-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HghEDGMcpjEhvaV+HAwDYMKK9eKDen59xMny/EuomafNmWn24jlB7TOgvH3sCHYW uMt8+wfaXNuNqc6Im8tvLg== 0001172665-07-000243.txt : 20070817 0001172665-07-000243.hdr.sgml : 20070817 20070817171829 ACCESSION NUMBER: 0001172665-07-000243 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20070817 DATE AS OF CHANGE: 20070817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Linkwell CORP CENTRAL INDEX KEY: 0001042463 STANDARD INDUSTRIAL CLASSIFICATION: SPECIALTY CLEANING, POLISHING AND SANITATION PREPARATIONS [2842] IRS NUMBER: 651053546 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24977 FILM NUMBER: 071065940 BUSINESS ADDRESS: STREET 1: NO. 476 HUTAI BRANCH ROAD STREET 2: BAOSHAN DISTRICT CITY: SHANGHAI STATE: F4 ZIP: 200436 BUSINESS PHONE: (86) 21-56689332 MAIL ADDRESS: STREET 1: NO. 476 HUTAI BRANCH ROAD STREET 2: BAOSHAN DISTRICT CITY: SHANGHAI STATE: F4 ZIP: 200436 FORMER COMPANY: FORMER CONFORMED NAME: KIRSHNER ENTERTAINMENT & TECHNOLOGIES INC DATE OF NAME CHANGE: 20030818 FORMER COMPANY: FORMER CONFORMED NAME: HBOA HOLDINGS INC DATE OF NAME CHANGE: 20001116 FORMER COMPANY: FORMER CONFORMED NAME: MIZAR ENERGY CO DATE OF NAME CHANGE: 19980923 10QSB 1 form10qsb.txt QUARTERLY FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly report ended June 30, 2007 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period from ________ to __________ Commission File Number: 000-24977 LINKWELL CORPORATION -------------------- (Exact name of small business issuer as specified in charter) FLORIDA 65-1053546 ------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) No. 476 Hutai Branch Road, Baoshan District, Shanghai, China 200436 ------------------------------------------------------------------- (Address of principal executive offices) (86) 21-56689332 ---------------- (Issuer's telephone number) not applicable -------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X] APPLICABLE ONLY TO COPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: At August 8, 2007 there were 73,531,675 shares of common stock issued and outstanding. 2 LINKWELL CORPORATION AND SUBSIDIARIES FORM 10-QSB QUARTERLY PERIOD ENDED JUNE 30, 2007 INDEX PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheet (Unaudited) As of June 30, 2007 6 Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2007 and 2006 7 Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2007 and 2006 8 Notes to Unaudited Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis or Plan of Operation 25 Item 3. Controls and Procedures 32 PART II - OTHER INFORMATION Item 1. Legal Proceedings 33 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33 Item 3. Default Upon Senior Securities 33 Item 4. Submission of Matters to a Vote of Security Holders 33 Item 5. Other Information 33 Item 6. Exhibits 35 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the risk of doing business in the People' Republic of China, our ability to implement our strategic initiatives, our access to sufficient capital, the effective integration of our subsidiaries in the PRC into a U.S. public company structure, economic, political and market conditions and fluctuations, government and industry regulation, Chinese and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business. 3 OTHER PERTINENT INFORMATION When used in this quarterly report, the terms: o "Linkwell," the "Company," "we," and "us" refers to Linkwell Corporation, a Florida corporation, our subsidiaries, o "Linkwell Tech" refers to our subsidiary Linkwell Tech Group, Inc., a Florida corporation, o "LiKang Disinfectant" refers to Shanghai LiKang Disinfectant High-Tech Company, Limited, a 90% owned subsidiary of Linkwell Tech, and o "LiKang International" refers to Shanghai LiKang International Trade Co., Ltd., a wholly owned subsidiary of Linkwell. We also use the following terms when referring to certain related parties: o "Shanhai" refers to Shanghai Shanhai Group, a Chinese company which is the minority owner of LiKang Disinfectant, o "Meirui" refers to Shanghai LiKang Meirui Pharmaceuticals High-Tech Co., Ltd., a company of which Shanhai is a majority shareholder, o "LiKang Pharmaceuticals" refers to Shanghai LiKang Pharmaceuticals Technology Co., Ltd., a company owned by our officers and directors, and o "Biological" refers to Shanghai LiKang Biological High-Tech Co., Ltd., a company owned by our officers and directors. The information which appears on our web site at www.linkwell.us is not part of this report. 4 PART I - FINANCIAL INFORMATION LINKWELL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 5 LINKWELL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, 2007 (Unaudited) ASSETS CURRENT ASSETS: Cash $ 742,818 Accounts receivable, net of allowance for doubtful accounts of $83,004 5,487,196 Other receivables 171,945 Inventories, net 633,762 Prepaid expenses and other current assets 213,088 ------------------- Total Current Assets 7,248,809 Intangible assets, net 34,668 Property and equipment, net 759,788 Due from related parties 655,755 ------------------- Total Assets $ 8,699,020 =================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Loans payable $ 668,870 Loan payable - Related party 165,471 Accounts payable, accrued expenses and other payables 1,503,558 Due to related party 473,118 Advances from customers 20,855 ------------------- Total Current Liabilities 2,831,872 ------------------- MINORITY INTEREST 497,898 ------------------- 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) - Series B convertible preferred stock (No Par Value; 1,500,000 Shares Authorized; 1,500,000 shares issued and outstanding) - Common Stock ($0.0005 Par Value; 150,000,000 Shares Authorized 73,081,675 shares issued and outstanding) 36,541 Additional paid-in capital 5,610,261 Accumulated deficit (23,999) Deferred compensation (489,806) Other comprehensive gain - foreign currency 235,553 -------------------- Total Stockholders' Equity 5,369,250 -------------------- Total Liabilities and Stockholders' Equity $ 8,699,020 ==================== See notes to consolidated financial statements 6 LINKWELL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months For the Six Months Ended June 30, Ended June 30 --------------------------------- --------------------------------- 2007 2006 2007 2006 --------------- -------------- --------------- -------------- NET REVENUES Non-affiliated companies $ 2,646,528 $ 794,191 $ 4,942,478 $ 1,402,462 Affiliated companies 485,692 669,060 1,035,574 1,929,315 --------------- -------------- --------------- -------------- Total Net Revenues 3,132,220 1,463,251 5,978,052 3,331,777 COST OF SALES 2,003,578 762,592 3,856,698 1,990,040 --------------- -------------- --------------- -------------- GROSS PROFIT 1,128,642 700,659 2,121,354 1,341,737 --------------- -------------- --------------- -------------- OPERATING EXPENSES: Selling expenses 336,941 99,648 603,726 205,207 General and administrative 336.387 322,422 586,559 585,038 --------------- -------------- --------------- -------------- Total Operating Expenses 673,328 422,070 1,190,285 790,245 INCOME FROM OPERATIONS 455,314 278,589 931,069 551,492 --------------- -------------- --------------- -------------- OTHER INCOME (EXPENSE): - Other income (2,479) 118,035 - Registration rights penalty - (30,000) - (30,000) Interest income 717 866 1,810 2,423 Interest expense - related party (4,343) (8,849) (8,640) (12,994) Interest expense (10,659) (9,011) (22,576) (19,781) --------------- -------------- --------------- -------------- Total Other Expense (16,764) (46,994) 88,629 (60,352) --------------- -------------- --------------- -------------- INCOME BEFORE DISCONTINUED OPERATIONS, INCOME TAXES AND MINORITY INTEREST $ 438,550 $ 231,595 $ 1,019,698 $ 491,140 --------------- -------------- --------------- -------------- Gain ( Loss) From Discontinued Operations - - - 12,794 --------------- -------------- --------------- -------------- INCOME BEFORE INCOME TAXES AND MINORITY INTERES 438,550 231,595 1,019,698 503,934 INCOME TAXES (36,189) (15,258) (79,604) (62,382) --------------- -------------- --------------- -------------- INCOME BEFORE MINORITY INTEREST 402,361 216,337 940,094 441,552 MINORITY INTEREST (51,175) (27,585) (92,337) (50,860) --------------- -------------- --------------- -------------- NET INCOME $ 351,186 $ 188,752 $ 847,757 $ 390,692 =============== ============== =============== ============== CUMULATIVE PREFERRED DIVIDENDS - - (53,692) DEEMED PREFERRED STOCK DIVIDENDS - (7,743) - - --------------- -------------- --------------- -------------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 351,186 $ 181,009 $ 847,757 $ 337,000 =============== ============== =============== ============== BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE: Basic $ 0.01 $ 0.00 $ 0.01 $ 0.01 =============== ============== =============== ============== Diluted 0.01 0.00 0.01 0.01 =============== ============== =============== ============== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 73,081,675 60,469,126 72,835,810 60,387,088 =============== ============== =============== ============== Diluted 75,179,150 66,146,196 74,933,286 63,991,243 =============== ============== =============== ==============
