Investors, Ltd.
(see footnote 6 above).
(8) The number of shares owned and offered includes 500,000 shares of common
stock which are presently outstanding 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 which were purchased from us in the
December 2005 Private Placement. Mr. George Williams has voting and dispositive
control over securities held by George Williams I.R.A. The 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.
(9) The number of shares owned and offered includes 45,680 shares of common
stock which are presently outstanding and 45,680 shares issuable upon the
exercise of outstanding common stock purchase warrants with an exercise price of
$0.10 per share which were purchased from us in the June 2005 Private Placement.
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(10) The number of shares owned and offered includes 75,820 shares of our
common stock which are presently issued and outstanding and 75,820 shares
issuable upon the exercise of outstanding common stock purchase warrants with an
exercise price of $0.10 per share which were purchased from us in the June 2005
Private Placement.
(11) The number of shares owned and offered includes 60,510 shares of our
common stock which are presently issued and outstanding and 60,510 shares
issuable upon the exercise of outstanding common stock purchase warrants with an
exercise price of $0.10 per share which were purchased from us in the June 2005
Private Placement.
(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 for its services to Monarch Capital Fund, Ltd. in connection with
the December 2005 Private Placement. Mr. Solomon Eisenberg has voting and
dispositive control over securities held by Utica Advisors, LLC.
(13) Monarch Capital Fund, Ltd. holds 200,000 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 which it purchased from us in the December
2005 Private Placement. The number of shares offered includes up to 3,500,000
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 50,000 shares of our Series B 6% Cumulative
Convertible Preferred Stock and common stock purchase warrants exercisable into
2,266,666 shares of our common stock with exercise prices ranging from $0.20 to
$0.30 per share . The number of shares offered includes up to 875,000 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 which underlie securities purchased from us in the December 2005
Private Placement and 266,666 shares of our common stock underlying warrants
with an exercise price of $0.20 per share as a due diligence fee in connection
with the December 2005 Private Placement. 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.
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(15) The number of shares owned and offered includes 62,500 shares of our
common stock which are presently issued and outstanding and 62,500 shares
issuable upon the exercise of outstanding common stock purchase warrants with an
exercise price of $0.10 per share which were purchased from us in the June 2005
Private Placement.
(16) The number of shares owned and offered includes 37,500 shares of our
common stock which are presently issued and outstanding and 37,500 shares
issuable upon the exercise of outstanding common stock purchase warrants with an
exercise price of $0.10 per share which were purchased from us in the June 2005
Private Placement.
(17) The number of shares owned and offered includes 125,000 shares of our
common stock which are presently outstanding 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 which were purchased from us in the
December 2005 Private Placement. The 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 of our
common stock which are presently issued and outstanding and 175,630 shares
issuable upon the exercise of outstanding common stock purchase warrants with an
exercise price of $0.10 per share which were purchased from us in the June 2005
Private Placement.
(19) The number of shares owned and offered by Professor Shan includes 30,000
shares of our common stock which are presently issued and outstanding and
30,000 shares issuable upon the exercise of outstanding common stock purchase
warrants with an exercise price of $0.10 per share which were purchased from us
in the June 2005 Private Placement. The number of shares beneficially owned by
Professor Shan Ting Ting excludes an aggregate of 2,715,260 shares owned by CIIC
Investment Banking Services Co., Ltd. as described in footnote 4 to this table
over which Professor Shan has voting and dispositive control.
(20) The number of shares owned and offered includes 45,680 shares of our
common stock which are presently issued and outstanding and 45,680 shares
issuable upon the exercise of outstanding common stock purchase warrants with an
exercise price of $0.10 per share which were purchased from us in the June 2005
Private Placement.
(21) Whalehaven Capital Fund Limited holds 150,000 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 which were purchased from us in the
December 2005 Private Placement. The number of shares offered includes up to
2,625,000 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.
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(22) The number of shares owned and offered includes 937,500 shares of our
common stock which are presently issued and outstanding and 937,500 shares
issuable upon the exercise of outstanding common stock purchase warrants with an
exercise price of $0.10 per share which were purchased from us in the June 2005
Private Placement.
(23) The number of shares owned and offered includes 500,000 shares of our
common stock which are presently issued and outstanding and 500,000 shares
issuable upon the exercise of outstanding common stock purchase warrants with an
exercise price of $0.10 per share which were purchased from us in the June 2005
Private Placement.
(24) Ellis International, Ltd. holds 50,000 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 up to 875,000 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 which underlie securities purchased from us the December 2005 Private
Placement and 66,667 shares of common stock issuable upon the exercise of
warrants with an exercise price of $0.20 per share which it received as a due
diligence fee in connection with the December 2005 Private Placement. 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.
(25) The number of shares owned and offered by the selling security holder
includes shares of our common stock which are presently outstanding.
(26) The selling security holder is an employee of our company.
(27) Mr. Guan is an executive officer and director of our company. The number of
shares owned and offered by him include shares of our common stock which are
presently outstanding.
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.
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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:
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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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. We will supplement this prospectus to disclose the names of any
pledges, donees, transferees, or other successors-in-interest that intend to
offer common stock through 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 August 4, 2006, we had 57,557,589 shares of common stock issued
and outstanding. Of the issued and outstanding shares, approximately 49,677,553
shares of our common stock are "restricted securities". We have included
13,208,450 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, 2005 and 2004 of Linkwell Corporation. and subsidiaries 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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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
Capitalization.............................. 14 LINKWELL CORPORATION
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 ________________, 2006
Principal Shareholders...................... 51
Description of Securities................... 52
Selling Security Holders.................... 56
Plan of Distribution ....................... 60
Shares Eligible for Future Sale............. 63
Legal Matters............................... 63
Experts..................................... 63
Additional Information...................... 64
Financial Statements........................ F-1
61,328,565 SHARES
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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.........................................$ 1,409
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*............................................................1,091
TOTAL........ ................................................$45,000
======
* 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
recipient represented that he was acquiring the shares for investment purposes
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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
resulting in total gross proceeds to us of $247,500. 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
resulting in total gross proceeds to us of $10,000.00. 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 resulting in total gross
proceeds to us of $60,000. 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 resulting in total gross
proceeds to us of $10,000. 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.
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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.
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 in
exchange for 100% of the capital stock of Linkwell Tech. 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 (Shanghai) Company, Limited, accredited
investors, for advisory services and as a finders fee which 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.
Our financial statements included elsewhere herein to not recognize an expense
attributable to these shares.
In connection with the share exchange agreement, we also issued our
former CEO 1,400,000 shares of our common stock under the terms negotiated with
him prior to the transaction. Our financial statements included elsewhere herein
to not recognize an expense attributable to these shares. 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 $277,276 (net of
costs of $23,000). 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.
II-3
<page>
In June 2006, the holders of our Series A Convertible Preferred Stock
converted those shares into 3,753,450 of our common stock pursuant to the
designations, rights and preferences of those securities. The issuance of the
shares were exempt from registration under the Securities Act in reliance on an
exemption provided by Section 3(a)(9) of that act.
In July 2006, the holders of 850,000 shares of our Series B 6%
Cumulative Convertible Preferred Stock converted those shares into 8,500,000 of
our common stock pursuant to the designations, rights and preferences of those
securities. The issuance of the shares were exempt from registration under the
Securities Act in reliance on an exemption provided by Section 3(a)(9) of that
act.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No Description of Document
2.1 Stock Purchase Agreement between HBOA.Com, Inc., Philip J. Davis and John
C. Lee dated November 17, 1999 (1)
2.2 Amendment No. 1 to the Stock Purchase Agreement between HBOA.Com, Inc.,
Phillip J. Davis and John C. Lee dated December 28, 1999 (1)
2.3 Stock Exchange Agreement dated May 2, 2005 by and among Kirshner
Entertainment & Technologies, Inc., Gary Verdier, Linkwell Tech Group, Inc
and the shareholders of Linkwell (2)
3.1 Articles of Incorporation (3)
3.2 Articles of Amendment to Articles of Incorporation (4)
3.3 Articles of Amendment to Articles of Incorporation (5)
3.4 Articles of Amendment to Articles of Incorporation (6)
3.5 Articles of Amendment to the Articles of Incorporation (11)
3.6 Bylaws (3)
3.7 Articles of Amendment to the Articles of Incorporation (12)
4.1 Form of common stock purchase warrant (7)
4.2 Form of Class A and Class B Common Stock Purchase Warrants (11)
5.1 Opinion of Schneider Weinberger & Beilly LLP **
10.1 HBOA Holdings, Inc. - Year 2000 Equity Compensation Plan (8)
10.2 HBOA Holdings, Inc. - Non Qualified Stock Option Plan (9)
10.3 Kirshner Entertainment & Technologies, Inc. 2005 Equity Compensation Plan
(10)
10.4 Consulting and Management Agreement dated August24, 2005 between Linkwell
Corporation and China Direct Investments, Inc. *
10.5 Form of Subscription Agreement for $1,500,000 unit offering (11)
10.6 Form of agreement between Shanghai Likang Disinfectant High-Tech Company,
Limited and its customers (12)
10.7 Form of agreement between Shanghai Likang Disinfectant High-Tech Company,
Limited and its suppliers (12)
10.8 Sales Agreement dated as of January 1, 2005 between Shanghai Likang
Disinfectant High-Tech Co., Ltd. and Shanghai Likang Meirui Pharmaceutical
High-Tech Co., Ltd. *
II-4
<page>
10.9 Lease Agreement effective January 1, 2005 between Shanghai Likang
Disinfectant High-Tech Co., Ltd. and Shanghai Shanhai Group for principal
executive offices*
10.10 Lease Agreement effective January 1, 2002 between Shanghai Likang
Pharmaceuticals Co., Ltd. and Shanghai Likang Disinfectant High-Tech Co.
