-----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, HVb/WOffICc0C9LxP3HEzugoh/smbbn8/WCqH4QUnYtXr1vKV++jBrLKy3+FNkS+ MbwW/AdeZA+EptK5ieun4w== 0001282826-06-000045.txt : 20060511 0001282826-06-000045.hdr.sgml : 20060511 20060511135235 ACCESSION NUMBER: 0001282826-06-000045 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060511 DATE AS OF CHANGE: 20060511 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: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24977 FILM NUMBER: 06829270 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 10KSB/A 1 lnk10ka05.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 1 to the Form 10-KSB (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ________ Commission file number: 000-24977 Linkwell Corporation --------------------------- (Name of small business issuer in its charter) Florida 65-1053546 -------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) No. 476 Hutai Branch Road Baoshan District Shanghai, China 200436 --------------------- ------ (Address of principal executive offices) (Zip Code) Issuer's telephone number: (86)21-56689332 Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered None not applicable - ---------------- (Title of each class) Securities registered under Section 12(g) of the Exchange Act: Common stock, par value $0.0005 per share ------------------------------------------- (Title of class) Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ] Check whether the issuer (1) 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[] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [] No [X] State issuer's revenues for its most recent fiscal year. $5,465,933 for the fiscal year ended December 31, 2005. State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within the past 60 days. The aggregate market value of the common equity held by non-affiliates computed at the closing price of the registrant's common stock on April 10, 2006 is approximately $2,009,187 On March 15, 2006, 45,304,139 shares of common stock are issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) of the Securities Act of 1933 ("Securities Act"). The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1990). Not Applicable. Transitional Small Business Disclosure Form (check one): Yes No X -- --- EXPLANATORY PARAGRAPH We are amending our Form 10-KSB for the year ended December 31, 2005 to restate our consolidated balance sheet at December 31, 2005 and consolidated statement of cash flows for the year ended December 31, 2005 and to revise disclosure related to same which appeared in our Form 10-KSB as filed on April 14, 2005. On May 8, 2005 we determined that $333,675 reflected on our balance sheet at December 31, 2005 was improperly recorded as Deposit - Related party when it should have been included in accounts receivable - related parties. This error was related to the accounting for a transaction recorded in the fourth quarter of fiscal 2005 in which our subsidiary, Shanghai Likang Disinfectant High-Tech Company, Limited ("Likang"), purchased a building from a related party, Shanghai Likang Pharmaceuticals Technology Company, Limited. Likang had previously leased approximately 21,500 square feet of manufacturing space from Shanghai Likang Pharmaceuticals Technology Company, Limited for approximately $11,500 annually. The purchase price of $333,675 for this building was paid by Likang through the reduction in accounts receivable due it by Shanghai Likang Pharmaceuticals Technology Company, Limited. Shanghai Likang Pharmaceuticals Technology Company, Limited distributes Likang's products to the commercial medical industry. Please see Note 1 Restatement contained in the Notes to Consolidated Financial Statements appearing later in this Form 10-KSB/A which further describes the effect of this restatement. The Items of this Form 10-KSB/A for the year ended December 31, 2005 which are amended and restated as a result of the restatement of our financial statements are as follows: * Part I, Item 1. Description of Business, * Part II, Item 6. Management's Discussion and Analysis or Plan of Operations, 2 * Part II. Item 7. Financial Information, including: * Consolidated Balance Sheet at December 31, 2005, * Consolidated Statement of Cash Flows for the year ended December 31, 2005, and * Notes to Consolidated Financial Statements as of December 31, 2005, * Part II, Item 8A. Controls and Procedures. * Part III, Item 12. Certain Relationships and Related Transactions. In addition, we have revised certain disclosure in Part I, Item 1. Description of Business as it relates to our research and development activities, our intellectual property protection as well as certain disclosure in Item 2. Description of Properties as it relates to leases to which we are a party. Finally, Part III, Item 13. Exhibits of this Form 10-KSB/A includes currently dated certificates from our Chief Executive Officer and Principal Accounting and Financial Officer in Exhibits 31.1, 31.2 and 32.1. The remaining Items contained in this Form 10-KSB/A consist of all other Items originally contained in our Form 10-KSB for the year December 31, 2005 as filed on April 14, 2006. This Form 10-KSB/A does not reflect events occurring after the filing of the original Form 10-KSB and supercedes in its entirety the previously filed Form 10-KSB for the year ended December 31, 2005. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Certain statements in this annual 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, our ability to increase our revenues, develop our brands, implement our strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made in this annual. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this annual report in its entirety, including the risks described in Item 1. Description of Business - Risk Factors. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this annual report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business. 3 When used in this annual report, the terms "Linkwell" "we," and "us" refers to Linkwell Corporation, a Florida corporation, our wholly-owned subsidiary Linkwell Tech Group, Inc., a Florida corporation ("Linkwell Tech") and Linkwell Tech's 90% owned subsidiary Shanghai Likang Disinfectant High-Tech Company, Limited ("Likang"). The information which appears on our web site at www.linkwell.us is not part of this annual report. All per share information contained in this annual report gives effect to a one for 10 (1:10) reverse stock split effective March 24, 2005. 4 PART I ITEM 1. DESCRIPTION OF BUSINESS We operate under a holding company structure and currently have one operating subsidiary, Linkwell Tech. Linkwell Tech owns 90% of Likang and we regard Likang's business of hospital disinfectant products as our primary business. Through our subsidiary we are involved in the development, manufacture, sale and distribution of disinfectant health care products primarily to the medical industry in China. Likang was founded by the Second Military Medical University of the Chinese Army in 1988 and we believe that these ties provide us with certain marketing advantages. Recently we have made efforts to penetrate the civil disinfection, industrial disinfection, livestock and agricultural disinfection markets of China. Currently we offer a variety of disinfectant products for the following applications: |X| Skin and mucous membrane disinfection |X| Hand disinfectants (external) |X| Environment and surface disinfectants |X| Medical devices and equipment disinfectants |X| Machine disinfectants We have been granted 26 hygiene licenses by the Ministry of Public Health of the central government of China. We have filed two additional product applications, and are presently developing three additional products. We also sell products which have been developed and manufactured by third parties. These parties manufacture disinfectant products which generate approximately 5% of our revenue. Products we manufacture account for approximately 95% of our total revenues for the fiscal year ended December 31, 2005. We have a national marketing and sales presence throughout all 22 provinces as well as four autonomous regions and four municipalities of China. We currently employ 19 full-time sales and marketing people based in Shanghai. Shanghai Likang Pharmaceuticals Technology Company, an affiliate, also sells our products using 72 independent sales representatives in other provinces in China. Industry Background Likang is a member of the disinfectant industry in China. According to a survey conducted by China Federation of Industrial Economics (CFIC), the disinfectant market in China is approximately $6.25 billion (USD) in 2004(1). The disinfectant industry in China is an emerging market. Currently we market our products to the medical industry in China and we have recently made efforts to diversify and expand our reach to the retail market. Recent Health Concerns in China China has witnessed a variety of public health crises in recent history which demonstrated the need for increased health standards in China. In response, the Chinese government has taken initiatives to improve public health and living standards, including the establishment by The Ministry of Public Health in China for the disinfectant industry in China. 5 The heightened public concerns as well as these new public standards have led to a surge in interest for disinfectant products in China with consumers maintaining stockpiles of disinfectant products. This activity represented a surge in sales for the industry. We believe that the stockpiles will eventually deplete which may lead to an additional surge in demand. There is no assurance as to the timing of this surge; however increased public awareness and heightened national standards, a growing population, and a higher standard of living, are just a few factors which we believe support the growth of demand for disinfectant products. - --------------------------------------- (1) http://cfie.org.cn/main000.jsp The table illustrates recent health care crises in China. - ----------------------- ----------------------- --------------------- ----------------------------------------- Outbreak time Location Disease Situation - ----------------------- ----------------------- --------------------- ----------------------------------------- January, 1988 Shanghai Hepatitis A 310,000 reported cases of Hepatitis A, 47 deaths - ----------------------- ----------------------- --------------------- ----------------------------------------- April - May, 1998 Shengzhen Sub- Tuberculosis Shenzhen Woman and Children Hospital bacillus disease reports an airborne infection. 168 M. chelonae patients infected, 46 severe cases - ----------------------- ----------------------- --------------------- ----------------------------------------- November 2002 Throughout China SARS 8,000 reported cases, 800 deaths - ----------------------- ----------------------- --------------------- ----------------------------------------- June 24 - August 20 Sichuan Province Swine Streptococcus 204 reported cases of humans infected 2005 suis with the Swine streptococci in Sichuan, 38 deaths - ----------------------- ----------------------- --------------------- ----------------------------------------- April 2005 Throughout China Pulmonary Pulmonary tuberculosis, Hepatitis B tuberculosis, remain top 2 priorities on the Hepatitis B infectious disease list in China - ----------------------- ----------------------- --------------------- ----------------------------------------- June, 2005 Tibet Bubonic plague 5 infected cases reported, 2 deaths - ----------------------- ----------------------- --------------------- ----------------------------------------- July-September 2005 Hunan, Fujian, Cholera 638 cases reported, 2 deaths Zhejiang provinces - ----------------------- ----------------------- --------------------- ----------------------------------------- August, 2005 Guizhou, Ningxia, Anthrax 140 cases reported, 1 death Liaoning, Jilin - ----------------------- ----------------------- --------------------- ----------------------------------------- October, 2005 Inner Mongolia, Hunan Avian Flu 3 confirmed cases reported, 2 deaths , Anhui , Liaoning , and Hubei provinces - ----------------------- ----------------------- --------------------- -----------------------------------------
SARS - Severe Acute Respiratory Syndrome In recent years the Severe Acute Respiratory Syndrome (SARS) has threatened the public community. SARS, which is a viral respiratory illness caused by a corona virus, called SARS-associated corona virus (SARS-CoV), was first reported in Asia in November 2002. Over the next few months, the illness spread to more than two dozen countries in North America, South America, Europe, and Asia before the SARS global outbreak of 2003 was contained. In April 2004, the Chinese Ministry of Health reported several new cases of possible SARS in Beijing and the Anhui Province, which is located in east-central China. According to the Center for Disease Control of the central government of China, the common manner in which SARS seems to spread is by close person-to-person contact. The virus that causes SARS is thought to be transmitted most readily by respiratory droplets ("droplet spread") when an infected person coughs or sneezes. Droplet spread occurs as germs from the cough or sneeze of an infected person are propelled a short distance (generally up to three feet) through the air and deposited on the mucous membranes of the mouth, nose, or eyes of nearby persons. The virus also can spread when a person touches a surface or object contaminated with infectious droplets and then touches his or her mouth, nose, or eye(s). Ultimately there is much the global community does not know about SARS, and it is possible that the SARS virus might spread more broadly through the air (airborne spread) or by other ways that are not yet known. 6 Avian Influenza In 2005, the threat of a global pandemic as a result of the avian flu has captured the attention of the global community. The avian flu is a type of the A strain virus that infects birds. Typically, it is not common for humans to be infected with the virus via contact with birds, however a few bird-to-human outbreaks have been reported and most have been in Asia. Humans were infected when they came into contact with sick birds or contaminated surfaces. In most cases, infected persons reported flu-like symptoms, but some had more serious complications, including pneumonia and acute respiratory distress. The avian flu has led to increased concerns for improved health conditions. China Health Standards In July 2002, the Chinese Ministry of Public Health issued the 27th order of Ministry of Health of the People's Republic of China establishing national standards for the disinfection industry. The first criterion of the new order stipulated that disinfectant manufacturers in China must obtain a license to manufacture hygiene disinfectants. Secondly, prior to release, all disinfectant instruments must obtain the official hygiene permit document of both the local provincial hygiene administrative department and the Ministry of Public Health. The process to obtain a manufacturing license, involves three stages: o Manufacturers file application materials to local public health administrative department; o Local administrative department perform an inspection of the manufacturing facilities according to "qualified disinfection product manufacturing enterprise requirements"; and o Upon satisfaction of "qualified disinfection product manufacturing enterprise requirements", the manufacturer will be issued a license The process to obtain the official hygiene permit for individual disinfectant or instrument, the company must follow the steps listed as below: 1. File the application; 2. Explain disinfectant ingredient or instrument layout and function; 3. Hygiene administrative department will examine the sample, and perform independent tests to verify industry standards and benefits; and 4. If all the standards are met, the permit will be issued. The table below details the 26 licenses issued to Likang by the Ministry of Public Health of the central government of China. 7 - ----------- ------------------------------------------------------------------------------- ---------------- # PRODUCTS DATE - ----------- ------------------------------------------------------------------------------- ---------------- 1 An'erdian Skin Disinfectant 2003.2.13 - ----------- ------------------------------------------------------------------------------- ---------------- 2 An'erdian type 2nd skin disinfectant 2002.11.22 - ----------- ------------------------------------------------------------------------------- ---------------- 3 An'erdian type 3rd skin and mucous membrane disinfectant 2005.1.19 - ----------- ------------------------------------------------------------------------------- ---------------- 4 Dian'erkang Aerosol Disinfectant 2004.3.22 - ----------- ------------------------------------------------------------------------------- ---------------- 5 Dian'erkang 2% glutaraldehyde disinfectant 2002.11.22 - ----------- ------------------------------------------------------------------------------- ---------------- 6 Aiershi disinfectant tablets 2004.2.9 - ----------- ------------------------------------------------------------------------------- ---------------- 7 Aiershi disinfectant 2004.2.9 - ----------- ------------------------------------------------------------------------------- ---------------- 8 Dian'erkang PVP-I disinfectant 2005.3.30 - ----------- ------------------------------------------------------------------------------- ---------------- 9 Dian'erkang Iodophor disinfectant 2004.2.19 - ----------- ------------------------------------------------------------------------------- ---------------- 10 Jifro disinfectant gel 2005.1.19 - ----------- ------------------------------------------------------------------------------- ---------------- 11 Dian'erkang alcohol disinfectant 2003.12.23 - ----------- ------------------------------------------------------------------------------- ---------------- 12 Jifro disinfectant 2003.2.13 - ----------- ------------------------------------------------------------------------------- ---------------- 13 JifroTaixin disinfectant 2003.2.13 - ----------- ------------------------------------------------------------------------------- ---------------- 14 Dian'erkang compound iodine disinfectant 2004.4.28 - ----------- ------------------------------------------------------------------------------- ---------------- 15 Lvshaxing disinfectant granule 2004.2.19 - ----------- ------------------------------------------------------------------------------- ---------------- 16 Lvshaxing disinfectant tablets 2004.3.29 - ----------- ------------------------------------------------------------------------------- ---------------- 17 Likang test paper of chlorine 2004.1.16 - ----------- ------------------------------------------------------------------------------- ---------------- 18 Lvshaxing LKQG-1000 air disinfection machine 2004.3.10 - ----------- ------------------------------------------------------------------------------- ---------------- 19 Jifro 4% Chlorhexidine gluconate surgical hand scrub 2004.9.7 - ----------- ------------------------------------------------------------------------------- ---------------- 20 JifroSongning disinfectant 2004.9.7 - ----------- ------------------------------------------------------------------------------- ---------------- 21 Lineng glutaraldehyde disinfectant 2005.2.17 - ----------- ------------------------------------------------------------------------------- ---------------- 22 Likang 121 steam pressure sterilization chemical indicator 2005.3.30 - ----------- ------------------------------------------------------------------------------- ---------------- 23 Likang 132 steam pressure sterilization chemical indicator 2005.3.30 - ----------- ------------------------------------------------------------------------------- ---------------- 24 Likang steam pressure sterilization chemical indicator 2005.4.1 - ----------- ------------------------------------------------------------------------------- ---------------- 25 Likang 84 disinfectant 2005.6.27 - ----------- ------------------------------------------------------------------------------- ---------------- 26 Likang Glutaraldehyde Monitors (Strip) 2005.12.14 - ----------- ------------------------------------------------------------------------------- ----------------
Product Lines We offer a diverse range of product offerings. We manufacture 38 disinfectant products and our product offerings come in three primary forms: o Liquids-gel o Tablets-powder o Aerosol Our disinfectant products range from air disinfection machines to hot press bags, disinfection swabs, and disinfection indicators. We believe that this wide product line has served as an advantage for our company in our efforts to create a national audience for our products and services. Approximately 95% of our sales are derived from products we have internally developed and produced and the remaining 5% of sales are produced by outside companies. The tables below offer a summary of our current product offerings: Skin and Mucous Membrane Disinfectants Skin and mucous membrane disinfectants target both exterior and internal applications. Prior to operations, incisions, or injections; the products can clean the skin surface. Mucous membrane disinfectants target internal germs located in the mouth, eye, perineum and other internal sources. This product group accounted for approximately 50% of our 2004 sales and approximately 57% of our 2005 sales. 8 - --------------------------------------------- --------------------- ----------------------- ------------------------- PRODUCT NAMES INGREDIENTS APPLICATION INDUSTRY STANDARD - --------------------------------------------- --------------------- ----------------------- ------------------------- An'erdian Skin Disinfectant iodine, alcohol Skin Disinfectant Q/SUVE 20-2003 - --------------------------------------------- --------------------- ----------------------- ------------------------- An'erdian type 3rd skin and mucous membrane iodine, skin & mucous Q/SUVE 22-2003 disinfectant chlorhexidine membrane disinfectant - --------------------------------------------- --------------------- ----------------------- ------------------------- Dian'erkang PVP-I disinfectant Povidone-iodine skin & mucous Q/SUVE 28-2004 membrane disinfectant - --------------------------------------------- --------------------- ----------------------- ------------------------- Dian'erkang alcohol disinfectant alcohol Skin disinfectant Q/SUVE 08-2004 - --------------------------------------------- --------------------- ----------------------- -------------------------
Hand Disinfectants Theses disinfectants target the skin surface. Products are applied to the skin prior to medial procedures. This product group accounted for approximately 6% of our 2004 sales and approximately 10% of our 2005 sales. - -------------------------------------------- ------------------ --------------------------- ------------------------- PRODUCT NAMES INGREDIENTS APPLICATION INDUSTRY STANDARD - -------------------------------------------- ------------------ --------------------------- ------------------------- Jifro antimicrobial hand washing Chlorhexidine Hand washing Q/SUVE 04-2003 - -------------------------------------------- ------------------ --------------------------- ------------------------- Jifro disinfectant gel DP300 (Triclosan) Hand disinfectant Q/SUVE 02-2003 - -------------------------------------------- ------------------ --------------------------- ------------------------- Jifro 4% Chlorhexidine gluconate surgical Chlorhexidine surgical hand disinfectant Q/SUVE 09-2004 hand scrub gluconate - -------------------------------------------- ------------------ --------------------------- -------------------------