See notes to consolidated financial statements 7 LINKWELL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, --------------------------------------- 2007 2006 ------------------ ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 847,757 $ 377,898 Adjustments to reconcile net income from operations to net cash provided by (used in) operating activities: Depreciation and amortization 20,996 44,680 Minority interest 103,578 54,094 Allowance for doubtful accounts (61,635) 48,616 Allowance for doubtful accounts-related party (87,937) - Stock-based compensation 156,416 134,647 Changes in assets and liabilities: Accounts receivable (1,346,514) (13,722) Accounts receivable - related party (901,808) (592,025) Other receivable 242,055 - Inventories (97,279) 527,276 Prepaid and other current assets 154,553 (76,950) Other assets - 734 Accounts payable and accrued expenses 175,064 (488,374) Tax payable (228) (74,967) Advances from customers (233,579) 254,900 ------------------ ----------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,028,561) 196,807 ------------------ ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in loan receivable 48,609 - Increase in loan receivable - related party (655,755) (249,797) Purchase of property, plant and equipment (17,781) (84,739) Purchase of Intangible Assets (34,668) - ------------------ ----------------- NET CASH USED IN INVESTING ACTIVITIES (659,595) (334,536) ------------------ ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of loans payable - (24,361) Repayment of loan payable - related party 268,851 (124,899) Proceeds from Warrants Exercised 321,332 32,474 ------------------ ----------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 590,183 (116,786) ------------------ ----------------- EFFECT OF EXCHANGE RATE ON CASH 127,068 6,999 ------------------ ----------------- NET INCREASE IN CASH (970,905) (247,516) ------------------ ----------------- CASH - beginning of year 1,713,723 1,460,078 ------------------ ----------------- CASH - end of period $ 742,818 $ 1,212,562 ================== ================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest $ 16,213 $ 28,088 ================== ================= Income taxes $ - $ 61,969 ================== =================
See notes to consolidated financial statements 8 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) 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 discontinued our entertainment division and our technology division, except for the Aerisys operations that continue on a limited basis. On May 2, 2005, the Company entered into and consummated a share exchange with all of the shareholders of Linkwell Tech Group, Inc. ("Linkwell"). 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 Disinfectant") through a stock exchange. The transaction on which Linkwell acquired its 90% interest in LiKang Disinfectant resulted in the formation of a U.S. holding company by the shareholders of LiKang as it did not result in a change in the underlying ownership interest of LiKang Disinfectant. LiKang Disinfectant is a science and technology enterprise founded in 1988. LiKang Disinfectant is involved in the development, production, marketing and sale, and distribution of disinfectant health care products. LiKang Disinfectant's products are utilized by the hospital and medical industry in China LiKang Disinfectant has developed a line of disinfectant product offerings. LiKang Disinfectant regards the hospital disinfecting products as the primary segment of its business. LiKang Disinfectant has developed and manufactured several series products in the field of skin mucous disinfection, hand disinfection, surrounding articles disinfection, medical instruments disinfection and air disinfection. On June 30, 2005, the Company's Board of Directors approved an amendment of its Articles of Incorporation to change the name of the Company to Linkwell Corporation. The effective date of the name change was after close of business on August 16, 2005. In August 2006, LiKang incorporated a new subsidiary, Shanghai LiKang International Trade Co., Ltd ("LiKang International"). The primary business of LiKang International involves import and export activities relating to computer, computer components, instruments and meters, electromechanical devices, constructional materials, metallic material, hardware, handiwork, knitting textile, furniture, chemical raw materials, and business consulting service, investment consulting, graphics design, conference services, exhibition services, equipment lease, import and export of technology. LiKang International is 100% owned by Shanghai LiKang Disinfection High-Tech Co., Ltd. and conducts business in the same building with LiKang Disinfectant. 9 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BASIS OF PRESENTATION Certain reclassifications have been made to the prior year to conform to current year presentation. The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The consolidated financial statements of the Company include the accounts of its wholly-owned subsidiary, Linkwell Tech Group, Inc., and its 90%-owned subsidiary, LiKang Disinfectant. All significant inter-company balances and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates in the six month period ended June 30, 2007 and 2006 include the allowance for doubtful accounts, stock-based compensation, the useful life of property and equipment and intangible assets, the inventory reserve, and the valuation of derivative liabilities. FAIR VAULE 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 June 30, 2007, the Company has established an allowance for doubtful accounts in the amount of $83,004, based on a review of its accounts receivable outstanding balances. INVENTORIES Inventories, consisting of raw materials, work in process and finished goods related to the Company's products are stated at the lower of cost or market utilizing the weighted average method. 10 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation and amortization are provided using the straight-line method over the estimated economic lives of the assets, which are from five to 40 years. The cost of repairs and maintenance are expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset's estimated fair value and its book value. The Company did not consider it necessary to record any impairment charges during the six months ended June 30, 2007. ADVANCES FROM CUSTOMERS Advances from customers at June 30, 2007 of $20,855 consist of prepayments from third party customers to the Company for merchandise that had not yet been shipped by the company. The Company will recognize the deposits as revenue as customers take delivery of the goods, in compliance with its revenue recognition policy. 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 The Company presents net income (loss) per share ("EPS") in accordance with SFAS No. 128, "Earnings per Share." Accordingly, basic income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding. The Company has made an accounting policy election to use the if-converted method for convertible securities that are eligible to participate in common stock dividends, if declared; however, the two-class method must be used if the effect is more dilutive. Since the two-class method was not more dilutive, the Company used the if-converted method. Diluted earnings per share reflects the potential dilution that could occur based on the exercise of stock options or warrants, unless such exercise would be anti-dilutive, with an exercise price of less than the average market price of the Company's common stock. 