Ltd.*
10.11 Lease Agreement effective January 1, 2005 between Shanghai Jinshan Zhuhang
Plastic Lamp Factory, Ltd. and Shanghai Likang Disinfectant High-Tech Co.
Ltd. *
10.12 Manufacturing Agreement dated as of January 1, 2005 between Shanghai
Likang Disinfectant High-Tech Co., Ltd. and Shanghai Likang Meirui
Pharmaceutical High-Tech Co., Ltd.*
10.13 Stock Purchase Agreement effective February 6, 2006 between Linkwell
Corporation, Aerisys IOncorporated and Gary Verdier (13)
10.14 Asset Purchase Agreement dated August 5,2006 between Shanghai Likang
Disinfectant High-Tech Company, Limited, Shanghai Likang Pharmaceuticals
Technology Company and Xuelian Bian **
10.15 Contract Management Agreement dated January 1, 2005 between Shanghai
Shanhai Group and Shanghai Likang Disinfectant High-Tech Co., Ltd. *
10.16 Lease Agreement dated December 15, 2004 between Shanghai Shanhai Group
and Shanghai Likang Disinfectant High-Tech Co., Ltd. *
10.17 Lease Agreement dated August 11, 2005 between Shanghai Henglain
Industrial Co., Ltd. and Shanghai Likang Disinfectant High-Tech Co., Ltd.*
10.18 Lease Agreement dated September 16, between Shanghai Henglain Industrial
Co., Ltd. and Shanghai Likang Disinfectant High-Tech Co., Ltd. *
14.1 Code of Business Conduct and Ethics*
16.1 Letter from Berkovits, Lago & Company LLP to the SEC dated May 13, 2005
(14)
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**
* previously filed
** filed herewith
(1) Incorporated by reference to the Current Report Form 8-K dated December
30, 1999.
(2) Incorporated by reference to Current Report on For 8-K as filed on May 6,
2005.
(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 14, 2000.
(9) Incorporated by reference to the Registration Statement on Form S-8 as
filed on December 21, 2000.
(10) Incorporated by reference to the Current Report on Form 8-K as filed on
August 4, 2005.
II-5
<page>
(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
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.
(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-6
<page>
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.
II-7
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 August 10, 2006.
LINKWELL CORPORATION
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, August 10, 2006
- ------------------- principal executive officer
Xue Lian Bian and principal financial and
accounting officer
/s/ Wei Guan Vice President, Secretary August 10, 2006
- ---------------------- and director
Wei Guan
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
Consolidated Balance Sheet (Unaudited) As of March 31, 2006.........F-2
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2006 and 2005 ........F-3
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2006 and 2005.........F-4
Notes to Unaudited Consolidated Financial Statements....... F-5 to F-20
Report of Independent Registered Public Accounting Firm..............F-21
Consolidated Balance Sheet
December 31, 2005....................................F-22
Consolidated Statements of Operations
December 31, 2005...................................F-23
Consolidated Statements of Stockholders' Equity
December 31, 2005...............................F-24-A/B
Consolidated Statements of Cash Flows
December 31, 2005...................................F-25
Notes to Consolidated Financial Statements
December 31, 2005...........................F-26 to F-43
F-1
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2006
(As Restated - See Note 1)
(Unaudited)
<table>
<s> <c>
ASSETS
CURRENT ASSETS:
Cash $ 879,920
Accounts receivable, net of allowance for doubtful accounts of $32,919 1,201,964
Accounts receivable - related parties 1,952,525
Inventories 479,295
Prepaid expenses and other 92,536
Loan receivable - related party 100,000
----------------------
Total Current Assets 4,706,240
PROPERTY AND EQUIPMENT - Net 737,691
----------------------
Total Assets $ 5,443,931
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable $ 535,145
Loan payable - related party 163,033
Accounts payable and accrued expenses 923,571
Accrued preferred stock dividends payable 37,874
Income tax payable 47,244
Advances from customers 355,563
----------------------
Total Current Liabilities 2,062,430
----------------------
MINORITY INTEREST 274,818
----------------------
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) 277,276
Series B convertible preferred stock (No Par Value; 1,500,000 Shares Authorized;
1,500,000 shares issued and outstanding) 1,395,000
Common Stock ($0.0005 Par Value; 150,000,000 Shares Authorized;
45,304,139 shares issued and outstanding) 22,652
Additional paid-in capital 2,912,442
Accumulated deficit (1,167,630)
Deferred compensation (367,223)
Other comprehensive gain - foreign currency 34,166
----------------------
Total Stockholders' Equity 3,106,683
----------------------
Total Liabilities and Stockholders' Equity $ 5,443,931
======================
</table>
See notes to unaudited consolidated financial statements
F-2
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(As Restated - See Note 1)
<table>
<caption>
For the Three Months
Ended March 31,
-----------------------------------
2006 2005
---------------- ----------------
(Unaudited) (Unaudited)
<s> <c> <c>
NET REVENUES:
Non-affilated companies $ 608,271 $ 589,938
Affiliated companies 1,260,255 357,987
---------------- ----------------
Total Net Revenues 1,868,526 947,925
COST OF SALES 1,227,448 754,637
---------------- ----------------
GROSS PROFIT 641,078 193,288
---------------- ----------------
OPERATING EXPENSES:
Selling expenses 105,559 44,734
General and administrative 262,616 132,457
---------------- ----------------
Total Operating Expenses 368,175 177,191
---------------- ----------------
INCOME FROM OPERATIONS 272,903 16,097
---------------- ----------------
OTHER INCOME (EXPENSE):
Interest income 1,557 182
Interest expense - related party (4,145) -
Interest expense (10,770) (11,299)
---------------- ----------------
Total Other Expense (13,358) (11,117)
---------------- ----------------
INCOME BEFORE DISCONTINUED OPERATIONS, INCOME TAXES
AND MINORITY INTEREST 259,545 4,980
DISCONTINUED OPERATIONS:
Gain from disposal of discontinued operations 12,794 -
---------------- ----------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 272,339 4,980
INCOME TAXES (47,124) (1,401)
---------------- ----------------
INCOME BEFORE MINORITY INTEREST 225,215 3,579
MINORITY INTEREST (23,275) (358)
---------------- ----------------
NET INCOME 201,940 3,221
CUMULATIVE PREFERRED STOCK DIVIDENDS (26,634) -
---------------- ----------------
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 175,306 $ 3,221
================ ================
BASIC INCOME PER COMMON SHARE:
Income from continuing operations $ 0.00 $ 0.00
Income from discontinued operations 0.00 -
---------------- ----------------
Net income per common share available to common shareholders $ 0.00 $ 0.00
================ ================
DILUTED INCOME PER COMMON SHARE:
Income from continuing operations $ 0.00 $ 0.00
Income from discontinued operations 0.00 -
---------------- ----------------
Net income per common share available to common shareholders $ 0.00 $ 0.00
================ ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 64,995,951 36,273,470
================ ================
Diluted 66,824,555 36,273,470
================ ================
</table>
See notes to unaudited consolidated financial statements
F-3
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<table>
For the Three Months
Ended March 31,
--------------------------------
2006 2005
--------------- ---------------
(Unaudited) (Unaudited)
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 201,940 $ 3,221
Gain from discontinued operations 12,794 -
--------------- ---------------
Income from continuing operations 189,146 3,221
Adjustments to reconcile net income from continuing
operations to net cash used in operating activities:
Depreciation and amortization 21,872 8,599
Minority interest 23,275 358
Allowance for doubtful accounts 19,402 -
Loss on disposal of property and equipment - 124
Stock-based compensation 67,324 -
Changes in assets and liabilities:
Accounts receivable 137,900 (57,752)
Accounts receivable - related party (1,070,531) (128,986)
Inventories 496,644 (89,438)
Prepaid and other current assets (10,086) 48,892
Other assets 739 -
Accounts payable and accrued expenses (485,651) 88,308
Accounts payable - related party - (36,583)
Tax payable (28,872) -
Advances from customers 227,608 -
--------------- ---------------
Net Cash Used in Continuing Operating Activities (411,230) (163,257)
Net Cash Used in Discontinued Operations - -
--------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (411,230) (163,257)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (66,842) -
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (66,842) -
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loans payable (99,307) -
--------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES (99,307) -
--------------- ---------------
EFFECT OF EXCHANGE RATE ON CASH (2,779) -
--------------- ---------------
NET DECREASE IN CASH (580,158) (163,257)
CASH - beginning of year 1,460,078 467,859
--------------- ---------------
CASH - end of period $ 879,920 $ 304,602
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ - $ 11,299
=============== ===============
Income taxes $ - $ 15,484
=============== ===============
</table>
See notes to unaudited consolidated financial statements.