Environment and Surface Disinfectants These disinfectants target a variety of surfaces, such as floors, walls, tables, and medical devices. Additionally the products can be applied to cloth materials including furniture and bedding. This product group accounted for approximately 17.5% of our 2004 sales and approximately 15% of our 2005 sales. - ---------------------------- --------------------------------- ---------------------------- ------------------------- PRODUCT NAMES INGREDIENTS APPLICATION INDUSTRY STANDARD - ---------------------------- --------------------------------- ---------------------------- ------------------------- Aiershi disinfectant Trichloroisocyanuric acid Circumstance and surface Q/SUVE 34-2004 tablets disinfection - ---------------------------- --------------------------------- ---------------------------- ------------------------- Lvshaxing disinfectant Dichloro dimethylhydantoin Circumstance and surface Q/SUVE 33-2003 tablets disinfection - ---------------------------- --------------------------------- ---------------------------- ------------------------- Dian'erkang Aerosol Benzethonium Chloride Circumstance and surface Q/SUVE 07-2004 Disinfectant disinfection, preventing the spread of airborne viruses such as human influenza virus, SARS and the Bird flu virus. - ---------------------------- --------------------------------- ---------------------------- ------------------------- Lvshaxing disinfectant Dichloro dimethylhydantoin Circumstance and surface Q/SUVE 32-2003 granule disinfection - ---------------------------- --------------------------------- ---------------------------- -------------------------
9 Medical Devices and Equipment Disinfectants This line of disinfectants target medical equipment including the sterilization of thermo sensitive instruments and endoscope equipment. This product group accounted for approximately 16% of our 2004 and approximately 12% of our 2005 sales. - ------------------------------------------ ---------------------- ------------------------- ------------------------- PRODUCT NAMES INGREDIENTS APPLICATION INDUSTRY STANDARD - ------------------------------------------ ---------------------- ------------------------- ------------------------- Dian'erkang 2% glutaraldehyde Glutaraldehyde Disinfection and Q/SUVE 10-2003 disinfectant sterilization of device - ------------------------------------------ ---------------------- ------------------------- ------------------------- Dian'erkang 2% glutaraldehyde Glutaraldehyde Disinfection and Q/SUVE 10-2003 disinfectant (for the sterilization of endoscopes - ------------------------------------------ ---------------------- ------------------------- ------------------------- Dian'erkang multi-enzyme rapid detergents Multi-Enzyme Rinsing and Q/SUVE 14-2004 decontamination of device - ------------------------------------------ ---------------------- ------------------------- -------------------------
Machine Series This line of disinfectants targets air quality. The devices will monitor and disinfect air quality. This product group accounted for approximately 1% of our 2004 sales and approximately 3% of our 2005 sales. - --------------------------------------------- ------------------ -------------------------- ------------------------- PRODUCT NAMES INGREDIENTS APPLICATION INDUSTRY STANDARD - --------------------------------------------- ------------------ -------------------------- ------------------------- Lvshaxing LKQG-1000 air disinfection machine Ozone, Air disinfection Q/SUPE 09-2003 ultraviolet radiation, electrostatic - --------------------------------------------- ------------------ -------------------------- ------------------------- An'erdian disinfection swab An'erdian Skin & disinfection Q/NYMN07-2003 - --------------------------------------------- ------------------ -------------------------- ------------------------- Dian'erkang hot press bag Iron powder, Drive the "feng" Stop Q/NYMN01-2001 active carbon the pain Dispel the "han" - --------------------------------------------- ------------------ -------------------------- ------------------------- Likang test paper of chlorine reaction regent Indicator of Q/SUVE 40-2003 disinfectant concentration - --------------------------------------------- ------------------ -------------------------- ------------------------- Likang 121 steam pressure sterilization Indication oil Indication of Q/SUVE 16-2005 chemical indicator (card and adhesive tape) sterilization effect - --------------------------------------------- ------------------ -------------------------- ------------------------- Likang 132 steam pressure sterilization Indication oil Indication of Q/SUVE 17-2005 chemical indicator (label) sterilization effect - --------------------------------------------- ------------------ -------------------------- ------------------------- Likang stream pressure sterilization Indication oil Indication of Q/SUVE 18-2005 chemical indicator sterilization effect - --------------------------------------------- ------------------ -------------------------- -------------------------
Retail products Recently we have made efforts to expand our distribution reach to the retail market. As a result our products have gained access to hotels, schools, supermarkets, and drugstores. We have repackaged commercial disinfectant products for sale to the consumer market. Since October 1999, we redeveloped four separate products for distribution to the retail market. Likang redeveloped the following products: - Jin Zhongda collutory (mouth wash) October 1999 - antibacterial lubricant October 1999 - Likang 84 disinfectant August 2005 - Dian'erkang aerosol disinfectant October 2005 10 Customers We sell our products on a wholesale and retail basis to the medical community in China. We have approximately 5,000 active and recurring customers including hospitals, medical suppliers and distribution companies throughout China. We maintain over 20 distribution contracts with wholesale dealers and agents. We generally offer payment terms of four to six months before payment for the products is due. For fiscal years ended December 31, 2005 and 2004 two affiliated entities which are our customers, Shanghai Likang Pharmaceutical Technology Company, Limited and Shanghai Likang Meirui Pharmaceuticals High-Tech Co. Ltd., represented approximately 36% and approximately 40% of our total net revenues. See Item 12. Certain Relationships and Related Transactions appearing later in this annual report. We have contracts with all our dealer and agent customers. Manufacturing We operate two factory facilities in Shanghai, one located in the Shanghai Jiading district and one located in the Shanghai Jinshan district. Products are manufactured primarily in liquid, tablet, and powder form. Approximately 95% of Likang revenues are derived from products manufactured in these two factories. The Shanghai Jiading district factory is approximately 21,500 square feet, all of which is used for production. This factory meets the good manufacturing practice ("GMP") standards established by the central government for the production of medical and chemical products. The main products produced here are liquid and index disinfectant devices. The manufacturing facility has the capacity to produce approximately 9 million liters of liquid disinfectant annually. The manufacturing cycle for the liquids, from formulation to finished product, is one day. The Shanghai Jinshan district factory is approximately 4,300 square feet and is used in the manufacture of the tablet and powder forms of disinfectants. The manufacturing capacity is 300 metric tons of tablet and 180 metric tons of powder disinfectant annually. The average manufacturing cycle for the tablets and powder, from formulation to finish product, is one day. Products which represent the remaining approximate 5% of our revenues are manufactured by third parties as set forth below: - ------------------------------- ----------------------------------------------------------- --------------------------- PRODUCT MANUFACTURER % OF REVENUE - ------------------------------- ----------------------------------------------------------- --------------------------- Lvshaxing Air Disinfectant Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. 2% Machine - ------------------------------- ----------------------------------------------------------- --------------------------- Likang Surgery hand-washing Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. Table - ------------------------------- ----------------------------------------------------------- --------------------------- Junle disinfectant Shanghai JunLe Daily Chemicals Co., Ltd. 3% - ------------------------------- ----------------------------------------------------------- --------------------------- Jiewang disinfectant Hangzhou JieWang Disinfectant Co., Ltd - ------------------------------- ----------------------------------------------------------- --------------------------- Shenle disinfectant Shanghai ShenLe Daily Chemicals Co., Ltd. - ------------------------------- ----------------------------------------------------------- --------------------------- Sterilized Q-tip (very small Shanghai DiCheng Health Products Manufacturing Co., Ltd quantity) - ------------------------------- ----------------------------------------------------------- ---------------------------
We package our products in various packages to meet different needs from the market. Liquid and gel disinfectants - - 40 ml - 750ml - - 50 ml - 1L - - 60 ml - 1.5L - - 80 ml - 2.5L - - 500ml - 5L 11 Tablets disinfectants - - 50 tablets/bottle each tablet is 1g which contains 500ml active chlorine - - 100 tablets/bottle - - 200 tablets/bottle Powder disinfectants - - 250g - - 500g. We maintain an inventory of finished products equal to approximately 2.5 months average sales. Currently, we are manufacturing at about 50% of full capacity based upon our current product demand, and we have the ability to produce at full capacity if demand continues to increase. We have an in-house fulfillment and distribution operation, which is used to manage the supply chain, beginning with the placement of the order, continuing through order processing, and then fulfilling and shipping of the product to the customer. We maintain inventory and fill customer orders from both Jiading factory and Jinshan factory. Raw Materials We purchase raw materials from six primary suppliers, including a related party, and we have signed purchase contracts with these suppliers in an effort to ensure a steady supply of raw materials. We have maintained stable business relations with these suppliers for over 10 years, and we believe that our relationships with these primary suppliers will remain stable. In the event the relationships falter, there are many suppliers with the capability to supply our company. We purchase raw materials on payment terms of 30 days to three months. Some of the suppliers import from foreign countries (listed below) and we purchase directly from these suppliers. The table below details the supply relationships for raw materials - ---------------------------------- --------------------------------------------------------------- ----------------- RAW MATERIALS SUPPLIERS ORIGIN - ---------------------------------- --------------------------------------------------------------- ----------------- Iodine Shanghai Wenshui Chemical Co., Ltd USA - ---------------------------------- --------------------------------------------------------------- ----------------- Potassium iodide Shanghai Wenshui Chemical Co., Ltd Holland - ---------------------------------- --------------------------------------------------------------- ----------------- Glutaraldehyde Shanghai Jin an tang Hygienical Product Factory Germany - ---------------------------------- --------------------------------------------------------------- ----------------- Triclosan Ciba Specialty Chemicals (China)LTD Domestic - ---------------------------------- --------------------------------------------------------------- ----------------- Alcohol Shanghai Jangbo Chemical Co., L td Domestic - ---------------------------------- --------------------------------------------------------------- ----------------- Trichloroisocyanuric acid Xuzhou Keweisi Disinfectant Co., Ltd Domestic - ---------------------------------- --------------------------------------------------------------- ----------------- Ozone producing device equipment Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. Domestic - ---------------------------------- --------------------------------------------------------------- ----------------- Ultraviolet radiation lamp light Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. Domestic - ---------------------------------- --------------------------------------------------------------- -----------------
12 Customer Service and Support We believe that a high level of customer service and support is critical in retaining and expanding our customer base. Customer care representatives participate in ongoing training programs under the supervision of our training managers. These training sessions include a variety of topics such as product knowledge and customer service tips. Our customer care representatives respond to customers' e-mails and calls that are related to order status, prices and shipping. If our customer care representatives are unable to respond to a customer's inquiry at the time of the call, we strive to provide an answer within 24 hours. We believe our customer care representatives are a valuable source of feedback regarding customer satisfaction. Our customer returns and credits average approximately 1% of total sales. New Product Development We are committed to research and development. Likang was created as a research and development organization by the Second Military Medical University of the Chinese Army in 1988. We develop our products internally and own all rights associated with those products. We have recently developed two new disinfectant products. Our An'erdian Type 3 Skin and Mucous Membrane Disinfectant, a skin disinfectant, was recently honored as a 2005 National Key New Product by the Chinese Ministry of Science & Technology. This product has numerous uses in gynecology, skin disease treatment as well as daily hygiene. We are currently in the patent application process for this product. We believe that another key new product will be Likang #84 Disinfectant, which was recently approved by the Chinese Public Health Department. This product is a liquid chemical disinfectant that contains the sodium hypochlorite and can be used in households on almost all surfaces. This new formula carries a shelf life of two years versus the competitors similar products which have a limited shelf life of 90 days. In addition, we are conducting research on additional products, including the Lvshaxing Air Disinfectant Machine Type 1, Lvshaxing Air Disinfectant Machine Type 2 and Likang 5% (chloride content) Disinfectant Liquid. We are unable to predict at this time if our research will result in the introduction of new products. We also recently announced we had begun the initial development of a new series of disinfectants employing Hypericin, a major compound found in St. Johns Wort. The new series of disinfectants will target the H5N1 and H9N2 strains of avian flu. Hypericin is a primary compound of St. Johns Wort, a Chinese herb. In recent laboratory tests, Hypericin has proven effective as a treatment for poultry infected with strands of the avian flu. Based upon the current stage of product development, we anticipate that we will introduce this product to market in fiscal 2007. We intend to follow the guidelines of the Shanghai Municipal Center for Disease Control & Prevention in developing this new disinfectant series, however, we have yet to produce a product to treat avian flu and there is no assurance that we will ever produce such a product. For the fiscal years ended December 31, 2005 and 2004, we spent approximately $36,000 and $76,000, respectively, on research and development which was included in cost of sales. 13 Marketing and Sales We were formed in 1988 as a research and development organization by the Second Military Medical University of the Chinese Army. Our CEO, Mr. Xue Lian Bian, was a member of the staff of the university. We believe that these ties provide us with certain marketing advantages. The university is a well recognized, prestigious institution in China and many of its graduates work at hospitals, medical suppliers and distribution companies throughout China in senior positions which place them in the decision making process when it comes to purchasing products such as ours. In addition, the students and faculty at the university provide a pool of talent from which we draw, both as potential employees or summer interns who go on to work at other companies, many of whom are customers or potential customers for our products. In marketing our products, we seek to leverage these relationships. We have a national marketing and sales presence throughout all 22 provinces, as well as four autonomous regions, and four municipalities of China. We currently employ 19 full-time sales and marketing people based in Shanghai. Shanghai Likang Pharmaceuticals Technology Company, an affiliate, also sells our products using 72 independent sales representatives in other provinces of China. Approximately 30% of our sales are achieved by our proprietary sales force while the remaining approximately 70% are outsourced to independent dealers and agents. We compensate our proprietary salesman with a base salary and commission. The sales representatives are located in provinces other than Shanghai. The external sales network currently covers hospitals in 20 provinces including: Beijing, Guangdong, Tianjin, Fujian, Yunnan, Hainan, Jiangsu, Zhejiang, Anhui, Shandong, Henan, Hebei, Liaoning, Heilongjiang, Shanxi, Gansu, Ningxia, Guizhou, Hunan, Sichuan, Xinjiang, Neimenggu. The independent sales representatives sell directly to the end-users. We also have relationships with 23 independent distribution agents who purchase products from us in larger quantities and then resell in smaller quantities to smaller health care facilities. In January 2005 we signed a two year agreement with Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. to market our products to the retail/consumer market. Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd., a company of which Shanghai Shanhai Group, Likang's minority shareholder, owns a 68% interest, has a sales network which covers certain sectors of the retail/consumer market in China. During fiscal 2006 we will seek to expand our distribution capability in the PRC through the possible purchase of independent sales networks. While we have allocated a portion of the proceeds from our recent private offering for such use, we have not identified any potential targets and we may inevitably choose not to pursue this strategy. Intellectual Property We have received six patents and have four pending patent applications with National Property Right Administration of the PRC. The patent approval process can take up to 36 months. The following is a list of Likang's patents and pending patent applications: 14 - ------------------------- -------------------------------------- ------------------------------ ------------------- PATENT CATEGORY PATENT NAME PATENT NO NOTES - ------------------------- -------------------------------------- ------------------------------ ------------------- Product Improvement Improved bottle ZL 03 2 29616.9 Approved, expires March 2013 - ------------------------- -------------------------------------- ------------------------------ ------------------- Appearance design Bottle (with the wing stretch) ZL 00 3 14391.0 Approved, expires April 2010 - ------------------------- -------------------------------------- ------------------------------ ------------------- Appearance design Packaging bottle ZL 2003 3 0108274.5 Approved, expires November 2013 - ------------------------- -------------------------------------- ------------------------------ ------------------- Appearance design Test paper box of chlorine ZL 2004 3 0022740.2 Approved, expires May 2014 - ------------------------- -------------------------------------- ------------------------------ ------------------- Product Improvement High strength water sterilizer with ZL 03 2 10513.4 Approved, expires Model H ultraviolet lamp September 2013 - ------------------------- -------------------------------------- ------------------------------ ------------------- Product Improvement Sewage application ZL 2004 2 0037013.8 Approved, expires June 2014 - ------------------------- -------------------------------------- ------------------------------ ------------------- Product Improvement Container with the vacuum pump Application # Pending. Applied 200420090682.1 on 2004-9-29 - ------------------------- -------------------------------------- ------------------------------ ------------------- New invention Anti HP Gel Application # Pending. Applied 200410099002-7 on 2004-12-24 - ------------------------- -------------------------------------- ------------------------------ ------------------- New invention Low smell and stimulus contain Application # 200410068135.8 Pending. Applied chlorine disinfectant tablet, powder on 2004-11-12 etc - ------------------------- -------------------------------------- ------------------------------ ------------------- New invention A new skin &mucous membrane Application # 200410025305.4 Pending. Applied disinfectant including preparation on 2004-6-21 methods - ------------------------- -------------------------------------- ------------------------------ -------------------
We have four registered trademarks with the China State Administration for industry and commerce trademark office for An'erdian, Jifro, Dian'erkang and Lvshaxing. We are not a party to any confidentiality or similar agreements with any of our employees or any third parties regarding our intellectual property. It is possible a third party could, without authorization, utilize our propriety technologies without our consent. We can give no assurance that our proprietary technologies will not otherwise become known or independently developed by competitors. Competition We operate in a highly fragmented, competitive national market for healthcare disinfectant products. The disinfectant industry in China is an emerging industry and the industry is populated with small regional players. We estimate there are over 1,000 manufacturers and distributors of disinfectant products in China; however, most domestic competitors offer a limited line of products and there are few domestic companies with a nationwide presence. We believe that our national marketing and sales presence throughout all 22 provinces, as well as four autonomous regions, and four municipalities of China gives us a competitive advantage over many other disinfectant companies in China. In addition, prior to the adoption of industry standards in July 2002 by the central government of China, disinfectant products were generally marketed and sold based on pricing factors. We believe the recent standards implemented by the government will shift the customer demand from price to quality. 15 Furthermore we estimate the new government standards adopted in July 2002 have increased the barriers to entry and increased the bar for competitors in the disinfectant industry. We believe that the new standards may lead to fewer competitors as companies falter in their efforts to adhere to the new standards. The implementation of these improved production standards and licenses has effectively decreased the competitiveness of small to mid size manufacturers. The new standards are especially difficult for companies with limited product offerings and inferior technical content. As a result of this heightened license and permit system, all disinfectant manufacturers must comply with "qualified disinfection product manufacturing enterprise requirements" established by the Ministry of Public Health. The requirements include standards for both hardware and software. Hardware would include facilities and machinery. Software would include the technology to monitor the facilities. Furthermore the requirements will encompass the knowledge and capability of both the production staff and quality control procedures. We believe that the following are the principal competitive strengths that differentiate our company from the majority of our competition: o Product selection and availability. A number of our competitors are smaller, regional companies with a limited number of product offerings. We offer our customers a wide variety of disinfectant products and ability to ship products to our customers on a timely basis throughout the PRC. o Research and development. Our efforts to respond to market demand for new products have resulted in the issuance to us of 26 hygiene licenses by the Ministry of Public Health of the central government of China. Based upon our knowledge of our competitors, we do not believe the majority of our competitors have received as many license since the enactment of the licensing standards in July 2002. o Manufacturing capacity. Our Shanghai Jiading district factory, which is devoted to liquid and index disinfectant devices, has the capacity to produce 9 million liters of disinfectant annually. Our Shanghai Jinshan district factory, which is devoted to tablet and powder form disinfectants, has the capacity to manufacture 300 metric tons of tablet and 180 metric tons of powder annually. Both of our factories have production cycles from formulation to finished product of one day. o Trained service personnel. We believe our sales personnel are thoroughly educated in our product lines which enable them to better meet the needs of our customers. o Reliability and speed of delivery. We believe our products have developed a reputation of good quality and effectiveness and our manufacturing capabilities enable us to product and ship products to our customers promptly thus allowing our customers the ability to better manage their purchasing dollars. o Customer service. Our customer service representatives participate in ongoing product training programs and we strive to respond to all customer inquiries within 24 hours. o Price. We have developed relationships with a number of raw material suppliers which enables us to keep our costs low and thereby offer prices to our customers which are very competitive. 