11 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME (LOSS) PER COMMON SHARE (CONTINUED) The Company's common stock equivalents at June 30, 2007 and 2006 include the following: 2007 2006 -------------------- ------------------ Convertible preferred stock - 18,753,450 Warrants 33,921,545 37,134,865 -------------------- ------------------ 33,921,545 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(pound)(0) 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 occurs simultaneously with the shipment being made by our related parties to their customers. Upon shipment, title passes, and collectibility is reasonably assured. The Company receives purchase orders from our related parties on an as need basis from the related party customers. Generally, the related party does not hold the Company's inventory. If the related party has inventory on hand at the end of a reporting period, the sale is reversed and the inventory is included on the Company's balance sheet. Prior to October 1, 2006, LiKang International follows the guidance of EITF99-19 "Reporting Revenue Gross as a Principal versus Net as an agent." LiKang International records the net revenue when the supplier is the primary obligor in the arrangement. Since October 1, 2006, LiKang International has become the primarily obligor for providing products to its customers and takes ownership of its inventory. Accordingly, effective October 1, 2006, LiKang International records gross 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 determined, and collectibility is reasonable assured. 12 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions 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 wide distribution of our products and shorter payment terms then customary in PRC. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk. For the six months ended June 30, 2007 and 2006, sales to related parties accounted for 17% and 58% 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 $168,089 and $52,309for the six months ended June 30, 2007 and 2006, respectively. ADVERTISING Advertising is expensed as incurred. For the six months ended June 30, 2007 and 2006, advertising expenses amounted to $47,491 and $15,121, respectively. 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. 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"). 13 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) 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 December 31, 2006 we reflected accrued registration rights penalty payable of $120,000 in connection with the Company's Series B Preferred Stock offering. During the six months ended June 30,2007, each of the investors from the Series B Preferred Stock offering elected to waive their right to penalties related to the Series B Preferred Stock offering. Accordingly, the full amount of the accrued penalty of $120,000, which has been waived, has been included as an element of other income in our consolidated statements of operations at June 30, 2007. 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 Renminbi, the local currency, or sometimes referred to as the Chinese Yuan ("RMB"). The financial statements of the subsidiary are translated into United States dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. The cumulative translation adjustment and effect of exchange rate changes on cash at June 30, 2007 was $235,553. RESERCH 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 six months ended June 30, 2007 and 2006 were approximately $8,006 and $9,594, respectively. 14 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"). This Statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. The Statement is to be effective for the Company's financial statements issued in 2008; however, earlier application is encouraged. The Company is currently evaluating the timing of adoption and the impact that adoption might have on its financial position or results of operations. In September 2006, the Staff of the SEC issued SAB No. 108: "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements". SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year's financial statements are materially misstated. The SEC staff believes registrants must quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This Statement is effective for fiscal years ended after November 15, 2006. The adoption of SAB No. 108 did not have a significant impact on the company's consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FAS 115" (Statement 159). Statement 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. Statement 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the timing of adoption and the impact that adoption might have on its financial position or results of operations In June 2007, the FASB Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No. 06-11, "Accounting for Income Tax Benefits on Dividends on Share-Based Payment Awards" ("EITF 06-11"). EITF 06-11 provides accounting guidance on how to recognize the realized tax benefits associated with the payment of dividends under a share-based payment arrangement. EITF 06-11 requires that the realized tax benefits associated with dividends on unvested share-based payments be charged to equity as an increase in additional paid-in capital and included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. The Company is currently evaluating the timing of adoption and the impact that adoption might have on its financial position or results of operations In June 2007, the EITF reached a consensus on EITF Issue No. 07-3 "Accounting for Advance Payments for Goods or Services to be Received for Use in Future Research and Development Activities" ("EITF 07-3"). EITF 07-3 provides clarification surrounding the accounting for non-refundable research and development advance payments, whereby such payments should be recorded as an asset when the advance payment is made and recognized as an expense when the research and development activities are performed. The adoption of SAB No. 108 did not have a significant impact on the company's consolidated financial statements. 15 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 2 - INVENTORIES At June 30, 2007, inventories consisted of the following: Raw materials $ 382,412 Work in process 44,850 Finished goods 335,761 ------------------ Total 763,023 Less: reserve for obsolescence (129,261) ------------------ Inventory, net $ 633,762 ================== NOTE 3 - PROPERTY AND EQUIPMENT At June 30, 2007, property and equipment consist of the following: Estimated Life -------------- Office equipment and furniture 5-7 Years $ 131,425 Autos and trucks 10 Years 182,793 Manufacturing equipment 7 Years 215,446 Building and land 20 Years 517,841 ----------------- Total 1,047,505 Less: accumulated depreciation (287,717) ----------------- Property and equipment, net $ 759,788 ================= For the six months ended June 30, 2007 and 2006, depreciation expense amounted to $20,996 and $44,680, respectively. NOTE 4 - LOANS PAYABLE Loans payable consisted of the following at June 30, 2007: Note to De Chang Credit Union due on June 3, 2008 with interest at 7.88% per annum. Guaranteed by Shanghai Shanhai $ 340,993 Note to De Chang Credit Union due on December 3, 2007 with interest 7.34% per annum. Guaranteed by Shanghai Shanhai and Chairman Bian 27,877 ------------- Total $ 668,870 ============= 16 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 5 - RELATED PARTY TRANSACTIONS The Company's 90% owned subsidiary, LiKang Disinfectant, is engaged in business activities with four related parties; Shanghai LiKang Meirui Pharmaceuticals High-Tech Company, Ltd. ("Meirui"), Shanghai Shanhai Group ("Shanhai"), Shanghai LiKang Pharmaceuticals Technology Co., Ltd. ("LiKang Pharmaceuticals"), and Shanghai LiKang Biological High-Tech Co., Ltd. ("Biological"). Shanghai LiKang Meirui Pharmaceuticals High-Tech Co., Ltd. ("Meirui"), a company of which Shanghai Shanhai Group, LiKang Disinfectant's minority shareholder, owns 68%, provides certain contract manufacturing of two products for LiKang Disinfectant. Specifically, Meirui provides LiKang Disinfectant with ozone producing 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 Disinfectant. In January 2005, LiKang Disinfectant 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 six months ended June 30, 2007 and 2006, the Company recorded net revenues of $14,667 and $7,949 to Meirui, respectively. At June 30, 2007, Meirui owed LiKang Disinfectant $18,356. 