F-4
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Linkwell Corporation (formerly Kirshner Entertainment & Technologies, Inc.) 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 June 2003, the
Company formed its entertainment division and changed its name to reflect this
new division.
On May 2, 2005, the Company entered into and consummated a share exchange with
all of the shareholders of Linkwell Tech Group, Inc. ("Linkwell Tech"). Pursuant
to the share exchange, the Company acquired 100% of the issued and outstanding
shares of Linkwell Tech's common stock, in exchange for 36,273,470 shares of our
common stock, which at closing represented approximately 87.5% of the issued and
outstanding shares of 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 7,030,669 or approximately 12.5% of the
outstanding stock. The consolidated financials statements reflect the change in
the capital structure of the Company due to the recapitalization and the
consolidated financial statements reflect the operations of the Company and its
subsidiaries for the periods presented.
Linkwell Tech was founded on June 22, 2004, as a Florida corporation. On June
30, 2004, Linkwell Tech acquired 90% of Shanghai Likang Disinfectant High-Tech
Company, Ltd. ("Likang") through a stock exchange. The transaction on which
Linkwell acquired its 90% interest in Likang resulted in the formation of a U.S.
holding company by the shareholders of Likang as it did not result in a change
in the underlying ownership interest of Likang. Likang is a science and
technology enterprise founded in 1988. 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.
Likang has developed and manufactured several series products in the field of
skin mucous disinfection, hand disinfection, surrounding articles disinfection,
medical instruments disinfection and air disinfection.
On June 30, 2005, the Company's Board of Directors approved an amendment of its
Articles of Incorporation to change the name of the Company to Linkwell
Corporation. The effective date of the name change was after close of business
on August 16, 2005.
F-5
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The accompanying financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These consolidated financial statements should be read in
conjunction with the financial statements for the year ended December 31, 2005
and notes thereto contained on Form 10-KSB/A of the Company as filed with the
Securities and Exchange Commission. The results of operations for the three
months ended March 31, 2006 are not necessarily indicative of the results for
the full fiscal year ending December 31, 2006.
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, and its 90%-owned subsidiary, Likang.
All significant inter-company balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates. Significant estimates in 2006 and 2005 include the allowance for
doubtful accounts, stock-based compensation, and the useful life of property and
equipment and intangible assets.
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.
Accounts receivable
The Company has a policy of reserving for uncollectible accounts based on its
best estimate of the amount of probable credit losses in its existing accounts
receivable. The Company periodically reviews its accounts receivable to
determine whether an allowance is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization of an account
may be in doubt. Account balances deemed to be uncollectible are charged to the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. At March 31, 2006, the Company has
established, based on a review of its outstanding balances, an allowance for
doubtful accounts in the amount of $32,919.
F-6
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Property and equipment
Property and equipment are carried at cost. The cost of repairs and maintenance
is expensed as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included in
income in the year of disposition. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", the Company examines the possibility of decreases in the
value of fixed assets when events or changes in circumstances reflect the fact
that their recorded value may not be recoverable.
Advances from customers
Advances from customers at March 31, 2006 of $355,563 consist of prepayments
from third party customers to the Company for merchandise that had not yet
shipped. The Company will recognize the deposits as revenue as customers take
delivery of the goods, in compliance with its revenue recognition policy.
Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," The Company
periodically reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. The Company recognizes an impairment loss when the sum of
expected undiscounted future cash flows is less than the carrying amount of the
asset. The amount of impairment is measured as the difference between the
asset's estimated fair value and its book value. The Company did not consider it
necessary to record any impairment charges during the year ended March 31, 2006.
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.
F-7
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income (loss) per common share
In accordance with SFAS No. 128 "Earnings Per Share," Basic earnings per share
is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings 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. Diluted loss per common share is not presented
because it is anti-dilutive. The Company's common stock equivalents at March 31,
2006 include the following:
Convertible preferred stock 18,753,450
Warrants and options 37,134,865
------------------
55,888,315
==================
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:
The Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
The Company's revenues from the sale of products to related parties are recorded
when the goods are shipped which correlates with the shipment by the related
parties to its customers, at which time title passes, and collectibility is
reasonably assured. The Company receives sales order on a just-in-time basis
from the related party. Generally, the related party does not hold the Company's
inventory. If the related party has inventory on hand at the end of a reporting
period, the sale is reversed and the inventory is included on the Company's
balance sheet.
Concentrations 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 in the
U.S. and in China. 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 three months ended March 31, 2006 and
2005, sales to related parties accounted for 67% and 38% of net revenues,
respectively.
F-8
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive income
The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
"Reporting Comprehensive Income". Comprehensive income is comprised of net
income and all changes to the statements of stockholders' equity, except those
due to investments by stockholders', changes in paid-in capital and
distributions to stockholders.
Shipping costs
Shipping costs are included in selling and marketing expenses and totaled
$28,918 and $10,602 for the three months ended March 31, 2006 and 2005,
respectively.
Advertising
Advertising is expensed as incurred. Advertising expenses for the three months
ended March 31, 2006 and 2005 was not material.
Stock-based compensation
Effective October 1, 2005, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share Based Payment ("SFAS No. 123R"). SFAS
No. 123R establishes the financial accounting and reporting standards for
stock-based compensation plans. As required by SFAS No. 123R, the Company
recognized the cost resulting from all stock-based payment transactions
including shares issued under its stock option plans in the financial
statements.
Prior to October 1, 2005, the Company accounted for stock-based employee
compensation plans (including shares issued under its stock option plans) in
accordance with APB Opinion No. 25 and followed the pro forma net income, pro
forma income per share, and stock-based compensation plan disclosure
requirements set forth in the Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123").
Non-employee stock based compensation
The cost of stock based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in Emerging
Issues Task Force Issue ("EITF") 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18").
F-9
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Registration rights agreements
The Company has adopted View C of EITF 05-4 "Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF 00-19" ("EITF
05-4"). Accordingly, the Company classifies as liability instruments, the fair
value of registration rights agreements when such agreements (i) require it to
file, and cause to be declared effective under the Securities Act, a
registration statement with the SEC within contractually fixed time periods, and
(ii) provide for the payment of liquidating damages in the event of its failure
to comply with such agreements. Under View C of EITF 05-4, (i) registration
rights with these characteristics are accounted for as derivative financial
instruments at fair value and (ii) contracts that are (a) indexed to and
potentially settled in an issuer's own stock and (b) permit gross physical or
net share settlement with no net cash settlement alternative are classified as
equity instruments. At March 31, 2006, the Company recorded a registration
rights penalty expense of $44,000, which has been included on the accompanying
consolidated balance sheet in accounts payable and accrued expenses.
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 March 31, 2006 was $2,779.
Research and development
Research and development costs are expensed as incurred. These costs primarily
consist of cost of material used and salaries paid for the development of the
Company's products. In certain cases, the Company may employ the resources of
third parties for research and development. Accordingly, the Company may incur
research and development fees payable to third parties. To date, these fees have
been minimal. Research and development costs for the three months ended March
31, 2006 and 2005 was not material and are included in cost of sales.
F-10
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements
In September 2005, the FASB ratified the Emerging Issues Task Force's ("EITF")
Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues," which addresses whether a modification to
a conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt). This
issue is effective for future modifications of debt instruments beginning in the
first interim or annual reporting period beginning after December 15, 2005. The
adoption of this pronouncement did not have any effect on the Company's
financial position or results of operations.
In September 2005, the FASB also ratified the EITF's Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature,"
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
recorded in the shareholder's equity for book purposes, but as a liability for
income tax purposes), and, if so, whether that basis difference is a temporary
difference under FASB Statement No. 109, "Accounting for Income Taxes." This
Issue should be applied by retrospective application pursuant to Statement 154
to all instruments with a beneficial conversion feature accounted for under
Issue 00-27 included in financial statements for reporting periods beginning
after December 15, 2005. The adoption of this pronouncement did not have any
effect on the Company's financial position or results of operations.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
Restatement
The Company revised its financial statements and notes thereto for the three
months ended March 31, 2006 to accrue undeclared and unpaid cumulative preferred
stock dividends related to its Series A and Series B preferred stock and to
disclose the per share and aggregate amount of these cumulative preferred
dividends in its footnotes. The effect of this restatement is to increase
current liabilities and decrease stockholders' equity by $26,634, respectively.
F-11
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 2 INVENTORIES
At March 31, 2006, inventories consisted of the following:
Raw materials $ 261,239
Work in process 26,689
Finished goods 315,082
--------------
603,010
Less: reserve for obsolescence (123,715)
--------------
$ 479,295
==============
NOTE 3 PROPERTY AND EQUIPMENT
At March 31, 2006, property and equipment consist of the following:
<table>
<s> <c> <c>
Useful Life
-------------------------
Office equipment and furniture 5-7 Years $ 96,885
Autos and trucks 10 Years 123,111
Manufacturing equipment 7 Years 186,323
Building and land 20 Years 489,152
Leasehold improvements 5 Years 3,380
---------------------------
898,851
Less accumulated depreciation (161,160)
---------------------------
$ 737,691
===========================
</table>
For the three months ended March 31, 2006 and 2005, depreciation expense
amounted to $21,872 and $8,599, respectively.