16 Our primary competitors in the sale of chemical disinfectants are 3M and Ace Disinfection Factory Co., Ltd. The primary competitors for instrument disinfectants are Chengdu Kangaking Instrument Co., Ltd. and Hangzhou Yangchi Medicine Article Co., Ltd. and the primary competitors for chemical indicators are 3M and Shandong Xinhua Medical Instrument Co., Ltd. Domestic competition comes from regional companies which tend to offer products in small geographic areas and do not distribute their product lines throughout China. Our primary domestic competitors include: Competitor Products 3M: Hand disinfectant, skin and mucous disinfectant Ace: Skin and mucous disinfectant Chengdu Kangaking: medical equipment and devices Hangzhou Yangchi: sterilized Q-tip Shandong Xinhua: chemical indicators Our primary foreign competitor is 3M Company which has had a presence in China for more than 20 years. 3M Company entered the hand disinfection market at the end of 2004 and primarily offers products in the areas of index and control devices and disinfectant machines. At present, 3M Company has five products for use in operating rooms and its products are found in provincial capital cities of China such as Shanghai, Beijing, Guangzhou, Hangzhou, Nanjin, Chengdu and Xi'an. 3M Company's product line in China is very narrow with few overlapping products between 3M Company and our company. Another foreign competitor is Johnson & Johnson, which established operations in China in 1994. In China, Johnson & Johnson offers a variety of skin, hand, and medical equipment disinfectants. Prior to the recent initiatives by the government, disinfectant products were marketed based on pricing and despite the brand awareness of Johnson & Johnson; its products did not have widespread reception amongst the community. Furthermore, Johnson & Johnson does not offer a wide variety of disinfectant products in China. Due to the difficulties in attaining a critical mass Johnson & Johnson recently withdrew from the surgical disinfectant market in China and has refocused its efforts on the disinfection of medical devices. Government Regulations Our business and operations are located in the PRC. We are subject to local food, drug, environmental laws related to certification of manufacturing and distributing of disinfectants. We are also licensed by the Shanghai City Government to manufacture and distribute disinfectants. We are in substantial compliance with all provisions of those licenses and have no reason to believe that they will not be renewed as required by the applicable rules of Shanghai. In addition, our operations must conform to general governmental regulations and rules for private companies conducting business in China. 17 Pursuant to the July 2002 Ministry of Public Health 27th Order of Ministry of Health of the People's Republic of China, all disinfectant manufacturers in China must obtain a license to manufacture hygiene disinfectants. Prior to release, all disinfectant instruments must obtain the official hygiene permit document of Ministry of Public Health and the approval of the provincial hygiene administrative department. The implementation of these improved production standards and licenses has effectively decreased the competitiveness of small to mid size manufacturers with single product and inferior technical content. Presently we meet all standards initiated by this ordinance, and we have been granted 26 hygiene licenses by the Ministry of Public Health. We have filed applications for two additional products. We are also subject to various other rules and regulations, including the People's Republic of China Infectious Disease Prevention and Cure Law, Disinfection Management Regulation, Disinfection Technique Regulation, Disinfection Product Manufacturer Sanitation Regulation, and Endoscope Rinse and Disinfection Technique Manipulation Regulation. We believe we are in material compliance with all of the applicable regulations. PRC Legal System Since 1979, many laws and regulations addressing economic matters in general have been promulgated in the PRC. Despite development of its legal system, the PRC does not have a comprehensive system of laws. In addition, enforcement of existing laws may be uncertain and sporadic, and implementation and interpretation thereof inconsistent. The PRC judiciary is relatively inexperienced in enforcing the laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate law exists in the PRC, it may be difficult to obtain swift and equitable enforcement of such law, or to obtain enforcement of a judgment by a court of another jurisdiction. The PRC's legal system is based on written statutes and, therefore, decided legal cases are without binding legal effect, although they are often followed by judges as guidance. The interpretation of PRC laws may be subject to policy changes reflecting domestic political changes. As the PRC legal system develops, the promulgation of new laws, changes to existing laws and the preemption of local regulations by national laws may adversely affect foreign investors. The trend of legislation over the past 20 years has, however, significantly enhanced the protection afforded foreign investors in enterprises in the PRC. However, there can be no assurance that changes in such legislation or interpretation thereof will not have an adverse effect upon our business operations or prospects. Economic Reform Issues Since 1979, the Chinese government has reformed its economic systems. Many reforms are unprecedented or experimental; therefore they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. We cannot predict if this refining and readjustment process may negatively affect our operations in future periods. Over the last few years, China's economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have included devaluations of the Chinese currency, the Renminbi ("RMB"), restrictions on the availability of domestic credit, reducing the purchasing capability of certain of its customers, and limiting re-centralization of the approval process for purchases of some foreign products. These austerity measures alone may not succeed in slowing down the economy's excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets. 18 To date reforms to China's economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China's economic system will continue or we will not be adversely affected by changes in China's political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions. China's Accession into the WTO On November 11, 2001, China signed an agreement to become a member of the World Trade Organization ("WTO"), the international body that sets most trade rules, further integrating China into the global economy and significantly reducing the barriers to international commerce. China's membership in the WTO was effective on December 11, 2001. China has agreed, upon its accession to the WTO, to reduce tariffs and non-tariff barriers, remove investment restrictions, provide trading and distribution rights for foreign firms, and open various service sectors to foreign competition. China's accession to the WTO may favorably affect our business in that reduced market barriers and a more transparent investment environment will facilitate increased investment opportunities in China, while tariff rate reductions and other enhancements will enable us to develop better investment strategies for our clients. In addition, the WTO's dispute settlement mechanism provides a credible and effective tool to enforce members' commercial rights. Employees Likang employs approximately 163 full time employees, including our executive officers, as follows: DEPARTMENT NUMBER OF EMPLOYEES - ---------------------- -------------------------- Administrative center 7 Accounting 19 Production 73 Logistics 36 Sales and Marketing staff in Shanghai 19 Research and development 9 Total 163 - ---------------------- -------------------------- History of our Company We were incorporated in the state of Colorado on December 11, 1996. From our inception through December 28, 1999, we were involved in the business of acquiring, developing and operating oil and gas properties. On December 28, 1999, we sold 60% of our issued and outstanding common stock to HBOA.Com, Inc., a District of Columbia corporation ("HBOA-DC"). Pursuant to this stock sale, there was a change in our business and management team and we began to focus on HBOA's business, which was related to the sale of products and services to the owners of home based businesses through its Internet web site. 19 On May 31, 2000, HBOA-DC was merged with and into our wholly owned subsidiary, HBOA.Com, Inc., a Florida corporation ("HBOA-FL"). In June 2000, we began to develop our application service provider business, in addition to HBOA's web site. We focused on development of an Internet portal through which home based business owners, as well as commercial private label businesses, obtain the products, services, and information necessary to start, expand and profitably run their businesses. On November 10, 2000, our shareholders approved our proposal to change our name from Mizar Energy Company to HBOA Holdings, Inc. and to change our state of incorporation from Colorado to Florida and recorded a loss of approximately $258,000. On December 28, 2000, we formed a new subsidiary, Aerisys, Incorporated, a Florida corporation, to handle commercial private business. Effective as of July 18, 2003, we changed our name to Kirshner Entertainment & Technologies, Inc. On May 2, 2005, we closed a share exchange with all of the shareholders of Linkwell Tech in which we acquired 100% of the issued and outstanding shares of Linkwell Tech's common stock in exchange for 36,273,470 shares of our common stock, which at closing represented approximately 87.5% of the issued and outstanding shares of our common stock. As a result of the transaction, Linkwell Tech became our wholly owned subsidiary. Linkwell Tech was founded in June 2004. On June 30, 2004, Linkwell Tech acquired 90% of Likang through a stock exchange with Shanghai Likang Pharmaceuticals Technology Company, Limited, the then 90% shareholder of Likang. Shanghai Shanhai Group, an unaffiliated third party, owns the remaining 10% of Likang. Shanghai Shanhai Group is owned by Shanghai Shanhai Group Employee Share-holding Committee (16.25%) and Shanghai Baoshan District Dachang Town South Village Economic Cooperation Club (83.75%). Likang's officers and directors, Messrs. Xue Lian Bian and Wei Guan, own Shanghai Likang Pharmaceuticals Technology Company, Limited, owning 90% and 10%, respectively, of that company. The transaction in which Linkwell Tech acquired the 90% interest in Likang resulted in the formation of a U.S. holding company by Messrs. Bian and Guan as it did not result in a change in the underlying ownership interests of Likang. Our then officers and directors resigned at the closing of the share exchange and Messrs. Wei Guan and Xue Lian Bian, who were the officers and directors of Linkwell Tech, were appointed our officers and directors. In connection with the share exchange and to satisfy all outstanding obligations and indebtedness owed by our company to our former CEO and certain third parties, Linkwell Tech provided us $175,000 which we provided to our former CEO to be used by him to satisfy these obligations. We also issued our former CEO 1,400,000 shares of our common stock. In July 2005, we changed our name to Linkwell Corporation. As described later in this annual report under Item 6. Management's Discussion and Analysis or Plan of Operation - Sale of Aerisys Incorporated, in February 2006 we sold our interest in that subsidiary to our former CEO in exchange for the assumption of all liabilities related to it. In February 2006, we sold 100% of the stock of Aerisys to Mr. Gary Verdier, our former CEO, in exchange for the assumption of all liabilities and obligation of Aerisys. Prior to the share exchange agreement with Linkwell Tech in May 2005, Aerisys had represented our sole operations. Aerisys marketed and sold the Aerisys Intelligent Community (TM), a web-based software program and private, browser-based intranet product that allows schools to collaborate with parents and faculty each day on classroom homework, assignments, critical dates, team priorities and school news in a private forum, primarily to K through 12 private schools. We had not been able to improve sales or business opportunities for Aerisys since May 2005. RISK FACTORS Before you invest in our securities, you should be aware that there are various risks. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose your entire investment in our company. Risks Related to our Company We engage in a number of material transactions with related parties which could result in a conflict of interest involving our management. 20 We are materially dependent on certain related party transactions in the ongoing conduct of our business. Sales to related parties, including a company owned by our officers and directors which is the primary distributor of our products, represented approximately 36% of our sales in fiscal 2005 and approximately 44.5% of our accounts receivable at December 31, 2005. In addition, we lease our principal executive officers from the minority shareholder of our Likang subsidiary and an affiliated company of this minority shareholder both supplies us with raw materials and acts as a contract manufacturer for certain of our products. We have also engaged in an number of other related party transactions including extending a working capital loan to an affiliated entity and purchasing real property from that entity. These affiliated transactions may from time to time result in a conflict of interest for our management. Because these transactions are not subject to the approval of our shareholders, investors in our company are wholly reliant upon the judgment of our management in these related party transactions. We will need to raise additional capital to expand our operations in future periods. If we cannot raise sufficient capital, our ability to implement our business strategies and continue to expand will be at risk. We want to build an additional manufacturing line and upgrade our manufacturing facilities and technologies, in order to expand our disinfection products. Based upon our preliminary estimates this will require capital and other expenditures of approximately USD $1 million. Although we had cash on hand of approximately $1,460,000 at December 31, 2005, these funds are not sufficient to fund the additional line and upgrade our manufacturing facilities and technologies as well as providing working capital necessary for our ongoing operations and obligations. We will need to raise additional working capital to complete this project. We do not presently have any external sources of capital and will in all likelihood raise the capital in a debt or equity offering. If we raise the necessary capital through the issuance of debt, this will result in increased interest expense. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing shareholders will be reduced and those shareholders may experience significant dilution. In addition, new securities may contain certain rights, preferences or privileges that are senior to those of our common stock. We may be unable to secure acceptable financing to fund this project on terms which are suitable to us, if at all. Our ability to continue to implement our growth strategy could suffer if we are unable to raise the additional funds on acceptable terms which will have the effect of limiting our ability to increase our revenues in the future. The management of our company is located in the PRC and we are materially dependent upon advisory services of a U.S. company. None of the current members of our management have any experience in U.S. public companies and these individuals are not fluent in English. We have engaged China Direct Investments, Inc. to provide us with various advisory and consulting services, including U.S. business methods and compliance with SEC disclosure requirements. We selected China Direct Investments, Inc. to provide these services to us in part because its staff includes Chinese-speaking individuals with experience in the operation and regulatory framework applicable to U.S. public companies. Until such time as we are able to expand our board of directors to include English-speaking individuals who have experience with the operation and regulatory framework applicable to U.S. public companies, we are materially dependent upon our relationship with China Direct Investments, Inc. Our contract with this company expires in August 2006, subject to a 12-month renewal upon the mutual consent of the parties. If for any reason China Direct Investments, Inc. should fail to provide the contracted services at the anticipated levels or fails to extend its services and we have not added members to our board of directors with the requisite experience we may be unable to prepare and file reports as required by the Securities Exchange Act of 1934 on a timely basis which could lead to our common stock being removed from the OTCBB. In this event, your ability to liquidate your investment would be negatively impacted and you could lose your entire investment in our company. 21 Certain agreements to which we are a party and which are material to our operations lack various legal protections which are customarily contained in similar contracts prepared in the United States. We are a Chinese company and all of our business and operations are conducted in China. We are a party to certain material contracts, including an agreement for the lease for our principal offices and manufacturing facility. While these contracts contain the basic business terms of the agreements between the parties, these contracts do not contain certain provisions which are customarily contained in similar contracts prepared in the U.S., such as representations and warranties of the parties, confidentiality and non-compete clauses, provisions outlining events of defaults, and termination and jurisdictional clauses. Because our material contracts omit these types of clauses, notwithstanding the differences in Chinese and U.S. laws, we may not have the same legal protections as we would if the contracts contained these additional provisions. We anticipate that contracts we enter into in the future will likewise omit these types of legal protections. While we have not been subject to any adverse consequences as a result of the omission of these types of clauses, and we consider the contracts to which we are a party to contain all the material terms of our business arrangements with the other party, future events may occur which lead to a dispute under agreements which could have been avoided if the contracts were prepared in conformity with U.S. standards. Contractual disputes which may arise from this lack of legal protections will divert management's time from the operation of our business and require us to expend funds attempting in settling a possible dispute. This possible diversion of management time will limit the time our management would otherwise devote to the operation of our business, and the diversion of capital could limit the funds we have available to pay our ongoing operating expenses. Each of our product groups operate in highly competitive businesses. Each of our product groups is subject to competition from other manufacturers of similar products. There are approximately 1,000 manufacturers of similar disinfectant products in China, but only approximately 30 manufacturers, including our company, operate on a continuous basis with the remainder of the companies periodically entering the market in times of increased demand. While we believe we are one of the leading manufacturers of disinfectant products in the PRC, from time to time there is a sporadic oversupply of these products which can adversely impact our market share and competitive position in this product group. As a result, we may not be able to effectively compete in our product segments which could have the effect of limiting our ability to sustain our current level of operations or grow our revenues in future periods. Because of the specialized, technical nature of the business, we are highly dependent on certain members of management, as well as our marketing, engineering and technical staff. The loss of the services of our current management and skill employees could have a material and negative effect on our ability to effectively pursue our business strategy. In addition to manufacturing high volumes of our products and developing new products, we must attract, recruit and retain a sizeable workforce of technically competent employees, including additional skilled and experienced managerial, marketing, engineering and technical personnel. If we are unable to do so, our ability to grow our business and increase our revenues could be limited. If we experience customer concentration, we may be exposed to all of the risks faced by our remaining material customers. For the fiscal year ended December 31, 2005 revenues from one customer, which is an affiliate, represented approximately 36% of our total net revenues. Unless we maintain multiple customer relationships, it is likely that we will experience periods during which we will be highly dependent on a limited number of customers. Dependence on a few customers could make it difficult to negotiate attractive prices for our products and could expose us to the risk of substantial losses if a single dominant customer stops conducting business with us. Moreover, to the extent that we are dependent on any single customer, we are subject to the risks faced by that customer to the extent that such risks impede the customer's ability to stay in business and make timely payments to us. We depend on factories to manufacture our products, which may be insufficiently insured against damage or loss. Our results of operations and financial condition are currently solely dependent on our subsidiaries' factories in China. We do not currently maintain insurance to protect against damage and loss to our facilities and other leasehold improvements. Therefore, any material damage to, or the loss of, any of our facilities due to fire, severe weather, flooding or other cause, would not be covered by an insurance company. If the damage or loss is large enough, it would have a material and negative effect on our financial condition. If the damage was significant, we could be forced to stop operations until such time as the faculties could be repaired. 