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 independent third parties. Shanghai LiKang Pharmaceuticals Technology Co., Ltd., ("LiKang Pharmaceuticals"), 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 six months ended June 30, 2007 and 2006, the Company recorded net revenues of $1,020,906 and $ 1,920,473 to Shanghai LiKang Pharmaceuticals, respectively. At June 30, 2007, accounts receivable from sales due from LiKang Pharmaceuticals was $2,377,812. In general, accounts receivable due from LiKang Pharmaceuticals are payable in cash and are due within 4 to 6 months, which approximate normal business terms with independent third parties. Shanghai Shanhai Group, the minority shareholder of LiKang Disinfectant, 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 six months ended June 30, 2007 and 2006, rent expense paid to this related party amounted to $665,372 and $32,310, respectively. Additionally, in January 2005, the Company borrowed $165,471(RMB 1,310,000) from.Shanghai Shanhai Group for working capital purposes, which is reflected on the accompanying balance sheet as loans payable - related party. The loan bears interest at 10% per annum and is payable on demand. For the six months ended June 30, 2007, interest expense related to this note amounted to $8,640. Shanghai LiKang Biological High-Tech Company, Ltd. ("Biological"), which is 60% owned by Messrs. Xuelian Bian, the Company's officer and director, and 40%-owned by LiKang Pharmaceuticals (owned by Messrs. Xuelian Bian (90%) and Wei Guan (10%), the Company's officers and directors) sells biological products, cosmetic products and develops technology for third parties. Additionally, the Company sells certain raw materials to Biological employed in the Biological production process. Additionally, for the six months ended June 30, 2007, the Company purchased product from Biological amounting to $44,196. On January 2, 2007, the Company loaned $655,755(RMB 5,000,000) to Bioligical for working capital purpose, which is reflected on the accomanying balance sheet as due from related party. The loan bears interest at 0.558% per month, maturing on September 30, 2007. 17 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 6 - SHAREHOLDER' EQUITY COMMON STOCK On January 10, 2006 and effective January 1, 2006, the Company entered into a three year agreement with China Direct Investments, Inc. to provide business development and management services. In conncetion with this agreement, the Company issued 4,700,000 shares of the Company's common stock. The Company valued these service using the fair value of common shares on grant date at $0.18 per share and recorded deferred consulting expense of $846,000 to be amortized over the service period. For the six months ended June 30, 2007, amortization of deferred consulting expenses amounted to $141,000. On September, 2006, the Company entered into a three-year agreement with a consultant to provide business development and management services. In connection with this agreement, the Company issued 500,000 shares of the Company's common stock. The Company valued these services using the fair value of common shares on grant date at $0.185 per share and recorded deferred consulting expense of $92,500 to be amortized over the service period. For the six months ended June 30, 2007, amortization of consulting compensation amounted to $15,416. 2000 EQUITY COMPENSATION PLAN On October 10, 2000, the Company's Board of Directors adopted its 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 the Company's shareholders on November 10, 2000, is to encourage stock ownership by its officers, directors, key employees and consultants, and to give such persons a greater personal interest in the success of its 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 June 30, 2007, the Company did not have any options to purchase shares of its common stock outstanding under the plan. The 2000 Equity Compensation Plan is administered by the Company's Board of Directors who have the sole authority to determine which eligible employees of the 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 the Company's 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 the company. 18 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED) 2000 EQUITY COMPENSATION PLAN (CONTINUED) An optionee generally may exercise an option only while an employee of the 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 the Company's 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 the Company's Board of Directors adopted our Non-Qualified Stock Option Plan under which a total of 200,000 shares of common stock were 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 its 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 June 30, 2007, the Company did not have any options to purchase shares of our common stock outstanding under the plan. The Non-Qualified Stock Option Plan is administered by our Board of Directors 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. 19 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED) NON-QUALIFIED STOCK OPTION PLAN (CONTINUED) 2005 Equity Compensation Plan Effective June 28, 2005, the Company's Board of Directors authorized, approved and adopted its 2005 Equity Compensation Plan. The purpose of the plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give these persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. The Company has currently reserved 5,000,000 of its authorized but unissued shares of common stock for issuance under the plan, and a maximum of 5,000,000 shares may be issued, unless the plan is subsequently amended (subject to adjustment in the event of certain changes in our capitalization), without further action by its Board of Directors and stockholders, as required. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by the Company, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by the Company for other purposes. The plan is administered by the Company's Board of Directors or an underlying committee. The Board of Directors or the committee determines from time to time those officers, directors, key employees and consultants to whom stock grants or plan options are to be granted, the terms and provisions of the respective option agreements, the time or times at which such options shall be granted, the type of options to be granted, the dates such plan options become exercisable, the number of shares subject to each option, the purchase price of such shares and the form of payment of such purchase price. All other questions relating to the administration of the plan, and the interpretation of the provisions thereof and of the related option agreements are resolved by the Board or committee. Plan options may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended or non-qualified options. The Company's officers, directors, key employees and consultants are eligible to receive stock grants and non-qualified options under the plan; only the Company's employees are eligible to receive incentive options. In addition, the plan allows for the inclusion of a reload option provision which permits an eligible person to pay the exercise price of the option with shares of common stock owned by the eligible person and receive a new option to purchase shares of common stock equal in number to the tendered shares. Furthermore, compensatory stock grants may also be issued. Any incentive option granted under the plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any incentive option granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The term of each plan option and the manner in which it may be exercised is determined by the Board of Directors or the committee, provided that no option may be exercisable more than ten years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant. The exercise price of non-qualified options shall be determined by the Board of Directors or the Committee, but shall not be less than the par value on the date the option is granted. The per share purchase price of shares issuable upon exercise of a Plan option may be adjusted in the event of certain changes in our capitalization, but no such adjustment shall change the total purchase price payable upon the exercise in full of options granted under the Plan. Unless the plan has been previously suspended or terminated by the Board of Directors, the plan, as it relates to grants of incentive stock options, terminates on June 28, 2015. 