F-12
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 4 LOANS PAYABLE
Loans payable consisted of the following at March 31, 2006:
<table>
<s> <c>
Note to De Chang Credit Union due on May 18, 2006 with interest at 6.70% per $ 224,014
annum. Secured by equipment
Note to De Chang Credit Union due on September 30, 2006 with interest 6.70%
per annum. Secured by equipment 62,226
Note to Agriculture Bank of China due on December 7, 2006 with interest at
6.70% per annum. Secured by equipment 248,905
-------------------------
Total 535,145
Less: current portion of loans payable (535,145)
-------------------------
Loans payable, long-term $ -
=========================
</table>
NOTE 5 DISCONTINUED OPERATIONS
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.
Accordingly, Aerisys is reported as a discontinued operation, and prior periods
have been restated in the Company's financial statements and related footnotes
to conform to this presentation. Since, the Company did not acquire Aerisys
until May 3, 2005, the Company did not present pro forma information.
NOTE 6 RELATED PARTY TRANSACTIONS
The Company's 90% owned subsidiary, Likang, is engaged in business activities
with two affiliated entities.
Shanghai Likang Meirui Pharmaceuticals High-Tech Company, Ltd. ("Meirui"), a
company of which Shanghai Shanhai Group, Likang's minority shareholder, owns
68%, provides certain contract manufacturing of two products for Likang.
Specifically, Meirui provides Likang with Ozone producing device equipment and
Ultraviolet radiation lamp lights. In addition, under the terms of a two year
agreement entered into in January 2005, Meirui produces the Lvshaxing Air
Disinfectant Machine and Likang Surgery hand-washing table for Likang. In
January 2005, Likang signed a two year agreement with Meirui to market its
products to the retail/consumer market using Meirui's proprietary sales network
which caters to the retail/consumer market in China. For the three months ended
March 31, 2006 and 2005, the Company recorded net revenues of $4,044 and $8,013
to Meirui, respectively. Additionally, for the three months ended March 31, 2006
and 2005, the Company purchased product from Meirui amounting to $0 and $0,
respectively. At March 31, 2006, Meirui owed Likang $3,433. In general, accounts
receivable due from Meirui are payable in cash and are due within 4 to 6 months,
which approximate normal business terms with unrelated parties.
F-13
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 6 RELATED PARTY TRANSACTIONS (continued)
Shanghai Shanhai Group, who is the minority shareholder of Likang, is owned by
Group Employee Share-holding Commission (16.25%) and Baoshan District Dachang
Town South Village Economic Cooperation Club (83.75%). The Company leases its
principal executive offices and warehouse space from Shanghai Shanhai Group for
approximately $36,000 per year. Shanghai Shanhai Group also holds the land use
permit for the principal executive office building. For the three months ended
March 31, 2006 and 2005, rent expense paid to this related party amounted to
approximately $9,000 and $5,880, respectively. Additionally, in January 2005,
the Company borrowed $163,033 from Shanghai Shanhai Group for working capital
purposes. The loan bears interest at 10% per annum and is payable on demand. For
the three months ended March 31, 2006, interest expense related to this note
amounted to $4,145.
Shanghai Likang Pharmaceuticals Technology Company, Limited, which is owned by
Messrs. Xuelian Bian (90%) and Wei Guan (10%), the Company's officers and
directors, sells the Company's products to third parties. For the three months
ended March 31, 2006 and 2005, the Company recorded net revenues of $1,256,211
and $349,974 to Shanghai Likang Pharmaceuticals Technology Company, Limited,
respectively. At March 31, 2006, accounts receivable from sales due from
Shanghai Likang Pharmaceuticals Technology Company, Limited was $1,949,092. In
general, accounts receivable due from Likang are payable in cash and are due
within 4 to 6 months, which approximate normal business terms with unrelated
parties.
On December 28, 2005, the Company loaned $100,000 to Shanghai Likang
Pharmaceuticals Technology Company, Limited for working capital purposes. The
balance bears interest at 3% and was repaid in April 2006.
NOTE 7 - SHAREHOLDERS' EQUITY
Preferred Stock
(a) Series A Convertible 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 $277,276 (net of fees of
$23,000) 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 originally 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. Prior to December 31, 2005, this provision
was waived by the investors. 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. In accordance with Emerging Issues Task Force ("EITF") 98-5
and EITF 00-27, the Series A Preferred Stock was considered to have an embedded
beneficial conversion feature because the conversion price was less than the
fair value of the Company's common stock. This beneficial conversion feature is
calculated after the warrants have been valued with proceeds allocated on a
relative value basis. This series A convertible Preferred was fully convertible
at the issuance date, therefore the full amount of proceeds allocated to the
Series A Preferred was determined to be the value of the beneficial conversion
feature and was recorded as a deemed dividend with a corresponding credit to
additional paid-in capital in the amount of $300,276 in fiscal 2005.
As of March 31, 2006, accrued cumulative but undeclared dividends in arrears
related to the Company's Series A Preferred Stock amounted to approximately $.04
per share aggregating approximately $14,942 and is included on the accompanying
balance sheet.
F-14
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 7 - SHAREHOLDER' EQUITY (continued)
Preferred Stock (continued)
(b) Series B 6% Cumulative Convertible Preferred Stock
On December 28, 2005, the Company closed on a private placement with a group of
accredited investors, for the sale of 1,500,000 shares of the Company's Series B
6% Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") along
with warrants to purchase additional shares of the Company's common stock exempt
from registration under the Securities Act in reliance on exemptions provided by
Section 4(2) of that act and Regulation D. The 6% Convertible Preferred Stock
was priced at $1.00 per share, and the Company received gross proceeds of
$1,500,000. Each share of Series B Preferred Stock, as well as the value of all
accrued by unpaid dividends, is convertible at the option of the holder into
shares of the Company's common stock at a conversion price of $0.10 per share,
provided that no holder has the right to convert his shares of Series B
Preferred Stock if by virtue of such conversion the holder would become the
beneficial owner of than 4.99% of the Company's common stock. This ownership
limitation can be waived by the holder upon 61 days notice to the Company. The
conversion price is subject to adjustment in the event of stock splits,
reclassifications or stock dividends. Thus, if all of the shares of the Series B
Preferred Stock were converted to common stock, an additional 15,000,000 shares
of common stock would be issued. The shares of Series B Preferred Stock do not
have any voting rights except as may be provided under Florida law.
In connection with the sale of 1,500,000 shares of the Company's Series B
Preferred Stock, the Company issued Class A Common Stock Purchase Warrants to
purchase 15,000,000 shares of the Company's common stock at an exercise price of
$0.20 per share and Class B Common Stock Purchase Warrants to purchase
15,866,665 (including 866,665 granted to placement agent) shares of its common
stock at an exercise price of $0.30 per share. The Class A and Class B warrant
exercise prices are subject to adjustment pursuant to anti-dilution provisions
on either a cash or cashless exercise basis. The warrants expire five years from
the date of issuance.
The Series B Preferred Stock ranks ahead of the common stock of the Company upon
liquidation of the Company. The Series B Preferred Stock also ranks ahead of the
common stock with respect to the payment of dividends. 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", as defined in the agreement, has occurred.
The dividends are payable in cash or at the Company's option shares of
registered common stock. If the Company elects to pay dividends in the form of
shares of its 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. In connection with the transaction, the
Company filed a certificate of designation for the Series B Preferred Stock with
the Florida Department of Corporations on December 8, 2005. This filing
constituted an amendment to the Company's certificate of incorporation,
designating the terms, rights and preferences of a new series of preferred stock
of the Company.
As of March 31, 2006, accrued cumulative but undeclared dividends in arrears
related to the Company's Series B Preferred Stock amounted to approximately
$.015 per share aggregating approximately $22,192 and is included on the
accompanying balance sheet.
F-15
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 7 - SHAREHOLDER' EQUITY (continued)
Preferred Stock (continued)
The Company paid a due diligence fee of $65,000 in cash and Class B Warrants to
purchase 866,665 shares of its common stock to certain of the investors who
purchased securities in this offering. 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
In accordance with Emerging Issues Task Force ("EITF") 98-5 and EITF 00-27, the
Series B Preferred was considered to have an embedded beneficial conversion
feature because the conversion price was less than the fair value of the
Company's common stock. This beneficial conversion feature is calculated after
the warrants have been valued with proceeds allocated on a relative value basis.
This Series B Convertible Preferred was fully convertible at the issuance date,
therefore the full amount of proceeds allocated to the Series B Preferred was
determined to be the value of the beneficial conversion feature and was recorded
as a deemed dividend with a corresponding credit to additional paid-in capital
in the amount of $1,500,000 in fiscal 2005.
In 2005, the Company computes the fair value of the warrants using the
Black-Scholes valuation model. The Black-Scholes model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. The assumptions used in this model to estimate fair value of the
warrants granted are as follows:
Warrants
Exercise/Conversion Price $0.20 to $0.30
Fair Value of the Company's Common Stock $ 0.153
Expected life in years 5.0
Expected volatility 330%
Expected dividend yield 0.0%
Risk free rate 3.93%
Calculated fair value per share $ 0.153
Common Stock
For the three months ended March 31, 2006 and 2005, amortization of stock based
compensation amounted to $67,324 and $0, respectively.