22 Our operations are subject to government regulation. If we fail to comply with the applicable regulations, our ability to operate in future periods could be in jeopardy. We are subject to various state and local environmental laws related to our business. We are subject to local food, drug, environmental laws related to certification of manufacturing and distributing of any disinfectant. We are also licensed by the Shanghai City Government to manufacture and distribute disinfectants. While we are in substantial compliance with all provisions of those registrations, inspections and licenses and have no reason to believe that they will not be renewed as required by the applicable rules of the Central Government and the Shandong Province, any non-renewal of these authorities could result in the cessation of our business activities. We may not have sufficient protection of certain of our intellectual property. We utilize certain technologies in the purification of raw material used in our products which are proprietary in nature. To protect our proprietary rights, generally we rely on confidentiality agreements with employees and third parties, and agreements with consultants, vendors and customers, although we have not signed such agreements in every case. Despite such protections, a third party could, without authorization, utilize our propriety technologies without our consent. The unauthorized use of this proprietary information by third parties could adversely affect our business and operations as well as any competitive advantage we may have in our market segment. It is possible that our agreements with employees, consultants and others who participate in the production of our products will be breached. We may not have adequate remedies for any breach and our proprietary technologies could become known or independently developed by competitors, in which event our ability to effectively compete could be in jeopardy. We have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have reduced protections against interested director transactions, conflicts of interest and other matters. We are not subject to any law, rule or regulation requiring that we adopt any of the corporate governance measures that are required by the rules of national securities exchanges or The Nasdaq Stock Market such as independent directors and audit committees. It is possible that if we were to adopt some or all of the corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by independent directors and that policies had been implemented to define responsible conduct. Prospective investors should consider our current lack of corporate governance measures in formulating their investment decisions The dividend rate of our Series B 6% Cumulative Convertible Preferred Stock could increase to 20% per annum which would reduce the amount of operating capital available to us. The designations, rights and preferences of our Series B 6% Cumulative Convertible Preferred Stock provide that the annual dividend increases from 6% to 20% if an event of default has occurred. Based upon the presently outstanding shares, this would increase our annual dividend payments from $90,000 to $300,000, a 233% increase. This increase would reduce the amount of working capital we otherwise might have available to pay our ongoing operating expenses and grow our company. Risks Related to Doing Business in China Our operations are located in the PRC and are subject to changes resulting from the political and economic policies of the Chinese government. Our business operations could be restricted by the political environment in the PRC. The PRC has operated as a socialist state since 1949 and is controlled by the Communist Party of China. In recent years, however, the government has introduced reforms aimed at creating a "socialist market economy" and policies have been implemented to allow business enterprises greater autonomy in their operations. Changes in the political leadership of the PRC may have a significant effect on laws and policies related to the current economic reforms program, other policies affecting business and the general political, economic and social environment in the PRC, including the introduction of measures to control inflation, changes in the rate or method of taxation, the imposition of additional restrictions on currency conversion and remittances abroad, and foreign investment. Moreover, economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increases of such disparities could affect the political or social stability of the PRC. Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development of China, the future direction of these economic reforms is uncertain and the uncertainty may decrease the attractiveness of our company as an investment, which may in turn result in a decline in the trading price of our common stock. 23 The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. The PRC recently has permitted provincial and local economic autonomy and private economic activities. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in the PRC or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties. Future inflation in China may inhibit economic activity in China. In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past 10 years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by the PRC government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation has been more moderate since 1995, high inflation may in the future cause the PRC government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China. Any actions by the PRC government to regulate growth and contain inflation could have the effect of limiting our ability to grow our revenues in future periods. Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could interrupt our operations. A renewed outbreak of SARS or another widespread public health problem in China, where all of our revenue is derived, and in Shanghai, where our operations are headquartered, could have a negative effect on our operations. Our operations may be impacted by a number of health-related factors, including the following: * quarantines or closures of some of our offices which would severely disrupt our operations, * the sickness or death of our key officers and employees, or * a general slowdown in the Chinese economy. Any of the foregoing events or other unforeseen consequences of public health problems could result in a loss of revenues in future periods and could impact our ability to conduct our operations as they are presently conducted. If we were unable to continue our operations as they are now conducted, our revenues in future periods would decline and our ability to continue as a going concern could be in jeopardy. If we were unable to continue as a going concern, you could lose your entire investment in our company. Restrictions on currency exchange may limit our ability to receive and use our revenues effectively. Because all of our revenues are in the form of Renminbi, any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies, after providing valid commercial documents, at those banks authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to government approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect to foreign exchange transactions. We may be unable to enforce our rights due to policies regarding the regulation of foreign investments in China. 24 The PRC's legal system is a civil law system based on written statutes in which decided legal cases have little value as precedents, unlike the common law system prevalent in the United States. The PRC does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion and variation, and may be subject to influence by external forces unrelated to the legal merits of a particular matter. China's regulations and policies with respect to foreign investments are evolving. Definitive regulations and policies with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published. Statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad interpretation and discretion and to be modified, perhaps on a case-by-case basis. The uncertainties regarding such regulations and policies present risks which may affect our ability to achieve our business objectives. If we are unable to enforce any legal rights we may have under our contracts or otherwise, our ability to compete with other companies in our industry could be limited which could result in a loss of revenue in future periods which could impact our ability to continue as a going concern. It may be difficult for shareholders to enforce any judgment obtained in the United States against us, which may limit the remedies otherwise available to our shareholders. All of our assets are located outside the United States and all of our current operations are conducted in China. Moreover, all of our directors and officers are nationals or residents of China. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for our shareholders to effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the courts of China would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities law of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof. Risks Related to our Stock Provisions of our articles of incorporation and bylaws may delay or prevent a take-over which may not be in the best interests of our shareholders. Provisions of our articles of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our shareholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the Nevada Revised Statutes also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation's disinterested shareholders. In addition, our articles of incorporation authorize the issuance of up to 10,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our Board of Directors, of which no shares are currently outstanding. Our Board of Directors may, without shareholder approval, issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock. 25 Our stock price will fluctuate and could subject our company to litigation. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond its control. These factors include: * quarterly variations in operating results; * changes in accounting treatments or principles; * additions or departures of key personnel; * stock market price and volume fluctuations of publicly-traded companies in general and * Chinese-based companies in particular; and * general political, economic and market conditions. Because our stock currently trades below $5.00 per share, and is quoted on the OTC Bulletin Board, our stock is considered a "penny stock" which can adversely affect its liquidity. As the trading price of our common stock is less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction. SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market. We have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have more limited protections against interested director transactions, conflicts of interest and similar matters. Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges and Nasdaq are those that address board of directors' independence, audit committee oversight, and the adoption of a code of ethics. Because our stock is not listed on an exchange or quoted on Nasdaq, we are not required to adopt these corporate governance standards. While our board of directors has adopted a Code of Business Conduct and Ethics, our Board has not established Audit and Compensation Committees and we have not adopted all of the corporate governance measures which we might otherwise have been required to adopt if our securities were listed on a national securities exchange or Nasdaq. It is possible that if we were to adopt all of these corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions. 26 ITEM 2. DESCRIPTION OF PROPERTY Our facilities include our principal executive offices, located at No. 476 Hutai Branch Road, Baoshan District, Shanghai, China, and our two manufacturing facilities are located at 1104 Jiatang Road, Jiading District, Shanghai, 201807 and 2058 Linqiao Road, Zhuhang Town, Jinshan District, Shangahi, 201506. We own all of the manufacturing equipment in both of our factories. We lease our principal executive office building and warehouse space, which consists of approximately 14,000 square feet, from Shanghai Shanhai Group, an unaffiliated third party, under leases expiring in December 2010 for an annual rental of approximately $32,000. Until February 2006, we leased approximately 21,500 square feet of manufacturing space from Shanghai Likang Pharmaceutical Technology Company, Limited, an affiliate, under a lease expiring December 2006 for an annual rent of approximately $11,500. During the fourth quarter of fiscal 2005 we recorded the purchased this building, which includes an assignment of the land use permit, for $333,675. See Item 12. Certain Relationships and Related Transactions appearing later in this annual report. We lease approximately 4,300 square feet of manufacturing space from Shanghai Jinshan Zhuhang Plastics Lamps Factory, an unaffiliated third party, under a lease expiring in December 2006 for an annual rent of approximately $3,125. We also lease an additional approximate 1,480 square feet of warehouse space from Shanghai Henglian Industrial Co. Limited, an unaffiliated third party, under two leases which expire between September and October 2007 for an annual rental of approximately $37,410. ITEM 3. LEGAL PROCEEDINGS We are not a party to any material litigation presently pending nor, to the best of our knowledge, have any such proceedings been threatened, except as follows. In January 2004, the SEC commenced an informal inquiry of our company. At this time we have not received any further information on this matter and are therefore uncertain of the status of the SEC's informal investigation. We are not a party to any pending legal proceedings and, to our knowledge, none of our officers, directors or principal stockholders are party to any legal proceeding in which they have an interest adverse to us. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the OTCBB. On March 24, 2005 our symbol was changed from KSHR to LWLL in connection with a 1:10 reverse split of our common stock effective on that date. The reported high and low bid prices for the common stock as reported on the OTCBB are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions. 27 High Low Fiscal 2004 First quarter ended March 31, 2004 $0.085 $0.02 Second quarter ended June 30, 2004 $0.06 $0.01 Third quarter ended September 30, 2004 $0.02 $0.003 Fourth quarter ended December 31, 2004 $0.02 $0.002 Fiscal 2005 First quarter ended March 31, 2005 $.20 $.01 Second quarter ended June 30, 2005 $.40 $.11 Third quarter ended September 30, 2005 $.32 $.04 Fourth quarter ended December 31, 2005 $.74 $.148 Fiscal 2006 First quarter ended March 31, 2006 $.26 $.151 On April 10, 2006, the last sale price of our common stock as reported on the OTCBB was $0.28. As of March 15, 2006, there were approximately 160 record owners of our common stock. Dividend Policy We have never paid cash dividends on our common stock. Payment of dividends will be within the sole discretion of our Board of Directors and will depend, among other factors, upon our earnings, capital requirements and our operating and financial condition. At the present time, our anticipated financial capital requirements are such that we intend to follow a policy of retaining earnings in order to finance the development of our business. While we have no current intention of paying dividends on our common stock, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. Recent Sales of Unregistered Securities None. Securities Authorized for Issuance under Equity Compensation Plans The following table sets forth securities authorized for issuance under our 2001 Equity Compensation Plan, our 2005 Equity Compensation Plan and any compensation plan not approved by our shareholders as of December 31, 2005.
Number of Weighted Number of securities to be average securities remaining issued upon exercise available for future exercise of price of issuance under equity of outstanding outstanding compensation plans options,warrants options, (excluding securities and rights (a) warrants reflected in column and rights(b) (a)) Plan category 2005 Equity Compensation Plan 0 n/a 3,000,000 Equity compensation plans not approved by shareholders 0 n/a n/a Non-Qualified Stock Option Plan 0 n/a 0
28 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Overview In May 2005, we closed a share exchange agreement with all of the shareholders of Linkwell Tech under which we acquired 100% of the issued and outstanding shares of Linkwell Tech's common stock in exchange for 36,273,470 shares of our common stock, which at closing represented approximately 87.5% of the issued and outstanding shares of our common stock. As a result of the transaction, Linkwell Tech became our wholly owned subsidiary. In June, 2004, prior to our share exchange with Linkwell Tech, Linkwell Tech acquired 90% of Likang through a stock exchange with Shanghai Likang Pharmaceuticals Technology Company, Limited, the then 90% shareholder of Likang. Shanghai Likang Pharmaceuticals Technology Company, Limited is owned by Messrs. Xuelian Bian and Wei Guan, our officer, directors and principal shareholders. Shanghai Shanhai Group, an unaffiliated third party, owns the remaining 10% of Likang. The transaction in which Linkwell Tech acquired the 90% interest in Likang resulted in the formation of a U.S. holding company by Messrs. Bian and Guan as it did not result in a change in the underlying ownership interests of Likang. For financial accounting purposes, the reverse merger transaction in which we acquired Linkwell Tech was treated as a recapitalization of our company with the former shareholders of the company retaining approximately 12.5% of the outstanding stock. We regard Likang's business of disinfectant products for the commercial medical industry as the primary segment of our business. Our consolidated financials statements included elsewhere in this prospectus for the periods after the date of the stock exchange between our company and Linkwell Tech reflect the change in the capital structure of our company due to the recapitalization. The consolidated financial statements for the fiscal year ended December 30, 2005 reflect the operations of our company including Linkwell Tech and Likang for the periods presented while the results of operations for the fiscal year ended December 31, 2004 are those of Likang. Since 1988 we have developed, manufactured and distributed disinfectant health care products primarily to the medical industry in China. In the last few years China has witnessed a variety of public health crises, such as the outbreak of SARS, which demonstrated the need for increased health standards in China. In response, beginning in 2002 the Chinese government has undertaken various initiatives to improve public health and living standards, including continuing efforts to educate the public about the need for proper sanitation procedures and the establishment of production standards for the disinfectant industry in China. As a result of this heightened license and permit system, all disinfectant manufacturers must comply with "qualified disinfection product manufacturing enterprise requirements" established by the Ministry of Public Health. The requirements include standards for both hardware; including facilities and machinery, and software; including the technology to monitor the facilities, as well as the knowledge and capability of both the production staff and quality control procedures. Following the adoption of the industry standards in 2002, we have been granted 26 hygiene licenses by the Ministry of Public Health. 29 We believe that the government standards adopted in July 2002 have increased the barriers to entry for competitors in the disinfectant industry in China. The implementation of these improved production standards and license requirements has effectively decreased the competitiveness of small to mid size manufacturers since the new standards are especially difficult for companies with limited product offerings and inferior technical content. In addition, prior to the adoption of industry standards, disinfectant products were generally marketed and sold based on price as opposed to quality. We believe that as a result of the adoption of industry standards, the marketplace is evolving to a more stringent focus on product quality which we believe will enable us to increase our base of commercial customers thereby increasing our revenues. Historically our focus has been on the commercial distribution of our products. Our customers include hospitals, medical suppliers and distribution companies throughout China. Recently we have made efforts to expand our distribution reach to the retail market. We have repackaged certain of our commercial disinfectant products for sale to the consumer market and have begun to expand our customer base to include hotels, schools, supermarkets, and drugstores. By virtue of the Chinese government's continuing focus on educating the Chinese population about the benefits of proper sanitation procedures, we believe that another key to increasing our revenues is the continued expansion of the retail distribution of our products. The disinfectant industry in China is an emerging industry and the industry is populated with small, regional companies. We estimate that there are in excess of 1,000 manufacturers and distributors of disinfectant products in China; however, most domestic competitors offer a limited line of products and there are few domestic companies with a nationwide presence. We believe that our national marketing and sales presence throughout all 22 provinces, as well as four autonomous regions, and four municipalities of China gives us a competitive advantage over many other disinfectant companies in China and will enable us to leverage the brand awareness for products with commercial customers to the retail marketplace. Our present manufacturing facilities and production capacities are sufficient for the foreseeable future, and we believe that we otherwise have the assets and capital available to us necessary to enable us to increase our revenues in future periods as the overall market for disinfectant products in China continues to increase. During fiscal year 2006, we will continue to focus our efforts on developing a retail market for our products, as well as expanding our traditional base of commercial customers. In this regard, we have allocated approximately $300,000 from our recent private offering to be used towards expanded marketing of our products in the PRC and approximately $400,000 for costs associated with investigating the feasibility of expanding our sales outside the PRC to the U.S. In addition, we may also consider the possible acquisition of independent sales networks which could be used to increase our product distribution as well as smaller, regional companies in our industry. While we have allocated approximately $400,000 of proceeds from our recent private offering for acquisitions, we have not identified any potential acquisition targets. Sale of Aerisys Incorporated Prior to the transaction with Linkwell, our wholly-owned subsidiary, Aerisys Incorporated, had represented our sole operations. Aerisys marketed and sold the Aerisys Intelligent Community (TM), a web-based software program and private, browser-based intranet product that allows schools to collaborate with parents and faculty each day on classroom homework, assignments, critical dates, team priorities and school news in a private forum, primarily to K through 12 private schools. Revenues from Aerisys Incorporated represented slightly less than 1% of our total net revenues for the year ended December 31, 2005, and we were not able to improve sales or business opportunities for Aerisys since May 2005. In February 2006 we sold 100% of the stock of Aerisys Incorporated to Mr. Gary Verdier, our former CEO, in exchange for assumption of all liabilities and obligation of Aerisys Incorporated. 30 Results of Operations Fiscal year ended December 31, 2005 ("Fiscal 2005") as compared to the fiscal year ended December 31, 2004 ("Fiscal 2004")
Fiscal Fiscal $ % 2005 2004 Change Change - ----------------------------------------------------------------------------------------------------------- Net revenues $ 5,465,933 $4,422,522 $ 1,043,411 23.6% Cost of sales 3,329,444 3,049,764 $ 279,680 9.2% Selling expenses 331,258 258,148 $ 73,110 28.3% G&A expenses 878,930 426,532 $ 452,398 106.0% Total operating expenses 1,210,188 684,680 $ 525,508 76.7% Operating income 926,301 688,078 $ 238,223 34.7% Total other (expense) ( 91,839) ( 19,782) $ 72,057 364.2% Net income 544,129 502,708 $ 41,421 8.4% Deemed preferred stock dividends (1,800,276) 0 $ 1,800,276 100% Net income (loss) to common shareholders $(1,256,147) $ 502,708 $ (1,758,855) 350%