20 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED) NON-QUALIFIED STOCK OPTION PLAN (CONTINUED) 2005 Equity Compensation Plan (Continued) During the three months ended June 30, 2007, the Company did not grant any stock options. As of June 30, 2007, there are no unrecognized compensation costs since all options granted under the stock option plans are completely vested. COMMON STOCK WARRANTS Stock warrant activity for the six months ended June 30, 2007 is summarized as follows: Weighted Average Number of Shares exercise price ----------------- ------------------ Outstanding at December 31, 2006 37,134,865 $ 0.25 ----------------- Granted - - Exercised 3,213,320 $ 0.10 ----------------- Outstanding at June 30, 2007 33,921,545 $ 0.25 ================= The following table summarizes the Company's stock warrants outstanding at June 30, 2007: Warrants outstanding and exercisable ------------------------------------ Range of Weighted Weighted exercise average average price Number remaining exercise ------------ ------------ life price $ 0.10 540,130 ------------- ------------- $ 0.20 17,155,000 2.88 0.10 $ 0.30 15,866,665 3.15 0.20 $ 0.75-2.50 359,750 3.40 0.30 ------------ 0.95 2.02 33,921,545 ============ 21 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 7 - FOREIGN OPERATIONS For the six months ended June 30, 2007 and 2006, 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 June 30, 2007 as follows: Identifiable Assets at June 30, 2007: United States $ 100,000 China 8,599,020 ------------- Total $ 8,699,020 ------------- NOTE 8 - SEGMENT INFORMATION The following information is presented in accordance with SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. For the six months ended June 30, 2007 and 2006, the Company operated in two reportable business segments - (1) the sale of commercial disinfectant products and (2) trading company that involves import and export activities. The Company's reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. Condensed information with respect to these reportable business segments for the six months ended June 30, 2007 and 2006 is as follows: Six months ended June 30, 2007:
IMPORT AND CORPORATE DISINFECTANT EXPORT AND PRODUCTS BUSINESS OTHER CONSOLIDATED - --------------------------------------- ----------------- ----------------- ------------------ --------------------- Net revenue $ 2,588,836 $ 2,353,642 $ - $ 4,942,478 Net revenue-related party 1,035,574 - - 1,035,574 Interest income (expenses) (29,915) 509 - (29,406) Depreciation and Amortization 20,981 15 - 20,996 Net income (loss) 831,034 157,940 (141,218) 847,757 Long-lived asset expenditures 17,309 472 - 17,781 Segment Assets $ 7,527,571 $ 1,071,449 $ 100,000 $ 8,699,020
Net revenues for the six months ended June 30, 2007 were $5,978,052. Included in our net revenues for the six months ended June 30, 2007 are $1,035,574 in related party sales and $4,942,478 in sales to independent third parties. Included in our net revenues for the six months ended June 30, 2007, is $3,624,410 of revenues attributable to LiKang Disinfectant and $2,353,642 of revenues attributable to LiKang International. The Segment Assets related to the import and export business are comprised of cash of $411,261, accounts receivables of $515,031, other receivables $5,502, advances on purchases of $137,150, inventory of $2,078, and property and equipment of $417. 22 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 8 - SEGMENT INFORMATION (CONTINUED) Six months ended June 30, 2006:
CORPORATE DISINFECTANT AND PRODUCTS OTHERS CONSOLIDATED - ----------------------------------- ------------------ ----------------- -------------------- Net revenue $ 3,331,777 $ - $ 3,331,777 Net revenue-related party 1,929,315 - 1,929,315 Interest income (expense) 30,352 - 30,352 Depreciation and Amortization 44,680 - 44,680 Net income (loss) 390,692 - 390,692 Long-lived asset expenditures 84,739 - 84,739 Segment Assets $ 5,704,893 $ 134,627 $ 5,839,520
Net revenues for the six months ended June 31, 2006, were $3,331,777.Included in our net revenues are $1,929,315 in related party sales and $1,402,462 in third party sales. As we incorporated LiKang International during the second half of the fiscal year 2006, the table above did not have comparable revenues for LiKang International. NOTE 9 - 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 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 Renminbi converted to US dollars on that date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice. 23 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) NOTE 9 - OPERATING RISK (CONTINUED(pound)(C) (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 10 SUBSEQUENT EVENTS On July 4, 2007, our wholly-owned subsidiary Linkwell Tech Group, Inc., a Florida corporation ("Linkwell Tech") entered into a material stock purchase agreements. In the agreement, Linkwell Tech, which already owned a 90% equity interest in LiKang Disinfectant, entered into an agreement to purchase the remaining 10% equity interest of LiKang Disinfectant from Shanhai. Pursuant to the terms of the agreement, Shanhai will receive RMB2,831,221.27. Based on the best estimation of the management, the transaction is due to close on or before September 30, 2007. Following the transaction, our wholly-owned subsidiary Linkwell Tech will own 100% ownership equity interest of LiKang Disinfectant. On July 12, 2007, the Company issued 450,000 shares of its restricted common stock to First Trust Group, INC. to compensate the services rendered. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion contains forward-looking statements. Forward looking statements are identified by words and phrases such as "anticipate", "intend", "expect" and words and phrases of similar import. We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements due to risks, uncertainties and assumptions that are difficult to predict, including those set forth in Item 1A above. We encourage you to read those risk factors carefully along with the other information provided in this Report and in our other filings with the SEC before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law. You should read this MD&A in conjunction with the Consolidated Financial Statements and Related Notes in Item 1. In August 2006, the Company incorporated a new subsidiary, Shanghai LiKang International Trade Co., Ltd. ("LiKang International"). Since its inception, LiKang International has primarily served as an agent for third parties who desire to export goods from China, including computers, computer components, small medical equipment and instruments, meters, scales electromechanical devices. In October, 2006, LiKang International expanded its business to include light weight construction materials, textile crafts, furniture, and chemical raw materials. Following the consolidation of LiKang International during third quarter of fiscal 2006, we now report our operations in two segments, LiKang Disinfectant and LiKang International for the six months period ended June 30, 2007. For the comparable period of this report, the information included LiKang Disinfectant only. OVERVIEW 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 hardware such as facilities and machinery, and software, including the technology to monitor the facilities, as well as the heightened knowledge and capability