Stock Options
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
F-16
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 7 - SHAREHOLDER' EQUITY (continued)
Stock Options (continued)
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.
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
F-17
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 7 - SHAREHOLDER' EQUITY (continued)
Stock Options (continued)
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.
During the three months ended March 31, 2006, the Company did not grant any
stock options.
Common Stock Warrants
In January 2006, the Company 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 for business development and management
services rendered and to rendered in the future. The fair market value of these
warrants of $327,880 will be amortized over the service period and was estimated
on the date of grant using the Black-Scholes option-pricing model, in accordance
with SFAS No. 123 using the following weighted-average assumptions: expected
dividend yield 0%, risk-free interest rate of 4.35%, volatility of 330% and
expected term of 3 years.
Stock warrant activity for the year ended March 31, 2006 is summarized as
follows:
Number of Weighted average
shares exercise price
Outstanding at December 31, 2005 35,009,865 $0.25
Granted 2,125,000 0.20
Exercised - -
-------------- ------
Outstanding at March 31, 2006 37,134,865 $0.25
========== =====
The following table summarizes the Company's stock warrants outstanding at March
31, 2006:
<table>
<s> <c> <c>
Warrants outstanding and exercisable
Weighted Weighted
average average
Range of remaining exercise
exercise price Number life price
- ----------------------------------------------------- -----------------------
$0.75-2.50 359,750 1.45 $2.02
$0.10 3,753,450 4.25 $0.10
$0.20 17,155,000 4.50 $0.20
$0.30 15,866,665 4.75 0$.30
</table>
F-18
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 8 OPERATING RISK
(a) Country risk
Currently, the Company's revenues are primarily derived from the sale of line of
disinfectant product offerings to customers 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 manufacturers of disinfectant product
offerings, the Company competes with larger U.S. companies who have greater
funds available for expansion, marketing, research and development and the
ability to attract more qualified personnel. These U.S. companies may be able to
offer products at a lower price. There can be no assurance that the Company will
remain competitive should this occur.
(c) Exchange risk
The Company 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 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.
F-19
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE 11 FOREIGN OPERATIONS
For the three months ended March 31, 2006 and 2005, the Company derived all of
its revenue from its subsidiaries located in the People's Republic of China.
Identifiable assets by geographic areas as of March 31, 2006 are as follows:
Identifiable Assets
at March 31, 2006
-------------------------
United States $ 135,871
China 5,308,060
-------------------------
Total $ 5,443,931
=========================
F-20
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
<page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Linkwell Corporation and Subsidiaries
Shanghai, China
We have audited the accompanying consolidated balance sheet of Linkwell
Corporation and Subsidiaries as of December 31, 2005 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2005 and 2004. 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 Subsidiaries as of December 31, 2005, and the results
of their operations and their cash flows for the years ended December 31, 2005
and 2004, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
March 25, 2006
(August 4, 2006 as to Note 1 and as to the effects of the restatement
discussed in Note 1)
F-21
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005
(As Restated - See Note 1)
<table>
<caption>
ASSETS
<s> <c>
CURRENT ASSETS:
Cash $ 1,460,078
Accounts receivable, net of allowance for doubtful accounts of $13,343 1,347,163
Accounts receivable - related parties 872,370
Inventories 968,224
Prepaid expenses and other 81,750
Assets from discontinued operations 9,956
Loan receivable - related party 100,000
---------------------
Total Current Assets 4,839,541
PROPERTY AND EQUIPMENT - Net 686,234
OTHER ASSETS 734
---------------------
Total Assets $ 5,526,509
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable $ 628,869
Loan payable - related party 161,533
Accounts payable and accrued expenses 1,400,704
Accrued prefered stock dividends payable 11,240
Income tax payable 75,489
Advances from customers 126,199
Liabilities from discontinued operations 22,750
---------------------
Total Current Liabilities 2,426,784
MINORITY INTEREST 249,170
---------------------
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) 277,276
Series B convertible preferred stock (No Par Value; 1,500,000 Shares Authorized;
1,500,000 shares issued and outstanding) 1,395,000
Common Stock ($0.0005 Par Value; 150,000,000 Shares Authorized;
45,304,139 shares issued and outstanding) 22,652
Additional paid-in capital 2,584,562
Accumulated deficit (1,342,936)
Deferred compensation (106,667)
Other comprehensive gain - foreign currency 20,668
---------------------
Total Stockholders' Equity 2,850,555
---------------------
Total Liabilities and Stockholders' Equity $ 5,526,509
=====================
</table>
See notes to consolidated financial statements
F-22
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(As Restated - See Note 1)
<table>
<caption>
For the Years
Ended December 31,
----------------------------------------
2005 2004
------------------- ------------------
<s> <c> <c>
NET REVENUES (including net revenues to related parties of $1,957,030
and $1,766,279 for the years ended December 31, 2005 and 2004,
respectively $ 5,465,933 $ 4,422,522
COST OF SALES 3,329,444 3,049,764
------------------- ------------------
GROSS PROFIT 2,136,489 1,372,758
------------------- ------------------
OPERATING EXPENSES:
Selling expenses 331,258 258,148
General and administrative 878,930 426,532
------------------- ------------------
Total Operating Expenses 1,210,188 684,680
------------------- ------------------
INCOME FROM OPERATIONS 926,301 688,078
------------------- ------------------
OTHER INCOME (EXPENSE):
Other income 9,836 8,101
Registration rights penalty (44,000) -
Interest income 1,327 1,476
Interest expense - related party (16,282) -
Interest expense (42,720) (29,359)
------------------- ------------------
Total Other Expense (91,839) (19,782)
------------------- ------------------
INCOME BEFORE DISCONTINUED OPERATIONS, INCOME TAXES
AND MINORITY INTEREST 834,462 668,296
DISCONTINUED OPERATIONS:
Loss from discontinued operations (20,817) -
------------------- ------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 813,645 668,296
INCOME TAXES (177,177) (109,732)
------------------- ------------------
INCOME BEFORE MINORITY INTEREST 636,468 558,564
MINORITY INTEREST (92,339) (55,856)
------------------- ------------------
NET INCOME 544,129 502,708
CUMULATIVE PREFERRED DIVIDENDS (11,240) -
DEEMED PREFERRED STOCK DIVIDENDS (1,800,276) -
------------------- ------------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,267,387) $ 502,708
=================== ==================
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ (0.03) $ 0.02
Loss from discontinued operations (0.00) -
------------------- ------------------
Net income (loss) per common share available to common shareholders $ (0.03) $ 0.02
=================== ==================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 41,617,176 36,273,470
=================== ==================
</table>
See notes to consolidated financial statements
F-23
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2005 and 2004
(As Restated - See Note 1)
<table>
<caption>
Series A Preferred StockSeries B Preferred Stock Common Stock
------------------------------------------------ -------------------------
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
----------- ---------- ----------- ----------- ------------ ------------
<s> <c> <c> <c> <c> <c> <c>
Balance, December 31, 2003 - $ - - $ - 36,273,470 $ 18,138
Distributions - - - - - -
Net income for the year - - - - - -
----------- ---------- ----------- ----------- ------------ ------------
Balance, December 31, 2004 - - - - 36,273,470 18,138
Recapitalization of company - - - - 7,030,669 3,514
Sales of Series A preferred stock 375,345 277,276 - - - -
Sales of Series B preferred stock - - 1,500,000 1,395,000 - -
Common stock issued for services - - - - 2,000,000 1,000
Deemed preferred stock dividends - - - - - -
Cumulative preferred stock dividend - - - - - -
Comprehensive loss:
Net income for the year
Foreign currency translation adjustment - - - - - -
----------- ---------- ----------- ----------- ------------ ------------
Balance, December 31, 2005 375,345 $ 277,276 1,500,000 $ 1,395,000 45,304,139 $ 22,652
=========== ========== =========== =========== ============ ============
</table>
See notes to consolidated financial statements
F-24/A
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2005 and 2004
(As Restated - See Note 1)
<table>
Additional Other Total
Paid-in Accumulated Deferred Comprehensive Stockholders'
Capital Deficit Compensation Loss Equity
------------ ------------- --------------------------- ------------
<s> <c> <c> <c> <c> <c>
Balance, December 31, 2003 $ 585,727 $ (18,624) $ - $ - $ 585,241
Distributions - (559,633) - - (559,633)
Net income for the year - 502,708 - - 502,708
------------ ------------- ------------- ------------- ------------
Balance, December 31, 2004 585,727 (75,549) - - 528,316
Recapitalization of company 39,559 - - - 43,073
Sales of Series A preferred stock - - - - 277,276
Sales of Series B preferred stock - - - - 1,395,000
Common stock issued for services 159,000 (106,667) - 53,333
Deemed preferred stock dividends 1,800,276 (1,800,276) - - -
Cumulative preferred stock dividend - (11,240) - - (11,240)
Comprehensive loss:
Net income for the year 544,129 - 544,129
Foreign currency translation adjustment - - - 20,668 20,668
------------ ------------- ------------- ------------- ------------
Balance, December 31, 2005 $ 2,584,562 $ (1,342,936) $ (106,667) $ 20,668 $ 2,850,555
============ ============= ============= ============= ============
</table>
See notes to consolidated financial statements
F-24/B
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(As Restated - See Note 1)
<table>
<caption>
For the Year
Ended December 31,
---------------------------------
2005 2004
--------------- ----------------
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 544,129 $ 502,708
Loss from discontinued operations (20,817) -
--------------- ----------------
Income from continuing operations 564,946 502,708
Adjustments to reconcile net income from operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 42,373 34,483
Minority interest 96,606 55,856
Allowance for doubtful accounts (23,707) 1,067
Loss on disposal of property and equipment 7,402 729
Stock-based compensation 53,333 -
Changes in assets and liabilities:
Accounts receivable (218,871) (382,747)
Accounts receivable - related party (944,741) (261,304)
Inventories (26,913) (494,340)
Prepaid and other current assets (3,508) 22,514
Other assets (734) -
Accounts payable and accrued expenses 259,200 751,893
Accounts payable - related party (258,242) 155,106
Tax payable 75,489 -
Advances from customers (135,506) 106,528
--------------- ----------------
Net Cash (Used in) Provided by Operating Activities (512,873) 492,493
Net Cash Used in Discontinued Operations (8,023) -
--------------- ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (520,896) 492,493
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisition 2,460 -
Increase in loan receivable - related party (100,000) -
Purchase of property, plant and equipment (148,053) (103,724)
--------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (245,593) (103,724)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable 326,936 241,546
Repayment of loans payable (422,705) -
Proceeds from loan payable - related party 161,533 -
Shareholder distributions - (559,633)
Gross proceeds from sale of preferred stock 1,800,276 -
Placement fees and other fees paid (128,000) -
--------------- ----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,738,040 (318,087)
--------------- ----------------
EFFECT OF EXCHANGE RATE ON CASH 20,668 -
--------------- ----------------
NET INCREASE IN CASH 992,219 70,682
CASH - beginning of year 467,859 397,177
--------------- ----------------
CASH - end of year $ 1,460,078 $ 467,859
=============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 59,002 $ 29,359
=============== ================
Income taxes $ 101,688 $ 91,146
=============== ================
Non-cash investing and financing activities:
Accounts receivable - related party exchanged for building $ 333,675 $ -
=============== ================
</table>
See notes to consolidated financial statements.