Other key indicators: Fiscal 2005 Fiscal 2004 % of change ----------- ---------- -------- Cost of sales as a percentage of revenues 60.9% 69.0% -8.1% Gross profit margin 39.1% 31.0% +8.1% Selling expenses as a percentage of revenues 6.1% 5.8% +0.3% G&A expenses as a percentage of revenues 16.1% 9.6% +6.5% Total operating expenses as a percentage of revenues 22.1% 15.5% +6.6% Net revenues Net revenues for fiscal 2005 were $5,465,933 as compared to net revenues of $4,422,522 for fiscal 2004, an increase of $1,043,411 or approximately 24%. Included in our net revenues for fiscal 2005 were revenues of $1,933,043 from sales of our products to Shanghai Likang Pharmaceuticals Technology Company, Limited, an affiliated entity, an increase of $234,120, or approximately 14%, from fiscal 2004. Also included in our net revenues for fiscal 2005 were revenues of $23,987 from sales of our products to Shanghai Likang Meirui Pharmaceuticals High-Tech Co., Ltd., an affiliate, a decrease of $43,369, or approximately 64%, from fiscal 2004. We believe our increase in our net revenues in fiscal 2005 was attributable to a recent surge in demand for disinfectant products. Recent health scares such as SARS and the avian flu have increased the public awareness of health standards in China. In response the Chinese government has implemented a series of initiatives to establish minimum health standards. As a result, public demand for disinfectant products has increased. We cannot be assured that demand will continue to increase. Additionally Linkwell introduced new products such as Jifro 4% Chlorhexidine Gluconate, Dianerkang, 2% glutaraldehyde disinfectant, and the revised 84' disinfectant. Initially, these products have been received favorably by the public. There is no assurance that these products will continue to witness increased public demand. Cost of sales Cost of sales includes raw materials and manufacturing costs, which includes labor, rent and an allocated portion of overhead expenses such as utilities directly related to product production. For fiscal 2005, cost of sales amounted to $3,329,444 or approximately 61% of net revenues as compared to cost of sales of $3,049,764 or approximately 69% of net revenues for fiscal 2004. Historically, our costs of sales is attributable approximately 65% to raw material costs and approximately 35% to manufacturing costs. We purchase raw materials from six primary suppliers and we have signed purchase contracts with these suppliers in an effort to ensure a steady supply of raw materials. We also purchase raw materials and finished product from Shanghai Likang Meirui Pharmaceutical High-Tech Co. Ltd., an affiliate. These purchases totaled $48,489 and $389,400 for fiscal 2005 and fiscal 2004, respectively. We have not historically experienced a fluctuation in raw material prices and do not anticipate that the prices will vary much during fiscal 2006. Included in our overhead costs are rent on our manufacturing facilities which included a building we leased from Shanghai Likang Pharmaceuticals Technology Company, Limited, an affiliate, for approximately $11,500 annually. We experienced an increase in overhead costs such as utilities and rent during fiscal 2005 as compared to fiscal 2004. As a result of our purchase which was recorded in the fourth quarter of fiscal 2005 of facility we leased from an affiliate, we expect rent expense to decrease, however we are unable to anticipate if the balance of these overhead costs will continue to increase in fiscal 2006. 31 Gross profit Gross profit for fiscal 2005 was $2,136,489 or approximately 39% of net revenues, as compared to $1,372,758 or approximately 31% of revenues for the fiscal 2004. The gross profit reflects an overall increase in our sales prices as we expand into new markets. For example, our Ai'ershi disinfectant tablets are sold in Shanghai for approximately $.83 per bottle. However in newer markets such as DongBei Province, Ai'ershi disinfectant tablets are sold at approximately $1.64 per bottle. An'erdian skin disinfectant sold for approximately $.36 per bottle in BeiJing and Shanghai. We currently sell this product in western cities such as ChongQing and XiAn at approximately $.49 per bottle, an increase of 36%. Operating expenses Total operating expenses for fiscal 2005 were $1,210,188, an increase of $525,508, or approximately 77%, from total operating expenses in fiscal 2004 of $684,680. This increase included the following: * For fiscal 2005, selling expenses amounted to $331,258 as compared to $258,148 for fiscal 2004, an increase of $73,110 or approximately 28%. This increase is attributable to increased local sales tax costs and commissions associated with our increased revenues. We pay local sales tax to local authorities upon sale of product to customers. Additionally, in 2005, we incurred costs of approximately $14,000 in connection with sales training conferences. Selling expenses as a percentage of revenues remained relatively constant at approximately 6%. We expect our selling expenses to increase as our revenues increase and expect to spend increased funds on adverting and promotion of our products as well as sales training. We have set aside approximately $300,000 of the proceeds from our recent private placement for increased marketing of our products in the PRC during fiscal 2006. * For fiscal 2005, general and administrative expenses were $878,930 as compared to $426,532 for fiscal 2004, an increase of $452,398, or approximately 106% and included the following: o We incurred professional fees of approximately $67,000 in connection with the audit of our financials statements. Additionally, we experienced an increase in professional fees related to our corporate SEC filings, o We incurred consulting fees in 2005 of $153,311 substantially related to the issuance of common stock for business development and management services related to our administrative operations in the United States. We expect these costs to increase in 2006 due to our business development efforts in the United States, o In 2005, salaries and wages and related benefits increased by approximately $48,000 to $191,935 in 2005 from $144,227 in 2004 due to the hiring of additional employees, and o We incurred additional operating expenses associated with overall price increases, increased telephone and communications usage, and increase travel and entertainment. Included in our general and administrative expenses is rent expense that we pay on our principal executive offices warehouse space which we lease from Shanghai Shanhai Group, an affiliate, for approximately $32,000 a year. We anticipate that general and administrative expenses will continue to increase during fiscal 2006 as a result of increased professional fees related to audit costs and our registration statement. In addition, we have allocated $400,000 from the proceeds of our recent private placement for costs, including market research, related to the possible expansion of the market for our products into the U.S. 32 Income from operations We reported income from operations of $926,301 for fiscal 2005 as compared to income from operations of $688,078 for fiscal 2004, an increase of $238,223 or approximately 35%. Other income (expense) For fiscal 2005 total other expenses amounted to $91,839 as compared to $19,782 for fiscal 2004, an increase of $72,057. This change is primarily attributable to: * We recognized a registration rights penalty in fiscal 2005 of $44,000 for which we did not have a comparable expense in fiscal 2004. In the terms of our sale of shares of our Series B 6% Cumulative Convertible Preferred Stock and common stock purchase warrants in fiscal 2005 we agreed to file a registration statement covering the shares of our common stock underlying those securities. This non-cash expense represents the possible payment of liquidated damages if the registration statement of which this prospectus is a part is not declared effective by June 28, 2006, * Interest expense - related party, represents interest due Shanghai Shanhai Company, Likang's minority shareholder, on a demand loan in the principal amount of $161,533 made to Likang for working capital, and * Interest expense was $42,720 as compared to $29,359 for fiscal 2004, an increase of $13,361 due to increased borrowings during fiscal 2005. Income before discontinued operations, income taxes and minority interest Our income before discontinued operations, income taxes and minority interest increased by $166,166 for fiscal 2005 as compared to fiscal primarily as a result of increased net revenues. Discontinued operations In January 2006, we sold 100% of the capital stock of our Aerisys subsidiary to its former CEO in exchange for an assumption of all liabilities related to it. The loss from discontinued operations in fiscal 2005 represents the revenues from that subsidiary less the operating and non-operating expenses related to it. Minority interest For fiscal 2005, we reported a minority interest in income of $92,339 as compared to $55,856 for fiscal 2004. The minority interest is attributable to Likang's minority shareholder, and had the effect of reducing our net income. 33 Net income As a result of these factors, we reported net income of $544,129 for fiscal 2005 as compared to net income of $502,708 for fiscal 2004. Deemed preferred stock dividends During fiscal 2005, we recorded a deemed preferred stock dividend of $1,800,276 which relates to our Series A Convertible Preferred Stock ($300,276) and our Series B 6% Cumulative Convertible Preferred Stock ($1,500,000). This non-cash expense related to the beneficial conversion features of those securities and is recorded with a corresponding credit to paid in capital. Net income (loss) attributable to common shareholders We reported a net loss attributable to common shareholders of $(1,256,147) for fiscal 2005 as compared to net income attributable to common shareholders of $502,078 in fiscal 2004. This translates to an overall per-share loss available to shareholders of ($.03) for fiscal 2005 compared to per-share income of $.02 for fiscal 2004. Liquidity and Capital Resources Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. The following table provides certain selected balance sheet comparisons between December 31, 2005 and December, 2004: December 31, $ of % of ----------------------------------------------- 2005 2004 Change Change ----------------------------------------------- Working capital $ 2,423,997 $ 849,304 $ 1,574,693 +185.4% Cash $ 1,460,078 $ 467,859 $ 992,219 +212.0% Accounts receivable, net $ 1,347,163 $ 1,099,154 $ 248,009 + 22.6% Inventories $ 968,224 $ 941,311 $ 26,913 + 2.9% Prepaid expenses $ 81,750 $ 78,242 $ 3,508 NM Due from related parties $ 972,370 $ 261,304 $ 711,066 +272.5% Total current assets $ 4,839,541 $ 2,847,870 $ 1,991,671 + 69.9% Property and equipment, net $ 686,234 $ 254,281 $ 431,953 +170.0% Loans payable $ 628,869 $ 301,933 $ 326,936 +108.0% Loans payable - related $ 161,533 $ 0 $ 161,533 +100.0% Accounts payable and accrued expenses $ 1,400,704 $ 1,191,554 $ 209,150 +17.6% Advances from customers $ 126,199 $ 246,837 $ (120,638) -48.9% Total current liabilities $ 2,415,544 $ 1,998,566 $ 416,978 +20.9% Total liabilities $ 2,415,544 $ 2,421,271 $ (5,727) - NM NM = not meaningful At December 31, 2005, we had a cash balance of $992,219. As of December 31, 2005, our cash position by geographic area is as follows: United States $1,224,683 China 235,395 $1,460.078 Our working capital position increased to $2,423,997 at December 31, 2005 from $849,304 at December 31, 2004. This increase in working capital is primarily attributable to an increase in our current assets which reflects proceeds we received during fiscal 2005 from the sale of equity as well as increases in accounts receivable resulting from our increased sales in fiscal 2005, and an increase in the amount due us from related parties at December 31, 2005 as described below. The increase in our current assets of $1,991,671 at December 31, 2005 as compared to December 31, 2004 was offset by an increase in our current liabilities of $416,978 at December 31, 2005 as compared to December 31, 2004. The increase in our current liabilities is primarily attributable to increased borrowings during fiscal 2005 of approximately $327,000 which was used to fund equipment purchases as well as reclassification of certain existing loans to current liabilities as a result of their due dates coupled with higher accounts payable and accrued expenses and related party payables which are the result of an increase in working capital requirements. 34 At December 31, 2005, our inventories of raw materials, work in process and finished goods, before a reserve for obsolete inventory totaled $1,090,801, an increase of $149,490, or approximately 16%, from $941,311 at December 31, 2004. For fiscal 2005 we reserved $122,577 for possible obsolesces of inventories; we did not have a similar reserve in fiscal 2004. Our management determined the reserve was appropriate based upon its internal analysis of our sales and anticipated customer demand. During fiscal 2005 our inventory turnover was approximately 3.49 as compared to approximately 4.39 in fiscal 2004. This decrease in inventory turn was a result of an increase in average inventory on hand in 2005 compared to 2004, We expect to maintain higher inventory levels to accommodate for anticipated future sales growth as well as a wider variety of products. At December 31, 2005 our accounts receivable, allowance for doubtful accounts was $13,343 as compared to $37,050 at December 31, 2004 and reflects our best estimate of probable losses. During fiscal 2005 the average day outstanding for non-related party accounts receivable remained constant from fiscal 2004 at approximately 90 days and during fiscal 2005 the related party accounts receivable are generally outstanding for approximately 120 days. Occasionally we will request a customer prepaid an order prior to shipment. At December 31, 2005 our balance sheet reflected advances from customers of $126,199. At December 31, 2005 related parties owed us $972,370 which included: * $870,652 in accounts receivable due from to Shanghai Likang Pharmaceuticals Technology Company, Limited for the purchase of products from us, * $1,718 accounts receivable due from Shanghai Likang Meirui Pharmaceutical High-Tech Co. Ltd. for the purchase of products from us, and * $100,000 due April 2006 from Shanghai Likang Pharmaceuticals Technology Company, Limited which represents a working capital loan to that entity. As described earlier in this section, we sell products to these two affiliated entities. Our terms of sale and settlement on sales to Shanghai Likang Meirui Pharmaceutical High-Tech Co. Ltd. are the same as we offer our third party customers. Shanghai Likang Pharmaceuticals Technology Company, Limited purchases products from us on an as needed basis in order to fill customer orders they have received and do not maintain an inventory of our products. They tender payment to us upon receipt of payment from their customer. The accounts receivable from Shanghai Likang Pharmaceuticals Technology Company, Limited are historically paid within approximately 120 days. Our balance sheet at December 31, 2005 also reflects a loan payable to a related party of $161,533 which is a working capital loan made to us by Shanghai Shanhai Group in January 2005. This loan bears interest at 10% per annum and is due on demand. Net cash used in operating activities for fiscal 2005 was $935,578 as compared to net cash provided by operating activities of $492,493 for fiscal 2004. For fiscal 2005, we used cash in operations to fund an increase in accounts receivable of $1,163,612, including an increase of $944,741 in accounts receivables from related parties. Additionally, we funded an increase in inventories of $26,913, repayments in amounts due to a related party of $258,242, an increase in advances from customers of $120,638 and a decrease in other payables of $422,705 offset by our net income of $544,129, the add back of non-cash items of $176,007 and an increase in accounts payable and accrued expenses of $259,200. For fiscal 2004, we received cash from operations from our net income of $502,708, the add back of non-cash items of $92,125, increases in accounts payable and accrued expenses of $906,999, including an increase of $155,106 due to a related party, and an increase in advances from customers of $106,528 offset by cash used in operations to fund an increase in accounts receivable of $644,051, including $261,304 from related parties and increases in inventory of $494,340. 35 Net cash used in investing activities for fiscal 2005 was $245,593 as compared to $103,724 for fiscal 2004, an increase of $141,869 which was primarily due to capital expenditures for the acquisition of manufacturing equipment. Net cash provided by financing activities was $2,160,745 for fiscal 2005 as compared to net cash used in financing activities of $318,087 for fiscal 2004. For fiscal 2005, we received net proceeds from preferred stock offerings of approximately $1,672,000 and proceeds from loans payable of approximately $488,000. For fiscal 2004, we received cash of $241,546 as proceeds from loans which was offset by a shareholder distribution of $559,633. The shareholder distribution, which was made to Likang's then current shareholders, Shanghai Likang Pharmaceuticals Technology Company, Limited and Shanghai Shanhai Group and which was paid on a pro-rata basis, was made prior to our acquisition of Linkwell Tech in May 2005. The amount of the distribution was determined by the shareholders and was equal to Likang's retained earnings prior to the distribution. For fiscal 2005 the amount due Shanghai Shanhai Group was $9,375 which is included as additional rent expense under the terms of the agreement. The requirement to pay the fixed, after tax return is not contingent on the profitability of Likang. We reported a net increase in cash for fiscal 2005 of $1,460,078 as compared to a net increase in cash of $70,682 for fiscal 2004. We currently have no material commitments for capital expenditures. As of December 31, 2005, we had approximately $629,000 in short term loans maturing during fiscal 2006, including approximately $99,000 due in March 2006 which was repaid in the second quarter of fiscal 2006. We plan on renewing the balance of these loans when they become due at terms comparable to current terms. Other than working capital, loans and proceeds from the sale of preferred stock, we presently have no other alternative source of working capital. We want to build an additional manufacturing line and upgrade our manufacturing facilities and technologies, in order to expand our disinfection products. Based upon our preliminary estimates this will require capital and other expenditures of approximately $1 million. Although at December 31, 2005 we had cash on hand of approximately $1,460,000, these funds are not sufficient to fund the additional line and upgrade our manufacturing facilities and technologies as well as providing working capital necessary for our ongoing operations and obligations. We will need to raise additional working capital to complete this project. We may seek to raise additional capital through the sale of equity securities. No assurances can be given that we will be successful in obtaining additional capital, or that such capital will be available in terms acceptable to our company. At this time, we have no commitments or plans to obtain additional capital. Recent Capital Raising Transactions On June 30, 2005, we completed a $300,000 financing consisting of 375,345 shares of our Series A Convertible Preferred Stock, and common stock purchase warrants to purchase an additional 3,753,450 shares. We sold these securities to 12 accredited investors in a private transaction exempt from registration under the Securities Act in reliance on exemptions provided by Section 4(2) of that act and Regulation D. Each share of Series A Convertible Preferred Stock is convertible into 10 shares of common stock. Each warrant entitles the holder to purchase one share of common stock for a period of five years, at an exercise price of $.10 per share, subject to adjustment. The net proceeds from the transaction of approximately $277,000 are being used for general working capital purposes. 36 On December 28, 2005, we completed a $1,500,000 financing of units of our securities in a transaction exempt from registration under the Securities Act in reliance on exemptions provided by Section 4(2) of that act and Regulation D resulting in gross proceeds to us of $1,500,000. The offering consisted of 1,500,000 shares of our Series B 6% Cumulative Convertible Preferred Stock, Class A Common Stock Purchase Warrants to purchase 15,000,000 shares of common stock and Class B Common Stock Purchase Warrants to purchase 15,000,000 shares of common stock. The Class A Warrants are exercisable at $0.20 per share, and the Class B Warrants are exercisable at $0.30 per share, and both warrants are for a term of five years. The purchasers of the units were certain accredited institutional and individual investors. Conversion of the preferred shares and exercise of the warrants are also subject to a 4.99% cap on the beneficial ownership that each investor may have at any point in time while the securities are outstanding. We paid a due diligence fee of $65,000 in cash and Class B Warrants to purchase 866,665 shares of our common stock to certain of the investors and an advisor to one of the investors. We agreed to the payment of these due diligence fees, which are meant to offset the costs certain of the investors incur in making the decision to invest in an offering, as a term of the transaction. The recipients of the due diligence fee are as set forth below: Name Cash Fee Warrant Fee of Recipient Received Received - ----------------------------------------------------------------------------- Alpha Capital Aktiengesellschaft (1) $20,000 266,666 Ellis International Ltd. (1) 5,000 66,667 Osher Capital Inc. (1) 20,000 266,666 Utica Advisors, LLC (2) 20,000 266,666 Totals $65,000 866,665 (1) Investor in the offering. (2) Advisor to Monarch Capital Fund, Ltd., an investor in the offering. We intend to use the net proceeds from the transaction as follows: o approximately $300,000 will be used for marketing of our products in the PRC, o approximately $400,000 has been earmarked for costs, including market research, related to the possible expansion of the market for our products into the U.S., o approximately $400,000 has been allocated for expansion of our operations in the PRC, including the possible acquisitions of additional sales networks or other companies similar to ours, and o the balance will be used for general working capital. We have not identified any potential acquisition targets and may never close such a transaction. In that event, those funds will be used for general working capital. We agreed to file a registration statement covering the shares of common stock underlying the securities issued. In the event the registration statement is not filed by February 13, 2006 or does not become effective by June 28, 2006, we are required to pay liquidated damages in the amount of $30,000 per month until the deficiency is cured. We filed the registration statement on February 8, 2006 but are presently unable to predict if the SEC will declare it effective prior to June 28, 2006. The transaction documents also provide for the payment of liquidated damages to the investors in certain events, including our failure to maintain an effective registration statement covering the resale of the common shares issuable upon conversion or exercise of the securities. 37 The securities are subject to anti-dilution protections afforded to the investors. In addition, to the extent that the investors continue to own shares of our common stock received upon conversion or exercise of the securities, we have agreed to issue the investors additional shares to protect against our future issuances of common stock or derivative securities at less than the price of the common shares underlying the securities. Critical Accounting Policies Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management's applications of accounting policies. Critical accounting policies for our company include revenue recognition and the useful lives of property, plant and equipment. Revenue Recognition - We follow the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. We assess whether the fee associated with our revenue transactions is fixed or determinable based on the payment terms associated with the transaction. If a significant portion of the fee is due after our normal payment terms, we access if the fee is not fixed or determinable. In these cases, we may recognize revenue as the fees become due. We assess collectibility based on the credit worthiness of the customer and past transaction history. We perform initial credit evaluations of our customers and do not require collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defers the fee and recognize the revenue at the time that collection becomes reasonably assured. The following policies reflect specific criteria for our various revenues streams: o Revenues of Aerisys are recognized at the time the services are rendered to customers. Services are rendered when our company's representatives receive the customers' requests and complete the customers' orders. For contacts over a period of time, Aerisys recognizes the revenue on a straight-line basis over the period that the services are provided. o Our revenues from the sale of products are recorded when the goods are shipped, title passes, and collectibility is reasonably assured. o Revenues from the sale of products to related parties are recorded when the goods are shipped which correlates with the shipment by the related parties to its customers, at which time title passes, and collectibility is reasonably assured. We receive sales order on a just-in-time basis from the related party. Generally, the related party does not hold our inventory. If the related party has inventory on hand at the end of a reporting period, the sale is reversed and the inventory is included on our balance sheet. 