of the production staff regarding quality control procedures. Following the adoption of the industry standards in 2002, we 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 competitive landscape as it pertains to small to medium size manufacturers since the new standards are especially difficult for companies with limited product offerings and inferior technical content. In addition, prior to the adoption of industry standards, disinfectant products were generally marketed and sold based on price as opposed to quality. We believe that as a result of the adoption of industry standards, the marketplace is evolving with a more stringent focus on product quality, which we believe will enable us to increase our base of commercial customers thereby increase our revenues. Historically our focus has been on the commercial distribution of our products. Our customers include hospitals, medical suppliers and distribution companies throughout China. We have made efforts to expand our distribution reach to the retail market. We have repackaged certain of our commercial disinfectant products for sale to the consumer market and have commenced upon expanding our customer base to include hotels, schools, supermarkets, and pharmacies. By virtue of the Chinese government's continuing focus on educating the Chinese population about the benefits of proper sanitation procedures, we believe that another key to increasing our revenues is the continued expansion of the retail distribution of our products. 25 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 only a 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 in China gives us a competitive advantage over many other disinfectant companies in China, and will enable us to leverage the brand awareness for our products with commercial customers to the retail marketplace. Our present manufacturing facilities and production capacities are sufficient for the foreseeable future, and we believe that we otherwise have the assets and capital available to us necessary to enable us to increase our revenues in future periods as the market for disinfectant products in China continues to increase. During the second half of year 2007, we will continue to focus our efforts on the retail market for our products, as well as expanding our traditional base of commercial customers. In addition, we may also consider the possible acquisition of independent sales networks, which could be used to increase our product distribution capacity and align our company with small, regional companies in the industry. RESULTS OF OPERATIONS The table below sets forth the results of operations for the six months ended June 30, 2007 as compared to the same period ended June 30, 2006 accompanied by the change amount and percentage of changes.
For the Six Months $Change % Ended June 30 2007v 2007 2006 2006 Change ------------------ ------------------ ----------------- ---------- Revenues $ 4,942,478 $ 1,402,462 $ 3,540,016 +252% Revenues-related parties 1,035,574 1,929,315 (893,741) -46% ------------------ ------------------ ----------------- Total Net Revenues 5,978,052 3,331,777 2,646,275 +79% Cost of sales 3,856,698 1,990,040 1,866,658 +94% ------------------ ------------------ ----------------- Gross profit 2,121,354 1,341,737 779,617 +58% Operating expenses: Selling expenses 603,726 205,207 398,519 +194% General and administrative expenses 586,559 585,038 1,521 0.26% ------------------ ------------------ ----------------- Total Operating Expenses 1,190,285 790,245 400,040 +51% ------------------ ------------------ ----------------- Operating income 931,069 551,492 379,577 +69% Other income 118,035 - 118,035 Registration rights penalty - (30,000) 30,000 -100% Interest income 1,810 2,423 (613) -25% Interest expense - related party (8,640) (12,994) 4,354 -34% Interest expense (22,576) (19,781) (2,795) +14% ------------------ ------------------ ----------------- Total Other Income (Expenses) 88,629 (60,352) 148,981 +247% ------------------ ------------------ ----------------- Income before discontinued operations income $ 1,019,698 $ 491,140 528,558 +108% taxes and minority interest Gain ( Loss) from discontinued operations - 12,794 (12,794) -100% ------------------ ------------------ ----------------- Income taxes (79,604) (62,382) (17,222) -28% Minority interest (92,337) (50,860) (41,477) -82% ------------------ ------------------ ----------------- Net income $ 847,757 $ 390,692 $ 457,065 +117% ================== ================== ================= Other key indicators SIX MONTHS ENDED JUNE 30, % 2007 2006 Change Cost of sales as a percentage of revenues 65% 60% +5% Gross profit margin 35% 40% -5% Selling expenses as a percentage of revenues 10% 6% +4% G&A expenses as a percentage of revenues 10% 18% -8% Total operating expenses as a percentage of revenues 20% 24% -4%
26 NET REVENUES Net revenues for the six months ended June 30, 2007 were $5,978,052 as compared to net revenues of $3,331,777 for the six months ended June 30, 2006, an increase of $2,646,275 or approximately 79%. Included in our net revenues for the six months ended June 30, 2007 are revenues of $3,624,410 attributable to LiKang Disinfectant and revenues of $2,353,642 attributable to LiKang International. Of our total net revenues for the six months ended June 30, 2007, $1,035,574 or approximately 17% were attributable to related parties as compared to net revenues of $1,929,315 or approximately 67%, of our total net revenues for the comparable period in fiscal 2006. All revenues from related parties are attributable to LiKang Disinfectant. As described below, we expect the percentage of our total revenues attributable to related party sales to continue to decrease during the second half of fiscal 2007. Revenues associated with LiKang Disinfectant increased $292,633, or approximately 9%, during the six months of fiscal 2007 compared to the same period of fiscal 2006. LiKang Disinfectant's revenues associated with third parties increased $1,186,374, or approximately 85%, while revenues associated with related parties decreased $893,741, or approximately 46%. LiKang Disinfectant generated revenues to third parties of $2,588,836 for the six months in fiscal 2007 as compared to $1,929,315 for the same period of fiscal 2006; it generated revenues from related parties of $1,035,574 for the six months in fiscal 2007 as compared to $1,929,315 for the comparable period in fiscal 2006. Of the $1,035,574 of revenues derived from related parties during the six months ended June 30, 2007, $1,020,906, or approximately 99%, was from LiKang Pharmaceuticals, a decrease of $899,567, or approximately 47%, from the same period in fiscal 2006. We have made a conscious effort to market and our disinfectant products in less competitive markets in China. We believe that the higher margins, which our products can generate in these markets, will more than offset the increase of the shipping and other expenses. As we continue to promote and market our products into new markets, it is expected that our revenues generated from related parties will continue to decrease. Conversely we expect to witness a steady increase in sales revenues from independent third parties. 