F-25
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Linkwell Corporation (formerly Kirshner Entertainment & Technologies, Inc.) (the
"Company") was incorporated in the state of Colorado on December 11, 1996. On
May 31, 2000, the Company acquired 100% of HBOA.Com, Inc. The Company focused on
development of an Internet portal through which home based business owners, as
well as commercial private label businesses, obtain the products, services, and
information necessary to start, expand and profitably run their businesses. On
December 28, 2000, the Company formed a new subsidiary, Aerisys Incorporated
("Aerisys"), a Florida corporation, to handle commercial private business. In
June 2003, the Company formed its entertainment division and changed its name to
reflect this new division. Effective as of March 31, 2003, we 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 7,030,669 or approximately 12.5% of the
outstanding stock. The consolidated financials statements reflect the change in
the capital structure of the Company due to the recapitalization and the
consolidated financial statements reflect the operations of the Company and its
subsidiaries for the periods presented.
Linkwell was founded on June 22, 2004, as a Florida corporation. On June 30,
2004, Linkwell acquired 90% of Shanghai Likang Disinfectant High-Tech Company,
Ltd. ("Likang") through a stock exchange. The transaction on which Linkwell
acquired its 90% interest in Likang resulted in the formation of a U.S. Holding
company by the shareholders of Likang as it did not result in a change in the
underlying ownership interest of Likang. Likang is a science and technology
enterprise founded in 1988. 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 its 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 series
products in the field of skin mucous disinfection, hand disinfection,
surrounding articles disinfection, medical instruments disinfection and air
disinfection.
On June 30, 2005, the Company's Board of Directors approved an amendment of its
Articles of Incorporation to change the name of the Company to Linkwell
Corporation. The effective date of the name change was after close of business
on August 16, 2005.
Basis of presentation
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, Likang. All significant inter-company balances and transactions have
been eliminated.
F-26
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates. Significant estimates in 2005 and 2004 include the allowance for
doubtful accounts, stock-based compensation, the useful life of property and
equipment and intangible assets, and the valuation of derivative liabilities.
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.
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.
Accounts receivable
The Company has a policy of reserving for uncollectible accounts based on its
best estimate of the amount of probable credit losses in its existing accounts
receivable. The Company periodically reviews its accounts receivable to
determine whether an allowance is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization of an account
may be in doubt. Account balances deemed to be uncollectible are charged to the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. At December 31, 2005, the Company has
established, based on a review of its outstanding balances, an allowance for
doubtful accounts in the amount of $13,343.
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.
Property and equipment
Property and equipment are carried at cost. The cost of repairs and maintenance
is expensed as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included in
income in the year of disposition. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", the Company examines the possibility of decreases in the
value of fixed assets when events or changes in circumstances reflect the fact
that their recorded value may not be recoverable.
Advances from customers
Advances from customers at December 31, 2005 of $126,199 consist of prepayments
from third party customers to the Company for merchandise that had not yet
shipped. The Company will recognize the deposits as revenue as customers take
delivery of the goods, in compliance with its revenue recognition policy.
F-27
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," The Company
periodically reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. The Company recognizes an impairment loss when the sum of
expected undiscounted future cash flows is less than the carrying amount of the
asset. The amount of impairment is measured as the difference between the
asset's estimated fair value and its book value. The Company did not consider it
necessary to record any impairment charges during the year ended December 31,
2005.
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.
Income (loss) per common share
In accordance with SFAS No. 128 "Earnings Per Share," Basic earnings per share
is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings 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. Diluted loss per common share is not presented
because it is anti-dilutive. The Company's common stock equivalents at December
31, 2005 include the following:
Convertible preferred stock 19,691,812
Warrants and options 35,009,865
------------------
54,701,677
==================
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:
The Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
The Company's revenues from the sale of products to related parties are recorded
when the goods are shipped which correlates with the shipment by the related
parties to its customers, at which time title passes, and collectibility is
reasonably assured. The Company receives sales order on a just-in-time basis
from the related party. Generally, the related party does not hold the Company's
inventory. If the related party has inventory on hand at the end of a reporting
period, the sale is reversed and the inventory is included on the Company's
balance sheet.
F-28
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations 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 in the
US and in China. 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, 2005 and 2004,
sales to related parties accounted for 36% and 40% of net revenues,
respectively.
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.
Shipping costs
Shipping costs are included in selling and marketing expenses and totaled
$101,205 and $76,908 for the years ended December 31, 2005 and 2004,
respectively.
Advertising
Advertising is expensed as incurred. Advertising expenses for the years ended
December 31, 2005 and 2004 was not material.
Stock-based compensation
Through December 31, 2005, 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.
F-29
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Non-employee stock based compensation
The cost of stock based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in Emerging
Issues Task Force Issue ("EITF") 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18").
Registration rights agreements
The Company has adopted View C of EITF 05-4 "Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF 00-19" ("EITF
05-4"). Accordingly, the Company classifies as liability instruments, the fair
value of registration rights agreements when such agreements (i) require it to
file, and cause to be declared effective under the Securities Act, a
registration statement with the SEC within contractually fixed time periods, and
(ii) provide for the payment of liquidating damages in the event of its failure
to comply with such agreements. Under View C of EITF 05-4, (i) registration
rights with these characteristics are accounted for as derivative financial
instruments at fair value and (ii) contracts that are (a) indexed to and
potentially settled in an issuer's own stock and (b) permit gross physical or
net share settlement with no net cash settlement alternative are classified as
equity instruments. At December 31, 2005, the Company recorded a registration
rights penalty expense of $44,000, which has been included on the accompanying
consolidated balance sheet in accounts payable and accrued expenses.
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, 2005 was $20,668.
Research and development
Research and development costs are expensed as incurred. These costs primarily
consist of cost of material used and salaries paid for the development of the
Company's products and fees paid to third parties. Research and development
costs for the years ended December 31, 2005 and 2004 were approximately $36,000
and $76,000, respectively, and are included in cost of sales.
F-30
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. The Company believes the adoption of this pronouncement may have a
material effect its financials 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.
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.
F-31
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements (continued)
On June 29, 2005, the EITF ratified Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, `Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock.'" EITF Issue 05-2 provides guidance on determining whether
a convertible debt instrument is "conventional" for the purpose of determining
when an issuer is required to bifurcate a conversion option that is embedded in
convertible debt in accordance with SFAS 133. Issue No. 05-2 is effective for
new instruments entered into and instruments modified in reporting periods
beginning after June 29, 2005. The adoption of this pronouncement did not have a
material effect on the Company's financial statements.
In September 2005, the EITF issued EITF Issue No. 05-4, "The Effect of a
Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF
Issue No. 00-19, `Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock.'" EITF 05-4 provides guidance
to issuers as to how to account for registration rights agreements that require
an issuer to use its "best efforts" to file a registration statement for the
resale of equity instruments and have it declared effective by the end of a
specified grace period and, if applicable, maintain the effectiveness of the
registration statement for a period of time or pay a liquidated damage penalty
to the investor. The Company has adopted view C of this pronouncement.
Accordingly, the Company has bifurcated registration rights from their related
free standing financial instruments and recorded them at fair value.