38 We record property and equipment at cost. Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. We review these long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted future cash flows of the long-lived assets are less than the carrying amount, their carrying amount is reduced to fair value and an impairment loss is recognized. To date, we have not recognized any impairment losses. Accounting for Stock Based Compensation - We account for stock based compensation utilizing Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. We have chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the estimated fair market value of our stock at the date of the grant over the amount an employee must pay to acquire the stock. We have adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148 (See Recent Accounting Pronouncements), which require pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied. Because of this election, we continue to account for our employee stock-based compensation plans under Accounting Principles Board (APB) Opinion No. 25 and the related interpretations. We are required to comply with SFAS No. 123 (revised 2004) starting on the first day of our fiscal year 2006. We are currently evaluating the effect that the adoption of SFAS No. 123 (revised 2004) will have on our consolidated operating results and financial condition. No stock-based compensation cost is currently reflected in net income for employee and director option grants as all options granted under the 2005 Incentive Stock Plan and the Non-Employee Directors Stock Plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Recent Accounting Pronouncements In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No.123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant date fair value of stock options and other equity-based compensation issued to employees. FAS No. 123R is effective for the first fiscal year beginning after December 15, 2005. We believe the adoption of this pronouncement could have a material effect on our financial position in future periods in the event we grant stock options and other equity-based compensation to our employees. In April 2005, the Securities and Exchange Commission's Office of the Chief Accountant and its Division of Corporation Finance has released Staff Accounting Bulletin (SAB) No.107 to provide guidance regarding the application of FASB Statement No.123 (revised 2004), Share-Based Payment. Statement No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SAB 107 provides interpretative guidance related to the interaction between Statement No. 123R and certain SEC rules and regulations, as well as the staff's views regarding the valuation of share-based payment arrangements for public companies. 39 In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not believe that the adoption of SFAS 154 will have a significant effect on its financial statements. On June 29, 2005, the Emerging Issues Task Force (EITF) of FASB ratified Issue No. 05-2, "The Meaning of `Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, `Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.'" EITF Issue 05-2 provides guidance on determining whether a convertible debt instrument is "conventional" for the purpose of determining when an issuer is required to bifurcate a conversion option that is embedded in convertible debt in accordance with SFAS 133. Issue No. 05-2 is effective for new instruments entered into and instruments modified in reporting periods beginning after June 29, 2005. The adoption of this pronouncement did not have a material effect on our financial statements. In September 2005, the EITF issued EITF Issue No. 05-4, "The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, `Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.'" EITF 05-4 provides guidance to issuers as to how to account for registration rights agreements that require an issuer to use its "best efforts" to file a registration statement for the resale of equity instruments and have it declared effective by the end of a specified grace period and, if applicable, maintain the effectiveness of the registration statement for a period of time or pay a liquidated damage penalty to the investor. We adopted View C of this pronouncement. Accordingly, we bifurcated registration rights of our Series B 6% Cumulative Convertible Preferred Stock from their related free standing financial instruments and recorded them at fair value as reflected in the financial statements included elsewhere herein. 40 In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues," which addresses whether a modification to a conversion option that changes its fair value affects the recognition of interest expense for the associated debt instrument after the modification and whether a borrower should recognize a beneficial conversion feature, not a debt extinguishment if a debt modification increases the intrinsic value of the debt (for example, the modification reduces the conversion price of the debt). This issue is effective for future modifications of debt instruments beginning in the first interim or annual reporting period beginning after December 15, 2005. We are currently in the process of evaluating the effect that the adoption of this pronouncement may have on our financial statements. In September 2005, the FASB also ratified the EITF's Issue No. 05-8, "Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature," which discusses whether the issuance of convertible debt with a beneficial conversion feature results in a basis difference arising from the intrinsic value of the beneficial conversion feature on the commitment date (which is recorded in the shareholder's equity for book purposes, but as a liability for income tax purposes), and, if so, whether that basis difference is a temporary difference under FASB Statement No. 109, "Accounting for Income Taxes." This Issue should be applied by retrospective application pursuant to Statement 154 to all instruments with a beneficial conversion feature accounted for under Issue 00-27 included in financial statements for reporting periods beginning after December 15, 2005. We are currently in the process of evaluating the effect that the adoption of this pronouncement may have on our financial statements. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. Change of Independent Registered Public Accounting Firm On May 12, 2005, we dismissed Berkovits, Lago & Company, LLP as our independent registered public accounting firm. Berkovits, Lago & Company, LLP had been the independent registered public accounting firm for and audited the consolidated financial statements of our company as of December 31, 2004 and 2003. The reports of Berkovits, Lago & Company, LLP on our financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles, except such reports were modified as to an explanatory paragraph relating to our ability to continue as a "going concern" as a result of its lack of existing commitments from lenders to provide necessary financing, lack of sufficient working capital, and recurring losses from operations. The decision to change accountants was approved unanimously by the Board of Directors. In connection with the audit for the two most recent fiscal years and in connection with Berkovits, Lago & Company, LLP's review of the subsequent interim periods preceding dismissal on May 12, 2005, there were no disagreements between our company and Berkovits, Lago & Company, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Berkovits, Lago & Company, LLP, would have caused Berkovits, Lago & Company, LLP to make reference thereto in their report on our financial statements for these fiscal years. During the two most recent fiscal years and prior to the date of dismissal we had no reportable events (as defined in Item 304(a)(1) of Regulation S-B). On May 12, 2005, we engaged Sherb & Co., LLP as our independent registered public accounting firm. We had not consulted with Sherb & Co., LLP regarding the application of accounting principles to any contemplated or completed transactions nor the type of audit opinion that might be rendered on our financial statements, and neither written nor oral advice was provided that would be an important factor considered by us in reaching a decision as to an accounting, auditing or financial reporting issues. ITEM 7. FINANCIAL STATEMENTS Our financial statements are contained in pages F-1 through F-24, which appear at the end of this annual report. 41 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On May 12, 2005, we dismissed Berkovits, Lago & Company, LLP as our independent registered public accounting firm. Berkovits, Lago & Company, LLP had been the independent registered public accounting firm for and audited the consolidated financial statements of our company as of December 31, 2004 and 2003. The reports of Berkovits, Lago & Company, LLP on our financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles, except such reports were modified as to an explanatory paragraph relating to our ability to continue as a "going concern" as a result of its lack of existing commitments from lenders to provide necessary financing, lack of sufficient working capital, and recurring losses from operations. The decision to change accountants was approved unanimously by the Board of Directors. In connection with the audit for the two most recent fiscal years and in connection with Berkovits, Lago & Company, LLP's review of the subsequent interim periods preceding dismissal on May 12, 2005, there were no disagreements between our company and Berkovits, Lago & Company, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Berkovits, Lago & Company, LLP, would have caused Berkovits, Lago & Company, LLP to make reference thereto in their report on our financial statements for these fiscal years. During the two most recent fiscal years and prior to the date of dismissal we had no reportable events (as defined in Item 304(a)(1) of Regulation S-B). On May 12, 2005 we engaged Sherb & Co., LLP as our independent registered public accounting firm. We had not consulted with Sherb & Co., LLP regarding the application of accounting principles to any contemplated or completed transactions nor the type of audit opinion that might be rendered on our financial statements, and neither written nor oral advice was provided that would be an important factor considered by us in reaching a decision as to an accounting, auditing or financial reporting issues. ITEM 8A. CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of December 31, 2005, the end of the period covered by this annual 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 annual 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 President, to allow timely decisions regarding required disclosure. 42 Our management, including our President, 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. Initially, as of the evaluation date, our President concluded that we maintained disclosure controls and procedures that were effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information was accumulated and communicated to our management, including the President, to allow timely decisions regarding required disclosure. As set forth elsewhere herein, including Note 1 - Restatement to our Consolidated Financial Statements appearing in this annual report, subsequent to this initial evaluation our management has determined that there was a material weakness in our internal control over financial reporting as of December 31, 2006 as more fully described below. In this annual report on Form 10-KSB/A we are restating our consolidated balance sheet at December 31, 2005 and consolidated statement of cash flows for the year ended December 31, 2005 as contained in our annual report on Form 10-KSB as filed with the SEC on April 14, 2006. This restatement was made to correct an error related to the accounting for a transaction recorded in the fourth quarter of fiscal 2005 in which our subsidiary Likang purchased a building from a related party, Shanghai Likang Pharmaceuticals Technology Company, Limited. The purchase price of $333,675 for this building was paid by Likang through the reduction in accounts receivable due it by Shanghai Likang Pharmaceuticals Technology Company, Limited. This restatement resulted in the following changes: Balance sheet: * An increase in accounts receivable - related parties of $335,675 from $538,695 to $872,370, which resulted in an increase in current assets from $4,505,866 to $4,839,541, and * an elimination of Deposit-related party of $333,675 which was a long-term asset. These changes increased our working capital from $2,090,322 to $2,423,997, but did not change our total assets. Consolidated statement of cash flows: * Net cash used in continuing operating activities increased $667,350 from $268,228 to $935,578 which reflected the increase in accounts receivable - related party, * Net cash used in investing activities decreased by $333,675 from $579,268 to $245,593 and net cash provided by financing activities increased $333,675 from $1,827,070 to $2,160,745 which reflected the payment for the building as a reclassification of the reduction in accounts receivable - related party. 43 The restatement did not result in any change to our consolidated statement of operations for fiscal 2005 or our consolidated statement of changes in stockholders' equity. Because of these accounting errors, our management has determined that a deficiency in internal controls existed related to the recordation of related party transactions. Accordingly, our management has determined that this control deficiency constituted a material weakness. 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 intend to provide additional training to our accounting staff in the application of U.S. GAAP. 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. Other than the changes discussed above, there have been no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 8B. OTHER INFORMATION None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Directors and Executive Officers Name Age Positions Held Xue Lian Bian 40 Chief Executive Officer, President and Chairman of the Board Wei Guan 40 Vice President, Secretary and director Xue Lian Bian. Mr. Bian has served as our Chief Executive Officer, President and director since May 2, 2005, Chief Executive Officer, President and director of Linkwell Tech since its inception in June 2004 and General Manager of Shanghai Likang Disinfectant Company, Limited since 1993. From 1990 to 1993, he was a project assistant in charge of science and technology achievement application in the Second Military Medical University, Shanghai, China. From 1986 to 1990, Mr. Bian was a member of the technical staff in the Epidemiological Institute in the Second Military Medical University. Mr. Bian contributed to the compilation of "Disinfection - Antiseptic - Anticorrosion - Preservation" and "Modern Disinfection Study" of which the first book laid the foundation of the Chinese disinfectant study. Mr. Bian started related research with his colleagues on the microbiology sterilization effect examination, high strength ultraviolet lamp tube and decontaminating apparatus prior to the inception of Likang. Mr. Bian graduated from the China Army Second Military Medical University in 1990 with a bachelor degree in public health. Wei Guan. Mr. Guan has served as our Vice President and a member of our Board of Directors since May 2, 2005. He has served as Vice President of Linkwell Tech since its inception in June 2004 and vice General Manager of Shanghai Likang Disinfectant Company, Limited since 2002. From 1987 to 1990, Mr. Guan worked Hunan Machinery Importing & Exporting Corporation as a member of management. From 1990 to 2002, Mr. Guan worked for Division of Importing and Export at Worldbest Group as a general manager. Mr. Guan graduated from Hunan University in Changsha, Hunan Province with a bachelor degree in Industry Foreign Trading in 1987. There are no family relationship between any of the executive officers and directors. Directors are elected at our annual meeting of shareholders and hold office for one year or until his or her successor is elected and qualified. Key Employees Mr. Guoqiang Fan. Mr. Fan, 42, has been our Vice-General Manager in charge of marketing since May 2005 and has held the same position at Likang since 1997. From 1987 to 1997, Mr. Fan was employed at the Population College of Jiangsu Province as a teacher. Prior to his work as a teacher, Mr. Fan worked at Second Military Medical University's Shanghai Hospital as a pharmacist. Mr. Fan graduated from the Second Military Medical University School of Pharmacy with a degree in medicine. 44 Ms. Gendi Li. Ms. Li, 54, has served as Likang's Controller since 2003. From 1996 to 2003, Ms. Li was employed as an Executive Accountant and Financial Manager for QiaoFu Construction Holding Company (Shanghai). From 1993 to 1996, Ms. Li was employed as an Executive Accountant and Head of the Finance Department at Shanghai Yuxin Machinery Co., Ltd. From 1968 to 1993, Ms. Li was employed in various financial positions, including Executive Accountant, and Head of the Finance Department at First Plastic Machinery Factory. Ms. Li graduated from the Shanghai Finance and Economics Institute. Mr. Wensheng Sun. Mr. Sun, 38, has been Likang's Vice-General Manager for Production since 1995 and has held the same position at Likang since 1995 following completion of his Masters degree in Medicine at the Second Military Medical University School of Pharmacy. U.S. Advisor On August 24, 2005, we engaged China Direct Investments, Inc., whose staff includes Chinese-speaking individuals with experience in operation and regulatory framework applicable to U.S. public companies, as a consultant to advise the our management in areas related to marketing and operational support in the U.S., media and public relations, mergers and acquisitions, financial advisory and SEC disclosure compliance. In addition, China Direct Investment also provides us with translation services for both English and Chinese documents. Under the terms of one year agreement, we issued China Direct Investments, Inc. 2,000,000 shares of the our common stock, valued at $160,000, as compensation for its services, and granted it three year warrants to purchase 2,125,000 shares of our common stock at an exercise price of $0.20 per share commencing in January 2006. We also agreed to pay China Direct Investments, Inc. additional fees for its services as may be mutually agreed upon. Messrs. James Wang, Marc Siegel and David Stein are the officers, directors and shareholders of China Direct Investments, Inc. Committees of the Board of Directors Our Board of Directors has not established any committees, including an Audit Committee or a Nominating Committee. The functions of those committees are being undertaken by the entire board as a whole. As we expand our board in the future to include independent directors we will establish an Audit Committee. Director Independence, Audit Committee Of The Board Of Directors And Audit Committee Financial Expert None of the members of our Board of Directors are "independent" within the meaning of definitions established by the Securities and Exchange Commission. Our Board of Directors are presently comprised of individuals who were integral in Likang's operations. As a result of our limited operating history and minimal resources, small companies such as ours generally have difficulty in attracting independent directors. In addition, we will require additional resources to obtain directors and officers insurance coverage which is generally necessary to attract and retain independent directors. As we grow, in the future our Board of Directors intends to seek additional members who are independent, have a variety of experiences and backgrounds, who will represent the balanced, best interests of all of our shareholders and at least one of which who is an "audit committee financial expert" described below. None of our directors is an "audit committee financial expert" within the meaning of Item 401(e) of Regulation S-B. In general, an "audit committee financial expert" is an individual member of the audit committee or Board of Directors who: * understands generally accepted accounting principles and financial statements, * is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves, * has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements, * understands internal controls over financial reporting, and * understands audit committee functions. 45 Code of Business Conduct and Ethics In December 2005, we adopted a Code of Business Conduct and Ethics applicable to our Chief Executive Officer, principal financial and accounting officers and persons performing similar functions. A Code of Business Conduct and Ethics is a written standard designed to deter wrongdoing and to promote: o honest and ethical conduct, o full, fair, accurate, timely and understandable disclosure in regulatory filings and public statements, o compliance with applicable laws, rules and regulations, o the prompt reporting violation of the code, and o accountability for adherence to the code. A copy of our Code of Business Conduct and Ethics has been filed with the Securities and Exchange Commission as an exhibit to this annual report. We will provide a copy, without charge, to any person desiring a copy of the Code of Business Conduct and Ethics, by written request to No. 476 Hutai Branch Road, Baoshan District, Shanghai, China 200436. Compliance With Section 16(a) of the Exchange Act Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act during the fiscal year ended December 31, 2005 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended December 31, 2005, as well as any written representation from a reporting person that no Form 5 is required, we are not aware that any officer, director or 10% or greater shareholder failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act during the fiscal year ended December 31, 2005. ITEM 10. EXECUTIVE COMPENSATION Cash Compensation The following table summarizes all compensation recorded by us in each of the last three fiscal years for our Chief Executive Officer and each other executive officers serving as such whose annual compensation exceeded $100,000.
Long-Term Annual Compensation Compensation - ------------------------------------------------------------------------------------------------------------------- Restricted Securities Name and Other Annual Stock Underlying Principal Fiscal Salary Bonus Compensation Awards Options All Other Position Year ($) ($) ($) ($) SAR (#) Compensation - ------------------------------------------------------------------------------------------------------------------- Xue Lian Bian(1) 2005 $10,250 $0 $0 $0 0 0 Gary Verdier(1) 2004 $0 $0 $0 $0 20,000 0 2003 $0 $0 $0 $0 0 0 Daniel Zipkin(2) 2004 $0 $0 $0 $0 0 0 2003 $7,500 $0 $0 $0 0 0
46 (1) Mr. Bian has served as our Chief Executive Officer, President and director since May 2, 2005. (2) Gary Verdier served as our CEO and President from December 28, 1999 to August 2000, from February 21, 2001 to September 19, 2003 and October 31, 2004 to May 2, 2005. On August 24, 2004 the Board of Directors granted him a five-year option to purchase 10,000 shares of common stock at an exercise price of $0.15 and on January 3, 2004 the Board of Directors granted him a five option to purchase 10,000 shares of common stock at an exercise price of $1.00 per share. (3) Mr. Zipkin served as Chief Executive Officer from September 19, 2003 to October 30, 2003. Option/SAR Grants in Last Fiscal Year The following table sets forth information concerning individual grants of options made during Fiscal 2005 to the named executive officers. % of Total Number of Shares Options Granted Exercise or Underlying Options to Employees in Base Price Expiration Granted (#) Fiscal Year ($/Sh) Date - -------------------------------------------------------------------------------- Xue Lian Bian None Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values The following table indicates each exercise of stock options (or tandem SARS) and freestanding SARS during the last fiscal year by each of the named executive officers and the fiscal year end value of unexercised options and SARs.