27 COST OF SALES For the six months ended June 30, 2007 and 2006, the cost of sales as a percentage of revenues is 65% and 60% respectively. The increase of the percentage is mainly due to the high percentage from the LiKang International. During the six months of fiscal 2007, cost of sales related to LiKang Disinfectant was $1,910,422, or approximately 53% of revenues, as compared to cost of sales of $1,990,040, or approximately 60%, for the six months ended June 30, 2006. Cost of sales includes direct labor, direct raw materials costs and allocated overhead costs. The decrease in cost of sales as a percentage of revenues is attributable to increased unit selling prices. For the six months ended June 30, 2007, LiKang Disinfectant increased unit selling prices on its products sold outside of the rather competitive markets such as markets in Shanghai and Beijing. LiKang Disinfectant continues to promote and market its disinfectant products in less competitive markets where it can get a higher per unit selling price as opposed to more competitive markets. We expects raw material costs to remain stable, and anticipate in the per unit selling prices and our market share will continue to rise in the less competitive markets, which in turn further reduce the cost of sales as a percentage of revenues. For the six months ended June 30, 2007, cost of sales related to LiKang International was $1,946,276, or approximately 83% of revenues. LiKang International expects cost of sales will be in the range of 80% to 85% for the remainder of 2007. SELLING EXPENSES For the six months ended June 30, 2007, selling expenses were $603,726 as compared to $205,207 for the same period in 2006, an increase of $398,519, or approximate194%. Included in selling expenses during the six months of fiscal 2007 were expenses of $368,033 attributable to LiKang Disinfectant, increase of $162,826, or approximately 79%, from the same period in fiscal 2006. The selling expenses for the six months ended June 30, 2007 included $135,693 attributable to LiKang International. The increase in selling expenses form LiKang Disinfectant is primarily attributable to increases in advertising and conference expenses ($32,371), shipping and freight $(115,780) which were offset by decreases in consulting fees ($45,708), repair and maintenance included machinery maintenance cost $(21,956)and low consumables and customer service costs ($4,154). GENERAL AND ADMINISTRATIVE EXPENSES For the six months ended June 30, 2007 general and administrative expenses were $586,559 as compared to $585,038 for the same period in 2007, an increase of $1,521, or approximately 0.26%. The general and administrative expenses included approximate $34,620 from LiKang International for the six months ended June 30, 2007. We incurred non-cash consulting fees during the six months ended June 30, 2007 of $156,416 as compared to $134,647 for the six months ended June 30, 2006, an increase of $21,770 or approximately 16%. Non-cash consulting fees represents the amortization of fees to consultants under agreements entered into during fiscal 2006 which we pay in shares of our common stock. OTHER INCOME (EXPENSE) Our total other income for the six months ended June 30, 2007 was $88,629 compared to total other expense of $60,352 for the six months ended June 30, 2006, an increase of $148,981. The increase is primarily the result of an increase of $118,035 in other income which is primarily attributable to the forgiveness of $120,000 in accrued registration rights penalties associated with our Series B 6% cumulative convertible preferred stock offering. 28 DISCONTINUED OPERATIONS In January 2006, we sold 100% of the equity interest of our Aerisys subsidiary to its former CEO in exchange for an assumption of all liabilities related to it. The gain from discontinued operations of $12,794 for the first quarter of fiscal 2006 represents the gain on disposal of this subsidiary. MINORITY INTEREST For the six months ended June 30, 2007, we reported a minority interest expense of $92,337 as compared to $50,860 for the six months ended June 30, 2006 an increase of $41,477. The minority interest is attributable to minority shareholders of LiKang Disinfectant. LIQUIDITY AND CAPITAL RESOURCES As shown in the accompanying financial statements, our working capital increased $852,452, or approximately 24% from $3,564,485 on June 30, 2006 to $4,416,937 on June 30 2007. With the expansion of our businesses, we anticipate a strong demand on our capital resource in the near future. In addition to our working capital on hand, we intend to obtain required capital through a combination of bank loans and the sale of our equity securities. Although there are no commitments or agreements on the part of anyone at this time to provide us with additional bank financing or purchase of securities. We are optimistic to obtain additional capital resources to fund our business expansions. We currently have no material commitments for capital expenditures. At June 30, 2007, we had approximately $668,870 in short term loans which will mature in the second half 2007. We plan to renew these loan agreements at the current market terms. Other than our working capital and loans, we presently have no other alternative capital resources available to us. We plan to build an additional product lines and upgrade our manufacturing facilities, in order to expand our producing capacity and improve quality of our products. Based on our preliminary estimates, it will require additional capital of approximate $1 million. In addition, unless there are further postponements by the Securities and Exchange Commission of the enactment of Section 404 of the Sarbanes-Oxley Act of 2002 in respect of our annual report for fiscal year end December 31, 2007, our management will be required to provide an assessment of the effectiveness of our internal control over financial reporting, including statement as to whether or not internal control over financial reporting is effective. In order to comply with these requirements, we will need to engage consulting firm to undertake an analysis of our internal controls, as we do not have the expertise to conduct the necessary assessment. While we have not yet to engage such a consulting firm, we expect to incur consulting fees in developing the necessary documentation and testing procedures required. We are unable at this time to predict the amount of these fees. We need to raise additional capital resources to meet the demands described above. We may seek to raise additional capital through the sale of equity securities. There can be no assurances that any additional debt or equity financing will be available to us on acceptable terms, if at all. The inability to obtain debt or equity financing could have a material adverse effect on our operating results, and as a result we could be required to cease or significantly reduce our operations, seek a merger partner or sell additional securities on terms that may be disadvantageous to shareholders. OPERATING ACTIVITIES Net cash used in operating activities for the six months ended June30, 2007 was $1,028,561as compared to net cash provided by operating activities of $196,807 for the same period ended June 30, 2006. For the six months ended June 30, 2007, we used cash to fund a net increase in accounts receivable of $2,248,322, including an increase of $901,808 in accounts receivables from related parties, an increase of $97,279 in inventory, a decrease in advance from customers of $233,579. These increases were offset by our net income, a decrease in other receivables of $242,055, a decrease of $154,553 in prepaid and other current assets and an increase of $175,064 in accounts payablei(cent)accrued expenses and other payables For the six months ended June30, 2006, we used cash provided by operations to fund a net increase in accounts receivable of $605,747, including an increase of $592,025 in accounts receivables from related parties, and a decrease in accounts payable and accrued expenses of $488,374. These increases were offset by our net income, a decrease in inventory and an increase in advances from customers. 29 INVESTING ACTIVITIES Net cash used in investing activities for the six months ended June 30, 2007 was $659,595 as compared to net cash used in investing activities of $334,536 for the same period in 2006. This change is attributable to an increase of $655,755 in loan receivable from related parties and an increase of $34,668 in purchase of intangible assets during the six months ended June 30, 2007 by netting of decrease of $48,609 in loan receivable from third parties. For the six months ended June 30, 2006, net cash used in investing activities was $334,536 which was attributable to an increase in a deposit of approximately $250,000 and the purchase of additional manufacturing equipment during the six months ended June 30, 2006 of $84,739. FINANCING ACTIVITIES Net cash provided by financing activities was $590,183 for the six months ended June 30, 2007, as compared to net cash used in financing activities of $116,786 for the six months ended June 30, 2006. During the six months ended June 30, 2007 we received repayment from related party of $268,851 and proceeds from warrants exercised of $321,332. CRITICAL ACCOUNTING POLICIES The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: allowance for doubtful accounts; income taxes; stock-based compensation; asset impairment. ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts could be required. We initially record a provision for doubtful accounts based on our historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) our historical provision for doubtful accounts; (v) the credit worthiness of the customer; and (vi) the economic conditions of the customer's industry as well as general economic conditions, among other factors. INCOME TAXES We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS 109 prescribes the use of the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, or increase or decrease this allowance in a period, we increase or decrease our income tax provision in our statement of operations. If any of our estimates of our prior period taxable income or loss prove to be incorrect, material differences could impact the amount and timing of income tax benefits or payments for any period. In addition, as a result of the significant change in the Company's ownership, the Company's future use of its existing net operating losses may be limited. 30 The Company operates in several countries. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. The tax liabilities are reflected net of realized tax loss carry forwards. We adjust these reserves upon specific events; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the contingency has been resolved and the liabilities are no longer necessary. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year. STOCK-BASED COMPENSATION In December 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS No. 123 - Accounting for Stock-Based Compensation, providing alternative methods of voluntarily transitioning to the fair market value based method of accounting for stock based employee compensation. FAS 148 also require disclosure of the method used to account for stock-based employee compensation and the effect of the method in both the annual and interim financial statements. The provisions of this statement related to transition methods are effective for fiscal years ending after December 15, 2002, while provisions related to disclosure requirements are effective in financial reports for interim periods beginning after December 31, 2002. For stock options, we elected to continue to account for stock-based compensation plans using the intrinsic value-based method of accounting prescribed by APB No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under the provisions of APB No. 25, compensation expense is measured at the grant date for the difference between the fair value of the stock and the exercise price. For other items paid for by common stock, the value of the transaction is determined by the value of the goods or services received, measured at the time of the transaction. The corresponding stock value, used to determine the number of share to be issued, is the value of the average price for the 20 to 30 days prior to the transaction date. ASSET IMPAIRMENT We periodically evaluate the carrying value of other long-lived assets, including, but not limited to, property and equipment and intangible assets, when events and circumstances warrant such a review. The carrying value of along-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Significant estimates are utilized to calculate expected future cash flows utilized in impairment analyses. We also utilize judgment to determine other factors within fair value analyses, including the applicable discount rate. 31 Item 2(b). OFF-BALANCE SHEET ARRANGEMENTS There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that are material to investors. ITEM 3. CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of June 30, 2007, the end of the period covered by this quarterly report, our management concluded its evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this quarterly report, is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and to reasonably assure that such information is accumulated and communicated to our management, including our Chief Executive Officer who also serves as our principal financial and accounting officer, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer, does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. During fiscal 2006 we were required to restate our fiscal 2005 financial statements as well as certain financial statements for fiscal 2006 periods to correct accounting errors related to the recognition of interest expense, accounting for dividends on our preferred stock and corrections in our calculation of minority interest. All of our employees and accounting staff are located in the PRC and we do not presently have a chief financial officer, comptroller or similarly titled senior financial officer who is bilingual and experienced in the application of U.S. GAAP. During fiscal 2006 we began a search for an appropriate candidate who can fill such a position; however, we are unable to predict when such a person will be hired. During fiscal 2006 we also began providing additional training to our accounting staff in the application of U.S. GAAP. As a result of these matters, our management believes that a deficiency in our internal controls continues to exist. Based upon these historic accounting errors and lack of a chief financial officer and sufficient trained accounting staff, our management has determined that there is a deficiency in our internal controls over financial reporting and that our disclosure controls and procedures were ineffective at June 30, 2007. Until we expand our staff to include a bilingual senior financial officer who has the requisite experience necessary, as well as supplement the accounting knowledge of our staff, it is likely that we will continue to have material weaknesses in our disclosure controls. There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 32 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 31.1 Rule 13a-14(a)/15d-14(a) certification of CEO 31.2 Rule 13a-14(a)/15d-14(a) certification of principal accounting officer 32.1 Section 1350 certification of CEO and principal accounting officer 33 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Linkwell Corporation Date: August 17, 2007 By: /s/ Xuelian Bian ------------------ Xuelian Bian, Chief Executive Officer President and principal executive officer EX-31.1 2 ex311.txt SECTION 302 CERTIFICATION - CEO EXHIBIT 31.1 RULE 13A-14(A)/15D-14(A) CERTIFICATION I, Xue Lian Bian, certify that: 1. I have reviewed this quarterly report on Form 10-QSB for the period ended June 30, 2007 of Linkwell Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions after the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting. 5. The small business issuers other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 17, 2007 By: /s/ Xue Lian Bian ------------------------- Xue Lian Bian, Chief Executive Officer, President and principal executive officer EX-31.2 3 ex312.txt SECTION 302 CERTIFICATION - CFO EXHIBIT 31.2 RULE 13A-14(A)/15D-14(A) CERTIFICATION I, Xue Lian Bian, certify that: 1. I have reviewed this quarterly report on Form 10-QSB for the period ended June 30, 2007 of Linkwell Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions after the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting. 5. The small business issuers other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 17, 2007 By: /s/ Xue Lian Bian ---------------------------- Xue Lian Bian, Chief Financial Officer EX-32.1 4 ex321.txt SECTION 906 CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Linkwell Corporation (the "Company") on Form 10-QSB for the period ended June 30, 2007 as filed with the Securities and Exchange Commission (the "Report"), I, Xuelian Bian, CEO and President of the Company, certify, pursuant to 18 U.S.C. SS. 1350, as adopted pursuant to SS. 906 of the Sarbanes-Oxley Act of 2002, that: 1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: August 17, 2007 By: /s/ Xuelian Bian ----------------------- Xuelian Bian, Chief Executive Officer, Principal Financial Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----