In September 2005, the FASB ratified the Emerging Issues Task Force's ("EITF")
Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues," which addresses whether a modification to
a conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt). This
issue is effective for future modifications of debt instruments beginning in the
first interim or annual reporting period beginning after December 15, 2005. The
Company is currently in the process of evaluating the effect that the adoption
of this pronouncement may have on its financial statements.
In September 2005, the FASB also ratified the EITF's Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature,"
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
recorded in the shareholder's equity for book purposes, but as a liability for
income tax purposes), and, if so, whether that basis difference is a temporary
difference under FASB Statement No. 109, "Accounting for Income Taxes." This
Issue should be applied by retrospective application pursuant to Statement 154
to all instruments with a beneficial conversion feature accounted for under
Issue 00-27 included in financial statements for reporting periods beginning
after December 15, 2005. The Company is currently in the process of evaluating
the effect that the adoption of this pronouncement may have 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-32
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Restatement
As a result of a review of its financial statements, management has determined
that the Company's deposits - related party of $333,675 as previously reflected
on its consolidated balance, is not a deposit and should be part of accounts
receivable - related party. Additionally, the Company disclosed its note to
consolidated financial statements that this deposit was to be applied to the
purchase of a building from a related party in February 2006. Management has
determined that this deposit of $333,675 was applied to the purchase of a
building from related party in August 2005. The change in presentation of the
Company's deposit -related party has the effect of increasing current assets by
$333,675 and decreasing long-term assets by $333,675 as of December 31, 2005.
Additionally, this change in presentation changed the Company's cash flow
statement, increasing cash used in operations by $333,675 and reducing cash used
in investing activities by $333,675. This change in presentation of the
Company's deposit - related party did not have any impact on the Company's
consolidated statement of operations, earnings per share, and consolidated
statement of shareholders equity.
Additionally, the Company revised its financial statements and notes thereto for
the year ended December 31, 2005 to accrue undeclared and unpaid cumulative
preferred stock dividends related to its Series A and Series B preferred stock
and to disclose the per share and aggregate amount of these cumulative preferred
dividends in its footnotes. The effect of this restatement is to increase
current liabilities and decrease stockholders' equity by $11,240, respectively.
NOTE 2 - INVENTORIES
At December 31, 2005, inventories consisted of the following:
Raw materials $ 262,882
Work in process 33,306
Finished goods 794,613
--------------
1,090,801
Less: reserve for obsolescence (122,577)
--------------
$ 968,224
==============
NOTE 3 - PROPERTY AND EQUIPMENT
At December 31, 2005, property and equipment consist of the following:
<table>
<s> <c> <c>
Useful Life
-----------------------
Office equipment and furniture 5-7 Years $ 104,369
Autos and trucks 10 Years 119,364
Manufacturing equipment 7 Years 131,221
Building and land 20 Years 465,952
Leasehold improvements 5 Years 3,280
---------------------------
824,186
Less accumulated depreciation (137,952)
---------------------------
$ 686,234
===========================
</table>
For the year ended December 31, 2005 and 2004, depreciation expense amounted to
$42,373 and $34,483, respectively.
F-33
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 4 - LOANS PAYABLE
Loans payable consisted of the following at December 31, 2005:
<table>
<s> <c>
Note to De Chang Credit Union due on May 18, 2006 with interest at 6.70% per $ 221,954
annum. Secured by equipment
Note to De Chang Credit Union due on September 30, 2006 with interest 6.70%
per annum. Secured by equipment 61,654
Note to De Chang Credit Union due on March 9, 2006 with interest at 6.70% per
annum. Secured by equipment. Repaid in March 2006 98,646
Note to Agriculture Bank of China due on December 7, 2006 with interest at
6.70% per annum. Secured by equipment 246,615
-------------------------
Total 628,869
Less: current portion of loans payable (628,869)
-------------------------
Loans payable, long-term $ -
=========================
</table>
NOTE 5 - DISCONTINUED OPERATIONS
As noted in Note 12 - Subsequent Events, 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. Accordingly, Aerisys is reported as a
discontinued operation, and prior periods have been restated in the Company's
financial statements and related footnotes to conform to this presentation.
The assets and liabilities of Aerisys are presented in the balance sheet under
the captions "Assets of discontinued operation" and "Liabilities of discontinued
operation". The approximate carrying amounts of the major classes of these
assets and liabilities as of December 31, 2005 are summarized as follows:
Assets:
Cash $ 4,815
Accounts receivable 5,141
----------------------
Assets of discontinued operation $ 9,956
======================
Liabilities:
Due to related party 15,000
Deferred income 7,750
----------------------
Liabilities of discontinued operation $ 22,750
======================
F-34
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 5 - DISCONTINUED OPERATIONS (continued)
The following table sets forth for the fiscal year indicated selected financial
data of the Company's discontinued operations from date of acquisition (May 3,
2005) to December 31, 2005.
2005
-------------------
Revenues $ 34,245
Operating and other non-operating expenses 55,062
-------------------
Loss from discontinued operations $ (20,817)
===================
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company's 90% owned subsidiary, Likang, is engaged in business activities
with two affiliated entities.
Shanghai Likang Meirui Pharmaceuticals High-Tech Company, Ltd. ("Meirui"), a
company of which Shanghai Shanhai Group, Likang's minority shareholder, owns
68%, provides certain contract manufacturing of two products for Likang.
Specifically, Meirui provides Likang with Ozone producing device equipment and
Ultraviolet radiation lamp lights. In addition, under the terms of a two year
agreement entered into in January 2005, Meirui produces the Lvshaxing Air
Disinfectant Machine and Likang Surgery hand-washing table for Likang. In
January 2005, Likang signed a two year agreement with Meirui to market its
products to the retail/consumer market using Meirui's proprietary sales network
which caters to the retail/consumer market in China. For the years ended
December 31, 2005 and 2004, the Company recorded net revenues of $23,987 and
$67,356 to Meirui, respectively. Additionally, for the years ended December 31,
2005 and 2004, the Company purchased product from Meirui amounting to $48,489
and $389,400, respectively. At December 31, 2005, Meirui owed Likang $1,718. In
general, accounts receivable due from Meirui are payable in cash and are due
within 4 to 6 months, which approximate normal business terms with unrelated
parties.
Shanghai Shanhai Group, who is the minority shareholder of Likang, is owned by
Group Employee Share-holding Commission (16.25%) and Baoshan District Dachang
Town South Village Economic Cooperation Club (83.75%). The Company leases its
principal executive offices and warehouse space from Shanghai Shanhai Group for
approximately $36,000 per year. Shanghai Shanhai Group also holds the land use
permit for the principal executive office building. For the year ended December
31, 2005 and 2004, rent expense paid to this related party amounted to $32,660
and $37,962, respectively. Additionally, in January 2005, the Company borrowed
$161,533 from Shanghai Shanhai Group for working capital purposes. The loan
bears interest at 10% per annum and is payable on demand. For the year ended
December 31, 2005, interest expense related to this note amounted to $16,282.
Shanghai Likang Pharmaceuticals Technology Company, Limited, which is owned by
Messrs. Xuelian Bian (90%) and Wei Guan (10%), the Company's officers and
directors, sells the Company's products to third parties. For the years ended
December 31, 2005 and 2004, the Company recorded net revenues of $1,933,043 and
$1,698,923 to Shanghai Likang Pharmaceuticals Technology Company, Limited,
respectively. At December 31, 2005, accounts receivable from sales due from
Shanghai Likang Pharmaceuticals Technology Company, Limited was $870,652. In
general, accounts receivable due from Likang are payable in cash and are due
within 4 to 6 months, which approximate normal business terms with unrelated
parties. Additionally, through December 31, 2005, the Company leased
approximately 21,500 square feet of manufacturing space from Shanghai Likang
Pharmaceuticals Technology Company, Limited for approximately $11,500 annually.
In August 2005, the Company entered into an asset purchase agreement with
Shanghai Likang Pharmaceuticals Technology Company, Limited and Mr. Bian under
which the Company purchased this previously leased building for $333,675. The
purchase price was paid for through a reduction of the related party accounts
receivable owed from Shanghai Likang Pharmaceuticals Technology Company,
Limited.
F-35
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 6 - RELATED PARTY TRANSACTIONS
On December 28, 2005, the Company loaned $100,000 to Shanghai Likang
Pharmaceuticals Technology Company, Limited for working capital purposes. The
balance bears interest at 3%.
For the fiscal year ended December 31, 2004, Likang made distributions to its
shareholder, Shanghai Shanhai Group and to Shanghai Likang Pharmaceuticals
Technology Company, Limited, in the aggregate amount of $559,633. Shanghai
Likang Pharmaceuticals Technology Company, Limited is owned by Messrs. Bian and
Guan, our officers and directors.
At December 31, 2005, the Company owed $15,000 to a shareholder of the Company
for working capital advanced to the Company's subsidiary, Aerisys, The advances
are non-interest bearing, are payable on demand, and are included in liabilities
from discontinued operations on the consolidated balance sheet.