Shares Number of Securities Underlying Value of Unexercised Acquired on Value Unexercised Options/SARs at In-the-money Options/SARs at Exercise (#) Realized ($) FY End (#) FY End (#) Name Exercisable Unexercisable Exercisable Unexercisable - -------------------------------------------------------------------------------------------------------------------- Xue Lian Bian None
47 Stock Option Plans Year 2000 Equity Compensation Plan On October 10, 2000, our Board of Directors adopted our Year 2000 Equity Compensation Plan under which a total of 540,000 shares of common stock are made available for the granting of awards, a portion or all of which may qualify as incentive stock options, non-incentive stock options and restricted stock grants. The purpose of the plan, which was approved by our shareholders on November 10, 2000, is to encourage stock ownership by our officers, directors, key employees and consultants, and to give such persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us.. If any option or restricted stock grant expires or terminates before it has been exercised in full, the shares of common stock allocable to the unexercised portion of such option or restricted stock grant may again be subject to an option or restricted stock grant under the 2000 Equity Compensation Plan. The number of shares available and subject to options, option prices and, to the extent applicable, the number of shares subject to any restricted stock grant will be adjusted upward or downward, as the case may be, in the event of any subdivision or consolidation of shares or other capital readjustment, stock dividend, merger, consolidation or similar transaction affecting the shares. At March 31, 2006 we did not had any options to purchase shares of our common stock outstanding under the plan. The 2000 Equity Compensation Plan is administered by our Board of Directors who have the sole authority to determine which eligible employees of our company receive options and restricted stock grants under the plan, the times when options and restricted stock grants are granted, the number of shares covered by the option and restricted stock grant, the provisions of any agreement and when options may be exercised or when restricted stock grants become vested. In addition, the Board has the power and authority to construe and interpret the Plan. 48 Stock options may be granted by the Board at prices determined in the discretion of the Board, provided that the option price must be at least equal to the fair market value of the common stock on the date of the grant. The option price is payable in cash, common stock or such other form of payment as may be determined by the Board. The exercise price of an incentive stock option must be at least equal to the fair market value of our common stock on the date of grant or 110% of such value in the case of options granted to an individual who is a 10% or greater shareholder of our company. An optionee generally may exercise an option only while an employee of our company. If an optionee becomes disabled or dies while in the employ of our company, the option may be exercised within one year of the optionee's death or termination due to disability. The expiration date of an option will be determined by the Board at the time of the grant, but in no event will an incentive stock option be exercisable after the expiration of 10 years from the date of grant or five years in the case of incentive options granted to a 10% or greater shareholder. The Board may grant to an eligible individual shares of our common stock subject to specified restrictions on transferability and vesting as provided in a written grant agreement or resolutions in which the restricted stock grant is adopted and approved by the Board. Restricted stock grants may be made in lieu or cash compensation or as additional compensation. The Board may also make restricted stock grants contingent on pre-established performance goals determined by the Board. Except for certain transfers that may be permitted by the Board, no option or restricted stock grant may be transferred by an eligible individual other than by will or the laws of descent or distribution. The 2000 Equity Compensation Plan terminates on October 10, 2010. The Board of Directors may at any time amend, suspend or discontinue the plan, except that no amendment may be made without the approval of the shareholders which would increase the number of shares subject to the plan, materially change the designation of the class of employees eligible to receive options, remove the administration of the plan from the Board or a committee of the Board or materially increase the benefits accruing to participants under the plan. Non-Qualified Stock Option Plan 49 On December 21, 2000 our Board of Directors adopted our Non-Qualified Stock Option Plan under which a total of 200,000 shares of common stock are made available for granting of non-qualified stock options to officers, directors, employees and key advisors or consultants. The purpose of the plan is to encourage the participants to contribute materially to our growth. If any option expires or terminates before it has been exercised in full, the shares of common stock allocable to the unexercised portion of such option may again be subject to an option under the Non Qualified Stock Option Plan. The number of shares available and subject to options and option prices will be adjusted upward or downward, as the case may be, in the event of any subdivision or consolidation of shares or other capital readjustment, stock dividend, merger, consolidation or similar transaction affecting the shares. At March 31, 2006 we did not had any options to purchase shares of our common stock outstanding under the plan. The Non-Qualified Stock Option Plan is administered by our Board of Directors who have the sole authority to determine which who is eligible to receive grants of non-qualified options under the plan, the times when options are granted, the number of shares covered by the option, the provisions of any agreement and when options may be exercised. In addition, the Board has the power and authority to construe and interpret the Plan. Stock options may be granted by the Board at prices determined in the discretion of the Board and the exercise price of the option may be greater than, or less than, the fair market value of our common stock. The option price is payable in cash, common stock or such other form of payment as may be determined by the Board. An optionee generally may exercise an option only while the grantee is employed by us or otherwise providing our company services. If an optionee becomes disabled or dies while in the employ of our company or while otherwise providing services to us, the option may be exercised within 90 days after optionee's death or termination due to disability. The expiration date of an option will be determined by the Board at the time of the grant, but in no event will a stock option be exercisable after the expiration of 10 years from the date of grant. Except for certain transfers that may be permitted by the Board, no option may be transferred by an eligible individual other than by will or the laws of descent or distribution. The 2000 Equity Compensation Plan terminates on December 21, 2010. The Board of Directors may at any time amend, suspend or discontinue the plan, except that no amendment may be made without the approval of the shareholders which would increase the number of shares subject to the plan, materially change the designation of the class of employees eligible to receive options, remove the administration of the plan from the Board or a committee of the Board or materially increase the benefits accruing to participants under the plan. 50 2005 Equity Compensation Plan On June 28, 2005, our Board of Directors adopted our 2005 Equity Compensation Plan under which 5,000,000 shares of our common stock have been reserved for issuance upon the exercise of options or stock grants under the plan. Our officers, directors, key employees and consultants are eligible to receive stock grants and non-qualified options under the Plan. Only our employees are eligible to receive incentive options. The purpose of the 2005 Equity Compensation Plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give such persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by us, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by us for other purposes. As of March 31, 2006 we had no outstanding options or stock grants under the plan and there were 3,000,000 shares available for issuance under the 2005 Equity Compensation Plan. Our Board of Directors, or a committee of the Board, administers the 2005 Equity Compensation Plan including, without limitation, the selection of the persons who will be awarded stock grants and granted options, the type of options to be granted, the number of shares subject to each option and the exercise price. Plan options may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified options. In addition, the plan allows for the inclusion of a reload option provision, which permits an eligible person to pay the exercise price of the option with shares of common stock owned by the eligible person and receive a new option to purchase shares of common stock equal in number to the tendered shares. Any incentive option granted under the Plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any incentive option granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The exercise price of non-qualified options shall be determined by the Board of Directors, but shall not be less than the par value of our common stock on the date the option is granted. The term of each plan option and the manner in which it may be exercised is determined by the Board of Directors or the committee, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant. The plan provides that, with respect to incentive stock options, the aggregate fair market value (determined as of the time the option is granted) of the shares of common stock, with respect to which incentive stock options are first exercisable by any option holder during any calendar year shall not exceed $1,000,000. Unless the plan is approved by our shareholders within one year of the effective date, no incentive stock options may be granted and all incentive stock options that may have been previously granted shall automatically be converted into non-qualified stock options. As of the date of this annual report we have not submitted the 2005 Equity Compensation Plan to our shareholders for approval. 51 The plan provides that, if our outstanding shares are increased, decreased, exchanged or otherwise adjusted due to a share dividend, forward or reverse share split, recapitalization, reorganization, merger, consolidation, combination or exchange of shares, an appropriate and proportionate adjustment shall be made in the number or kind of shares subject to the plan or subject to unexercised options and in the purchase price per share under such options. Any adjustment, however, does not change the total purchase price payable for the shares subject to outstanding options. In the event of our proposed dissolution or liquidation, a proposed sale of all or substantially all of our assets, a merger or tender offer for our shares of common stock, the Board of Directors may declare that each option granted under the plan shall terminate as of a date to be fixed by the Board of Directors; provided that not less than 30 days written notice of the date so fixed shall be given to each participant holding an option, and each such participant shall have the right, during the period of 30 days preceding such termination, to exercise the participant's option, in whole or in part, including as to options not otherwise exercisable. Plan options are exercisable by delivery of written notice to us stating the number of shares with respect to which the option is being exercised, together with full payment of the purchase price therefor. Payment is to be in the form of cash, checks, certified or bank cashier's checks, promissory notes secured by the shares issued through exercise of the related options, shares of common stock or in such other form or combination of forms which may be acceptable to the Board of Directors, provided that any loan or guarantee by us of the purchase price may only be made upon resolution of the Board that such loan or guarantee is reasonably expected to benefit us. All plan options are nonassignable and nontransferable, except by will or by the laws of descent and distribution, and during the lifetime of the optionee, may be exercised only by such optionee. If an optionee shall die while our employee or within three months after termination of employment by us because of disability, or retirement or otherwise, such options may be exercised, to the extent that the optionee shall have been entitled to do so on the date of death or termination of employment, by the person or persons to whom the optionee's right under the option pass by will or applicable law, or if no such person has such right, by his executors or administrators. In the event of termination of employment because of death while an employee or because of disability, the optionee's options may be exercised not later than the expiration date specified in the option or one year after the optionee's death, whichever date is earlier, or in the event of termination of employment because of retirement or otherwise, not later than the expiration date specified in the option or one year after the optionee's death, whichever date is earlier. If an optionee's employment by us terminates because of disability and such optionee has not died within the following three months, the options may be exercised, to the extent that the optionee shall have been entitled to do so at the date of the termination of employment, at any time, or from time to time, but not later than the expiration date specified in the option or one year after termination of employment, whichever date is earlier. 52 If an optionee's employment terminates for any reason other than death or disability, optionee may exercise the options to the same extent that the options were exercisable on the date of termination, for up to three months following such termination, or on or before the expiration date of the options, whichever occurs first. In the event that the optionee was not entitled to exercise the options at the date of termination or if the optionee does not exercise such options (which were then exercisable) within the time specified herein, the options will terminate. If an optionee's employment terminates for any reason other than death, disability or retirement, all right to exercise the option terminate not later than 90 days following the date of such termination of employment. The Board of Directors may amend, suspend or terminate the plan at any time. Unless the plan shall have been earlier suspended or terminated by the Board of Directors, the 2005 Equity Compensation Plan terminates on June 28, 2015. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS At March 15, 2006, there were 45,304,139 shares of our common stock issued and outstanding which is our only outstanding class of voting securities. The following table sets forth, as of that date, information known to us relating to the beneficial ownership of these shares by: o each person who is the beneficial owner of more than 5% of the outstanding shares of common stock; o each director; o each executive officer; and o all executive officers and directors as a group. Unless otherwise indicated, the address of each beneficial owner in the table set forth below is care of No. 476 Hutai Branch Road, Baoshan District Shanghai, China 200436. We believe that all persons named in the table have sole voting and investment power with respect to all shares of beneficially owned by them. Under securities laws, a person is considered to be the beneficial owner of securities he owns and that can be acquired by him within 60 days from March 15, 2006 upon the exercise of options, warrants, convertible securities or other understandings. We determine a beneficial owner's percentage ownership by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person and which are exercisable within 60 days of March 15 2006, have been exercised or converted. Unless otherwise noted, the address of each of these principal shareholders is our principal executive offices. 53 Name of Amount and Nature of Percentage Beneficial Owner Beneficial Ownership of Class Xue Lian Bian 22,670,919 50.0% Wei Guan 13,602,551 30.1% All officers and directors as a group (two persons) 36,273,470 80.1% Marc Siegel (1) 3,545,052 7.5% Dr. James Wang (2) 3,800,000 8.3% David Stein (3) 3,080,000 1.4% Professor Ting Ting Shan(4) 2,775,26 5.9% (1) Mr. Siegel's address is 5301 North Federal Highway, Suite 120, Boca Raton, Florida 33487. The number of securities beneficially owned by Mr. Siegel includes: * A 40% interest of 955,000 (382,000) shares of our common stock which are presently outstanding and a 40% interest in common stock purchase warrants to purchase 2,125,000 (850,000) shares of common stock with an exercise price of $0.20 per share owned of record by China Direct Investments, Inc. China Direct Investments, Inc. is owned by Dr. James Wang and in his capacity as CEO has the authority to vote and dispose of those shares. Marc Siegel is an employee of China Direct Investments, Inc. holding a 40% interest, * 875,000 shares of our common stock issuable upon the conversion of shares of Series A Convertible Preferred Stock and 875,000 shares of common stock issuable upon the exercise of outstanding common stock purchase warrants with an exercise price of $0.20 per share. Mr. Marc Siegel has voting and dispositive control over securities held by Edge Capital Partners, Ltd., * A 20% interest in 900,000 (180,000) shares of common stock which are presently outstanding, and a 20% interest in 907,630 (181,526) shares of common stock issuable upon the conversion of shares of our Series * A Convertible Preferred Stock and a 20% interest in 907,630 (181,526) shares issuable upon the exercise of outstanding common stock purchase warrants with an exercise price of $0.10 per share owned of record by CIIC Investment Banking Services (Shanghai) Company, Limited. Professor Shan is the General Manager and a member of the Board of Directors of CIIC Investment Banking Services (Shanghai) Company, Limited and as such has voting and dispositive control over securities held by that company. Marc Siegel is a 20% shareholder of CIIC Investment Banking Services (Shanghai) Company, Limited., and * 20,000 shares of our common stock held by Marc Siegel. 54 The number of shares beneficially owned by Mr. Siegel excludes: * 500,000 shares of common stock issuable upon the conversion of shares of Series B 6% Cumulative Convertible Preferred Stock and 1,000,000 shares of common stock issuable upon the exercise of outstanding common stock purchase warrants with exercise prices ranging from $0.20 to $0.30 per share which owned of record by Edge Capital Partners, Ltd. Mr. Marc Siegel has voting and dispositive control over securities held by Edge Capital Partners, Ltd., and * 250,000 shares of our common stock issuable upon the conversion of shares of our Series B 6% Cumulative Convertible Preferred Stock and 500,000 shares of common stock issuable upon the exercise of outstanding common stock purchase warrants with exercise prices ranging from $0.20 to $0.30 per share owned of record by Edge LLC. Mr. Marc Siegel has voting and dispositive control over securities held by Edge LLC. The Series B 6% Cumulative Convertible Preferred Stock and associated common stock purchase warrants are not convertible or exercisable to the extent that (a) the number of shares of our common stock beneficially owned by the holder and (b) the number of shares of our common stock issuable upon the exercise of the warrants would result in the beneficial ownership by holder of more than 4.99% of our then outstanding common stock. This ownership limitation can be waived by the holder upon 61 days notice to us. (2) Dr. Wang's address is 5301 North Federal Highway, Suite 120, Boca Raton, Florida 33487. The number of securities beneficially owned by Dr. Wang includes: * 955,000 shares of our common stock which are presently outstanding and common stock purchase warrants to purchase 2,125,000 shares of common stock with an exercise price of $0.20 per share owned of record by China Direct Investments, Inc. China Direct Investments, Inc. is owned by Dr. James Wang and in his capacity as CEO has the authority to vote and dispose of those shares. * A 40% interest in 875,000 (350,000) shares of our common stock issuable upon the conversion of shares of Series A Convertible Preferred Stock and a 40% interest in 875,000 (350,000) shares of common stock issuable upon the exercise of outstanding common stock purchase warrants with an exercise price of $0.20 per share. Mr. Marc Siegel has voting and dispositive control over securities held by Edge Capital Partners, Ltd. Dr. Wang is an investor in Edge Capital Partners, Ltd. holding a 40% interest, and * 20,000 shares of our common stock held by Dr. Wang. The number of shares beneficially owned by Dr. Wang excludes: * A 40% interest in 500,000 (200,000) shares of common stock issuable upon the conversion of shares of Series B 6% Cumulative Convertible Preferred Stock and a 40% interest in 1,000,000 (400,000) shares of common stock issuable upon the exercise of outstanding common stock purchase warrants with exercise prices ranging from $0.20 to $0.30 per share which owned of record by Edge Capital Partners, Ltd. Mr. Marc Siegel has voting and dispositive control over securities held by Edge Capital Partners, Ltd. Dr. Wang is an investor in Edge Capital Partners, Ltd. holding a 40% interest,, 54 (3) Mr. Stein's address is 5301 North Federal Highway, Suite 120, Boca Raton, Florida 33487. The number of securities beneficially owned by Mr. Stein includes: * A 20% interest in 955,000 (191,000) shares of our common stock which are presently outstanding and a 20% interest in common stock purchase warrants to purchase 2,125,000 (425,000) shares of common stock with an exercise price of $0.20 per share owned of record by China Direct Investments, Inc. China Direct Investments, Inc. is owned by Dr. James Wang and in his capacity as CEO has the authority to vote and dispose of those shares. David Stein is an employee of China Direct Investments, Inc. holding a 20% interest., and * 20,000 shares of our common stock held by Mr. Stein. The number of securities beneficially owned by Mr. Stein excludes: * 250,000 shares of our common stock issuable upon the conversion of shares of our Series B 6% Cumulative Convertible Preferred Stock and 500,000 shares of common stock issuable upon the exercise of outstanding common stock purchase warrants with exercise prices ranging from $0.20 to $0.30 per share owned by him. The Series B 6% Cumulative Convertible Preferred Stock and associated common stock purchase warrants are not convertible or exercisable to the extent that (a) the number of shares of our common stock beneficially owned by the holder and (b) the number of shares of our common stock issuable upon the exercise of the warrants would result in the beneficial ownership by holder of more than 4.99% of our then outstanding common stock. (4) Professor Shan's address is 25/F West Wing, Hanwei Plaza, 7 Guanghuala, Chao Yang District, Beijing 100004, PRC. The number of securities beneficially owned by Professor Shan includes: * 30,000 shares issuable upon the conversion of shares of our Series A Convertible Preferred Stock and 30,000 shares issuable upon the exercise of outstanding common stock purchase warrants with an exercise price of $0.10 per share, and * 900,000 shares of common stock which are presently outstanding, 907,630 shares of common stock issuable upon the conversion of shares of our Series A Convertible Preferred Stock and 907,630 shares issuable upon the exercise of outstanding common stock purchase warrants with an exercise price of $0.10 per share owned of record by CIIC Investment Banking Services (Shanghai) Company, Limited. Professor Shan is the General Manager and a member of the Board of Directors of CIIC Investment Banking Services (Shanghai) Company, Limited and as such has voting and dispositive control over securities held by that company. 