NOTE 7 - SHAREHOLDERS' EQUITY
Preferred Stock
a) Series A Convertible 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 $277,276 (net of fees of
$23,000) 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 originally 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. Prior to December 31, 2005, this provision
was waived by the investors. 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. In accordance with Emerging Issues Task Force ("EITF") 98-5
and EITF 00-27, the Series A Preferred Stock was considered to have an embedded
beneficial conversion feature because the conversion price was less than the
fair value of the Company's common stock. This beneficial conversion feature is
calculated after the warrants have been valued with proceeds allocated on a
relative value basis. This series A convertible Preferred was fully convertible
at the issuance date, therefore the full amount of proceeds allocated to the
Series A Preferred was determined to be the value of the beneficial conversion
feature and was recorded as a deemed dividend with a corresponding credit to
additional paid-in capital in the amount of $300,276.
F-36
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 7 - SHAREHOLDER' EQUITY (continued)
Preferred Stock (continued)
As of December 31, 2005, accrued cumulative but undeclared dividends in arrears
related to the Company's Series A Preferred Stock amounted to approximately
$.028 per share aggregating approximately $10,500 and is included on the
accompanying balance sheet.
b) Series B 6% Cumulative Convertible Preferred Stock
On December 28, 2005, the Company closed on a private placement with a group of
accredited investors, for the sale of 1,500,000 shares of the Company's Series B
6% Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") along
with warrants to purchase additional shares of the Company's common stock exempt
from registration under the Securities Act in reliance on exemptions provided by
Section 4(2) of that act and Regulation D. The 6% Convertible Preferred Stock
was priced at $1.00 per share, and the Company received gross proceeds of
$1,500,000. Each share of Series B Preferred Stock, as well as the value of all
accrued by unpaid dividends, is convertible at the option of the holder into
shares of the Company's common stock at a conversion price of $0.10 per share,
provided that no holder has the right to convert his shares of Series B
Preferred Stock if by virtue of such conversion the holder would become the
beneficial owner of than 4.99% of the Company's common stock. This ownership
limitation can be waived by the holder upon 61 days notice to the Company. The
conversion price is subject to adjustment in the event of stock splits,
reclassifications or stock dividends. Thus, if all of the shares of the Series B
Preferred Stock were converted to common stock, an additional 15,000,000 shares
of common stock would be issued. The shares of Series B Preferred Stock do not
have any voting rights except as may be provided under Florida law.
In connection with the sale of 1,500,000 shares of the Company's Series B
Preferred Stock, the Company issued Class A Common Stock Purchase Warrants to
purchase 15,000,000 shares of the Company's common stock at an exercise price of
$0.20 per share and Class B Common Stock Purchase Warrants to purchase
15,866,665 (including 866,665 granted to placement agent) shares of its common
stock at an exercise price of $0.30 per share. The Class A and Class B warrant
exercise prices are subject to adjustment pursuant to anti-dilution provisions
on either a cash or cashless exercise basis. The warrants expire five years from
the date of issuance.
The Series B Preferred Stock ranks ahead of the common stock of the Company upon
liquidation of the Company. The Series B Preferred Stock also ranks ahead of the
common stock with respect to the payment of dividends. 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", as defined in the agreement, has occurred.
The dividends are payable in cash or at the Company's option shares of
registered common stock. If the Company elects to pay dividends in the form of
shares of its 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. In connection with the transaction, the
Company filed a certificate of designation for the Series B Preferred Stock with
the Florida Department of Corporations on December 8, 2005. This filing
constituted an amendment to the Company's certificate of incorporation,
designating the terms, rights and preferences of a new series of preferred stock
of the Company.
As of December 31, 2005, accrued cumulative but undeclared dividends in arrears
related to the Company's Series B Preferred Stock amounted to approximately $740
and is included on the accompanying balance sheet.
F-37
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 7 - SHAREHOLDER' EQUITY (continued)
Preferred Stock (continued)
The Company paid a due diligence fee of $65,000 in cash and Class B Warrants to
purchase 866,665 shares of its common stock to certain of the investors who
purchased securities in this offering. 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 the Company's failure to maintain an effective registration
statement covering the resale of the common shares issuable upon conversion or
exercise of the securities.
In accordance with Emerging Issues Task Force ("EITF") 98-5 and EITF 00-27, the
Series B Preferred was considered to have an embedded beneficial conversion
feature because the conversion price was less than the fair value of the
Company's common stock. This beneficial conversion feature is calculated after
the warrants have been valued with proceeds allocated on a relative value basis.
This Series B Convertible Preferred was fully convertible at the issuance date,
therefore the full amount of proceeds allocated to the Series B Preferred was
determined to be the value of the beneficial conversion feature and was recorded
as a deemed dividend with a corresponding credit to additional paid-in capital
in the amount of $1,500,000.
The Company computes the fair value of the warrants using the Black-Scholes
valuation model. The Black-Scholes model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
assumptions used in this model to estimate fair value of the warrants granted
are as follows:
Warrants
-------------------
Exercise/Conversion Price $ 0.20 to $0.30
Fair Value of the Company's Common Stock $ 0.153
Expected life in years 5.0
Expected volatility 330%
Expected dividend yield 0.0%
Risk free rate 3.93%
Calculated fair value per share $ 0.153
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.
F-38
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 7 - SHAREHOLDER' EQUITY (continued)
Common Stock (continued)
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 fair 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 year ended December 31, 2005,
amortization of deferred consulting expense amounted to $53,333.
Stock Options
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.
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.
F-39
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 7 - SHAREHOLDER' EQUITY (continued)
Stock Options (continued)
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.
Common Stock Warrants
In June 2005, in connection with the preferred stock Series A Preferred Stock
funding, the Company granted warrants to purchase 3,753,450 shares of its common
stock at $0.10. The Warrants are exercisable for five years after the issue
dates of the Warrants.
In December 2005, in connection with the Company's Series B Preferred Stock
funding, the Company granted warrants to purchase 15,000,000 shares of its
common stock at $0.20 and 15,866,665 at $.30. The warrants are exercisable for
five years after the issue dates of the Warrants.
Stock warrant activity for the year ended December 31, 2005 is summarized as
follows:
<table>
<s> <c> <c>
Number of Weighted average
shares exercise price
--------- ----------------
Outstanding at December 31, 2004 389,750 $ 1.88
Granted 34,620,115 .24
Exercised - -
------------ -----------
Outstanding at December 31, 2005 35,009,865 $ 0.25
============ ===========
</table>
F-40
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 7 - SHAREHOLDER' EQUITY (continued)
Common Stock Warrants (continued)
The following table summarizes the Company's stock warrants outstanding at
December 31, 2005:
<table>
<caption>
Warrants outstanding and exercisable
---------------------------------------------
<s> <c> <c> <c>
Weighted Weighted
average average
Range of remaining exercise
exercise price Number life price
---------------- ------------ --------------- -----------
$ 0.75-2.50 359,750 1.70 $2.02
$ 0.10 3,753,450 4.50 $0.10
$ 0.20 15,030,000 4.90 $0.20
$ 0.30 15,866,665 5.00 0$.30
</table>
NOTE 8 - 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, 2005
and 2004:
<table>
<s> <c> <c>
2005 2004
-------------------------- --------------------------
Computed "expected" provision $ 276,639 $ 227,220
State tax provision, net of federal effect 32,546 26,732
Effect of foreign income taxes (205,950) (144,220)
Other permanent differences 73,942 -
-------------------------- --------------------------
$ 177,177 $ 109,732
========================== ==========================
</table>
F-41
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office and manufacturing space under leases in Shanghai,
China that expire through February 2011.
Future minimum rental payments required under these operating leases are as
follows:
Year Ended December 31,
---------------------------------------------
2006 $109,572
2007 73,742
2008 41,078
2009 41,291
2010 41,291
2011 2,874
--------------
Total minimum lease payments $309,848
===============
For the years ended December 31, 2005 and 2004, rent expense amounted to $65,455
and $46,535, respectively.
Litigation
The Company is not a party to any pending legal proceeding. No federal, state or
local governmental agency is presently contemplating any proceeding against the
Company. No director, executive officer or affiliate of the Company or owner of
record or beneficially of more than five percent of the Company's common stock
is a party adverse to the company or has a material interest adverse to the
Company in any proceeding.
NOTE 10 - OPERATING RISK
(a) Country risk
Currently, the Company's revenues are primarily derived from the sale of line of
disinfectant product offerings to customers 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 manufacturers of disinfectant product
offerings, the Company competes with larger US companies who have greater funds
available for expansion, marketing, research and development and the ability to
attract more qualified personnel. These US companies may be able to offer
products at a lower price. There can be no assurance that the Company will
remain competitive should this occur.
F-42
<page>
LINKWELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 10 - OPERATING RISK
(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 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.
NOTE 11 - FOREIGN OPERATIONS
For the year ended December 31, 2005 and 2004, the Company derived all of its
revenue from its subsidiaries located in the People's Republic of China.
Identifiable assets by geographic areas as of December 31, 2005 is as follows:
Identifiable Assets
at December 31, 2005
----------------------------
United States $ 1,334,639
China 4,191,870
----------------------------
Total $ 5,526,509
===========================
NOTE 12 - SUBSEQUENT EVENT
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. The sale
of the Company's Aerisys subsidiary did not have a material effect on the
Company's results of operations or financial position.
In January 2006, the Company 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.
F-43
<page>