55 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Likang is engaged in business activities with Shanghai Likang Pharmaceuticals Technology Company, Limited, an affiliated entity. Messrs. Xuelian Bian and Wei Guan, our officer, directors and principal shareholders, are the shareholders of Shanghai Likang Pharmaceuticals Technology Company, Limited, owning 90% and 10%, respectively. We previously leased approximately 21,500 square feet of manufacturing space from Shanghai Likang Pharmaceuticals Technology Company, Limited for approximately $11,500 annually. In the fourth quarter of fiscal 2005 we recorded a transaction with Shanghai Likang Pharmaceuticals Technology Company, Limited and Mr. Bian under which we purchased this previously leased building for $333,675. We paid for this purchase through a reduction in the accounts receivable owed us by Shanghai Likang Pharmaceuticals Technology Company, Limited. Shanghai Likang Pharmaceuticals Technology Company, Limited distributes our products to the commercial medical industry. For the fiscal years ended December 31, 2005 and 2004, we recorded net revenues of $1,933,043 and $1,698,923, respectively, from sales to that related party. At December 31, 2005 Shanghai Likang Pharmaceuticals Technology Company, Limited owed us $870,652 as a related party receivable for products purchased from us. In December 2005 we loaned Shanghai Likang Pharmaceuticals Technology Company, Limited $100,000 for working capital purposes. The loan bears interest at the rate of 3% per annum. The principal and interest were paid in April 2006. Likang is engaged in business activities with other related entities, including: o Shanghai Likang Meirui Pharmaceutical High-Tech Co., Limited. Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. is a supplier of both raw materials and finished products to Likang and it purchases products from us which it resells to the retail/consumer market in the PRC. Shanghai Shanhai Group is the majority owner of Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd., owning a 68% interest. Specifically Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. provides Likang with Ozone producing device equipment and Ultraviolet radiation lamp lights to Likang. In addition, under the terms of a two year agreement entered into in January 2005 Shanghai Likang Meirui Pharmaceuticals High-Tech Co., Ltd. produces the Lvshaxing Air Disinfectant Machine and Likang Surgery hand-washing table for Likang. For the years ended December 31, 2005 and 2004 we purchased products from this affiliate totaling $48,489 and $389,400, respectively. We did not owe Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. any monies at December 31, 2005. In January 2005 Likang signed a two year agreement with Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. to market its products to the retail/consumer market using Shanghai Likang Meirui Pharmaceutical High-Tech Co. Ltd.'s proprietary sales network which caters to the retail/consumer market in China. For the fiscal years ended December 31, 2005 and 2004, respectively, we recorded net revenues on sales to this affiliate of $23,987 and $67,356, respectively. At December 31, 2005, Shanghai Likang Meirui Pharmaceuticals High-Tech Company owed us $1,718. 56 o Shanghai Shanhai Group. Shanghai Shanhai Group, which is the minority shareholder of our Likang subsidiary, is owned by Shanghai Shanhai Group Employee Share-holding Committee (16.25%) and Shanghai Baoshan District Dachang Town South Village Economic Cooperation Club (83.75%). These two entities are owned by the employees of Shanghai Shanhai Group. We lease our principal executive offices and warehouse space from Shanghai Shanhai Group for approximately $32,000 a year. Shanghai Shanhai Group also holds the land use permit for the principal executive office building. At December 31, 2005, we owed $15,000 to Mr. Gary Verdier, a shareholder and our former CEO, for working capital advanced to our subsidiary, Aerisys. The advances were non-interest bearing and were payable on demand. Subsequent to December 31, 2005, this liability was assumed by Mr. Verdier under the terms of his purchase of the stock of Aerisys as described earlier in this annual report under Item 1. Description of Business - History of our Company. For the fiscal year ended December 31, 2004, prior to our acquisition of Linkwell, Likang made distributions to its shareholders, Shanghai Likang Pharmaceuticals Technology Company, Limited and Shanghai Shanhai Group, in the aggregate amount of $559,633. The shareholder distribution was paid on a pro-rata basis to these shareholders. The amount of the distribution was determined by the shareholders and was equal to Likang's retained earnings prior to the distribution. Shanghai Likang Pharmaceuticals Technology Company, Limited is owned by Messrs. Bian and Guan, our officers and directors. In January 2005 Likang borrowed $161,533 from Shanghai Shanhai Group for working capital purposes. The loan bears interest at 10% per annum and is payable on demand. For the year ended December 31, 2005, interest expense related to this note amounted to $16,282 In January 2005 Likang also entered into a five year agreement with Shanghai Shanhai Group whereby it agreed to pay Shanghai Shanhai Group a fixed amount of $9,375 annually as additional rent which represents a return on its original investment in Likang of RMB 500,000 (approximately $62,500 U.S.). Under the terms of the agreement this amount is paid as additional rent. Other related party transactions In May 2005, in connection with our acquisition of Linkwell Tech, we issued an aggregate of 1,855,000 shares of common stock for services related to share exchange agreement. China Direct Investments, Inc. received 955,000 shares of our common stock as compensation for their services in negotiating the terms of the share exchange it assigned CIIC Investment Banking Services (Shanghai) Company, Limited the remaining 900,000 shares of our common stock as a finder's fee for the identification of Linkwell Tech. China Direct Investments, Inc. and CIIC Investment Banking Services (Shanghai) Company, Limited are affiliates. 57 In August 2005, we engaged China Direct Investments, Inc. as a consultant to advise the our management in areas related to marketing and operational support in the U.S., media and public relations, mergers and acquisitions, financial advisory and SEC disclosure compliance, in addition to providing us with translation services for both English and Chinese documents. Under the terms of one year agreement, we issued China Direct Investments, Inc. 2,000,000 shares of the our common stock, valued at $160,000, as compensation for its services, and granted it three year warrants to purchase 2,125,000 shares of our common stock at an exercise price of $0.20 per share commencing in January 2006. ITEM 13. EXHIBITS The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated: EXHIBIT NO. DESCRIPTION 2.1 Stock Purchase Agreement between HBOA.Com, Inc., Philip J. Davis and John C. Lee dated November 17, 1999 (1) 2.2 Amendment No. 1 to the Stock Purchase Agreement between HBOA.Com, Inc., Phillip J. Davis and John C. Lee dated December 28, 1999 (1) 2.3 Stock Exchange Agreement dated May 2, 2005 by and among Kirshner Entertainment & Technologies, Inc., Gary Verdier, Linkwell Tech Group, Inc. and the shareholders of Linkwell (2) 3.1 Articles of Incorporation (3) 3.2 Articles of Amendment to Articles of Incorporation (4) 3.3 Articles of Amendment to Articles of Incorporation (5) 3.4 Articles of Amendment to Articles of Incorporation (6) 3.5 Articles of Amendment to the Articles of Incorporation (11) 3.6 Bylaws (3) 3.7 Articles of Amendment to the Articles of Incorporation (12) 4.1 Form of common stock purchase warrant (7) 4.2 Form of Class A and Class B Common Stock Purchase Warrants(12) 10.1 HBOA Holdings, Inc. - Year 2000 Equity Compensation Plan (8) 10.2 HBOA Holdings, Inc. - Non-Qualified Stock Option Plan (9) 10.3 Kirshner Entertainment & Technologies, Inc. 2005 Equity Compensation Plan (10) 10.4 Consulting and Management Agreement dated August 24, 2005 between Linkwell Corporation and China Direct Investments, Inc. (15) 10.5 Form of Subscription Agreement for $1,500,000 unit offering (11) 58 10.6 Form of agreement between Shanghai Likang Disinfectant High-Tech Company, Limited and its customers (12) 10.7 Form of agreement between Shanghai Likang Disinfectant High- Tech Company, Limited and its suppliers (12) 10.8 Sales Agreement dated as of January 1, 2005 between Shanghai Likang Disinfectant High-Tech Co., Ltd. and Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. (15) 10.9 Lease Agreement effective January 1, 2005 between Shanghai Likang Disinfectant High-Tech Co., Ltd. and Shanghai Shanhai Group for principal executive offices (15) 10.10 Lease Agreement effective January 1, 2002 between Shanghai Likang Pharmaceuticals Co., Ltd. and Shanghai Likang Disinfectant High-Tech Co. Ltd. (15) 10.11 Lease Agreement effective January 1, 2005 between Shanghai Jinshan Zhuhang Plastic Lamp Factory, Ltd. and Shanghai Likang Disinfectant High-Tech Co. Ltd. (15) 10.12 Manufacturing Agreement dated as of January 1, 2005 between Shanghai Likang Disinfectant High-Tech Co., Ltd. and Shanghai Likang Meirui Pharmaceutical High-Tech Co., Ltd. (15) 10.13 Stock Purchase Agreement effective February 6, 2006 between Linkwell Corporation, Aerisys Incorporated and Gary Verdier (13) 10.14 Asset Purchase Agreement dated February 6, 2006 between Shanghai Likang Disinfectant High-Tech Company, Limited, Shanghai Likang Pharmaceuticals Technology Company and Xuelian Bian (13) 10.15 Distribution Agreement dated January 1, 2005 between Shanghai Shanhai Group and Shanghai Likang Disinfectant High-Tech Co., Ltd. (15) 14.1 Code of Business Conduct and Ethics (15) 23.1 Consent of Sherb & Co., LLP * 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * 31.2 Certification of Principal and Accounting Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * 59 * filed herewith (1) Incorporated by reference to the Current Report Form 8-K dated December 30, 1999. (2) Incorporated by reference to Current Report on For 8-K as filed on May 6, 2005. (3) Incorporated by reference to the definitive Proxy Statement filed as filed on October 24, 2000. (4) Incorporated by reference to the definitive Information Statement as filed on June 23, 2003. (5) Incorporated by reference to the definitive Information Statement as filed on March 3, 2005. (6) Incorporated by reference to the Current Report on Form 8-K as filed on May 13, 2005. (7) Incorporated by reference to the Current Report on Form 8-K as filed on July 6, 2005. (8) Incorporated by reference to Post Effective Amendment No. 1 to the Registration Statement on Form S-8 as filed on December 14, 2000. (9) Incorporated by reference to the Registration Statement on Form S-8 as filed on December 21, 2000. (10) Incorporated by reference to the Current Report on Form 8-K as filed on August 4, 2005. (11) Incorporated by reference to the Current Report on Form 8-K as filed on January 3, 2006. (12) Incorporated by reference to the Current Report on Form 8-K/A as filed on July 19, 2005. (13) Incorporated by reference to the Current Report on Form 8-K as filed on February 7, 2006. (14) Incorporated by reference to the Current Report on Form 8-K as filed on May 16, 2005. (15) Incorporated by reference to the registration statement on Form SB-2, SEC File No. 333-131666, as amended. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Sherb & Co, LLP and Berkovits, Lago & Company, LLP served as our independent registered public accounting firms for fiscal 2005 and fiscal 2004, respectively. The following table shows the fees that were billed for the audit and other services provided by the firm for each of fiscal 2005 and 2004. Fiscal 2005 Fiscal 2004 ----------- ----------- Audit Fees $ 65,000 $ 16,000 Audit-Related Fees 0 2,900 Tax Fees 0 0 All Other Fees 0 0 -------------- -------------- Total $ 65,000 $ 18,900 ============== ============== 60 Audit Fees -- This category includes the audit of our annual financial statements, review of financial statements included in our Form 10-QSB Quarterly Reports and services that are normally provided by the independent auditors in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements. Audit-Related Fees -- This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under "Audit Fees." The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting. Tax Fees -- This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice. All Other Fees -- This category consists of fees for other miscellaneous items. Our Board of Directors has adopted a procedure for pre-approval of all fees charged by the our independent auditors. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit and tax fees paid to the auditors with respect to fiscal year 2005 were pre-approved by the entire Board of Directors. 61 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Linkwell Corporation Dated: May 10, 2006 By: /s/ Xue Lian Bian ------------------- Xue Lian Bian, CEO, President, Principal executive officer principal financial and accounting officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Xue Lian Bian CEO, President, Chairman, May 10, 2006 - --------------------------- principal executive officer Xue Lian Bian and principal financial and accounting officer /s/ Wei Guan Vice President, Secretary May 10, 2006 - --------------------------- and director Wei Guan 62 LINKWELL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 LINKWELL CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Report of Independent Registered Public Accounting Firm...............F-2 Consolidated Financial Statements: Consolidated Balance Sheet........................................F-3 Consolidated Statements of Operations.............................F-4 Consolidated Statements of Stockholders' Equity...................F-5 Consolidated Statements of Cash Flows.............................F-6 Notes to Consolidated Financial Statements....................F-7 to F-24 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Linkwell Corporation and Subsidiaries Shanghai, China We have audited the accompanying consolidated balance sheet of Linkwell Corporation and Subsidiaries as of December 31, 2005 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2005 and 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amount and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Linkwell Corporation and Subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for the years ended December 31, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, the consolidated financial statements have been restated. /s/ Sherb & Co., LLP Certified Public Accountants Boca Raton, Florida March 25, 2006 (May 10, 2006 as to Note 1 and as to the effects of the restatement discussed in Note 1) F-2 LINKWELL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 2005 (As Restated - See Note 1)
ASSETS CURRENT ASSETS: Cash $ 1,460,078 Accounts receivable, net of allowance for doubtful accounts of $13,343 1,347,163 Accounts receivable - related parties 872,370 Inventories 968,224 Prepaid expenses and other 81,750 Assets from discontinued operations 9,956 Loan receivable - related party 100,000 --------------------- Total Current Assets 4,839,541 PROPERTY AND EQUIPMENT - Net 686,234 OTHER ASSETS 734 --------------------- Total Assets $ 5,526,509 ===================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Loans payable $ 628,869 Loan payable - related party 161,533 Accounts payable and accrued expenses 1,400,704 Income tax payable 75,489 Advances from customers 126,199 Liabilities from discontinued operations 22,750 --------------------- Total Current Liabilities 2,415,544 MINORITY INTEREST 249,170 --------------------- STOCKHOLDERS' EQUITY: Preferred stock (No Par Value; 10,000,000 Shares Authorized; No shares issued and outstanding) - Series A convertible preferred stock (No Par Value; 500,000 Shares Authorized; 375,345 shares issued and outstanding) 277,276 Series B convertible preferred stock (No Par Value; 1,500,000 Shares Authorized; 1,500,000 shares issued and outstanding) 1,395,000 Common Stock ($0.0005 Par Value; 150,000,000 Shares Authorized; 45,304,139 shares issued and outstanding) 22,652 Additional paid-in capital 2,584,562 Accumulated deficit (1,331,696) Deferred compensation (106,667) Other comprehensive gain - foreign currency 20,668 --------------------- Total Stockholders' Equity 2,861,795 --------------------- Total Liabilities and Stockholders' Equity $ 5,526,509 =====================
See notes to consolidated financial statements F-3 LINKWELL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, ---------------------------------------- 2005 2004 ------------------- ------------------ NET REVENUES (including net revenues to related parties of $1,957,030 and $1,766,279 for the years ended December 31, 2005 amd 2004, respectively $ 5,465,933 $ 4,422,522 COST OF SALES 3,329,444 3,049,764 ------------------- ------------------ GROSS PROFIT 2,136,489 1,372,758 ------------------- ------------------ OPERATING EXPENSES: Selling expenses 331,258 258,148 General and administrative 878,930 426,532 ------------------- ------------------ Total Operating Expenses 1,210,188 684,680 ------------------- ------------------ INCOME FROM OPERATIONS 926,301 688,078 ------------------- ------------------ OTHER INCOME (EXPENSE): Other income 9,836 8,101 Registration rights penalty (44,000) - Interest income 1,327 1,476 Interest expense - related party (16,282) - Interest expense (42,720) (29,359) ------------------- ------------------ Total Other Expense (91,839) (19,782) ------------------- ------------------ INCOME BEFORE DISCONTINUED OPERATIONS, INCOME TAXES AND MINORITY INTEREST 834,462 668,296 DISCONTINUED OPERATIONS: Loss from discontinued operations (20,817) - ------------------- ------------------ INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 813,645 668,296 INCOME TAXES (177,177) (109,732) ------------------- ------------------ INCOME BEFORE MINORITY INTEREST 636,468 558,564 MINORITY INTEREST (92,339) (55,856) ------------------- ------------------ NET INCOME 544,129 502,708 DEEMED PREFERRED STOCK DIVIDENDS (1,800,276) - ------------------- ------------------ NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,256,147) $ 502,708 =================== ================== BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE: Income (loss) from continuing operations $ (0.03) $ 0.02 Loss from discontinued operations (0.00) - ------------------- ------------------ Net income (loss) per common share available to common shareholders $ (0.03) $ 0.02 =================== ================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic and diluted 41,617,176 36,273,470 =================== ==================
See notes to consolidated financial statements F-4 LINKWELL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 2005 and 2004
Series A Preferred Stock Series B Preferred Stock Common Stock ----------------------- ------------------------ ------------------------- Number of Number of Number of Shares Amount Shares Amount Shares Amount ----------- ---------- ----------- ----------- ------------ ------------ Balance, December 31, 2003 - $ - - $ - 36,273,470 $ 18,138 Distributions - - - - - - Net income for the year - - - - - - ----------- ---------- ----------- ----------- ------------ ------------ Balance, December 31, 2004 - - - - 36,273,470 18,138 Recapitalization of company - - - - 7,030,669 3,514 Sales of Series A preferred stock 375,345 277,276 - - - - Sales of Series B preferred stock - - 1,500,000 1,395,000 - - Common stock issued for services - - - - 2,000,000 1,000 Deemed preferred stock dividends - - - - - - Comprehensive loss: Net income for the year Foreign currency translation adjustment - - - - - - ----------- ---------- ----------- ----------- ------------ ------------ Balance, December 31, 2005 375,345 $ 277,276 1,500,000 $ 1,395,000 45,304,139 $ 22,652 =========== ========== =========== =========== ============ ============
See notes to consolidated financial statements F-5A LINKWELL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 2005 and 2004
Additional Other Total Paid-in Accumulated Deferred Comprehensive Stockholders' Capital Deficit Compensation Loss Equity ------------ ------------- -------------- ------------- ------------ Balance, December 31, 2003 $ 585,727 $ (18,624) $ - $ - $ 585,241 Distributions - (559,633) - - (559,633) Net income for the year - 502,708 - - 502,708 ------------ ------------- ------------- ------------- ------------ Balance, December 31, 2004 585,727 (75,549) - - 528,316 Recapitalization of company 39,559 - - - 43,073 Sales of Series A preferred stock - - - - 277,276 Sales of Series B preferred stock - - - - 1,395,000 Common stock issued for services 159,000 (106,667) - 53,333 Deemed preferred stock dividends 1,800,276 (1,800,276) - - - Comprehensive loss: Net income for the year 544,129 - 544,129 Foreign currency translation adjustment - - - 20,668 20,668 ------------ ------------- ------------- ------------- ------------ Balance, December 31, 2005 $ 2,584,562 $ (1,331,696) $ (106,667) $ 20,668 $ 2,861,795 ============ ============= ============= ============= ============
See notes to consolidated financial statements F-5B LINKWELL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (As Restated- - See Note 1)
For the Year Ended December 31, --------------------------------- 2005 2004 --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations $ 564,946 $ 502,708 Adjustments to reconcile net income from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 42,373 34,483 Minority interest 96,606 55,856 Allowance for doubtful accounts (23,707) 1,067 Loss on disposal of property and equipment 7,402 729 Stock-based compensation 53,333 - Changes in assets and liabilities: Accounts receivable (218,871) (382,747) Accounts receivable - related party (944,741) (261,304) Inventories (26,913) (494,340) Prepaid and other current assets (3,508) 22,514 Other assets (734) - Accounts payable and accrued expenses 259,200 751,893 Accounts payable - related party (258,242) 155,106 Tax payable 75,489 - Advances from customers (135,506) 106,528 Other payables (422,705) - --------------- ---------------- Net Cash (Used in) Provided by Continuing Operating Activities (935,578) 492,493 --------------- ---------------- Net loss from discontinued operations (20,817) - Adjustments to reconcile loss from discontinued operations to net cash used in discontinued operating activities: Net increase in assets of discontinued operations (9,956) - Net increase in liabilities of discontinued operations 22,750 - --------------- ---------------- Net Cash Used in Discontinued Operations (8,023) - --------------- ---------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (943,601) 492,493 --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash received in acquisition 2,460 - Increase in loan receivable - related party (100,000) - Purchase of property, plant and equipment (148,053) (103,724) --------------- ---------------- NET CASH USED IN INVESTING ACTIVITIES (245,593) (103,724) --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loans payable 326,936 241,546 Proceeds from loan payable - related party 161,533 - Shareholder distributions - (559,633) Gross proceeds from sale of preferred stock 1,800,276 - Placement fees and other fees paid (128,000) - --------------- ---------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,160,745 (318,087) --------------- ---------------- EFFECT OF EXCHANGE RATE ON CASH 20,668 - --------------- ---------------- NET INCREASE IN CASH 992,219 70,682 CASH - beginning of year 467,859 397,177 --------------- ---------------- CASH - end of year $ 1,460,078 $ 467,859 =============== ================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest $ 59,002 $ 29,359 =============== ================ Income taxes $ 101,688 $ 91,146 =============== ================ Non-cash investing and financing activities: Accounts receivable - related party exchanged for building $ 333,675 $ - =============== ================
See notes to consolidated financial statements. F-6 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Linkwell Corporation (formerly Kirshner Entertainment & Technologies, Inc.) (the "Company") was incorporated in the state of Colorado on December 11, 1996. On May 31, 2000, the Company acquired 100% of HBOA.Com, Inc. The Company focused on development of an Internet portal through which home based business owners, as well as commercial private label businesses, obtain the products, services, and information necessary to start, expand and profitably run their businesses. On December 28, 2000, the Company formed a new subsidiary, Aerisys Incorporated ("Aerisys"), a Florida corporation, to handle commercial private business. In June 2003, the Company formed its entertainment division and changed its name to reflect this new division. Effective as of March 31, 2003, we decided to discontinue our entertainment division and our technology division, except for the Aerisys operations that continue on a limited basis. On May 2, 2005, the Company entered into and consummated a share exchange with all of the shareholders of Linkwell Tech Group, Inc. ("Linkwell"). Pursuant to the share exchange, the Company acquired 100% of the issued and outstanding shares of Linkwell's common stock, in exchange for 36,273,470 shares of our common stock, which at closing represented approximately 87.5% of the issued and outstanding shares of our common stock. As a result of the transaction, Linkwell became our wholly owned subsidiary. For financial accounting purposes, the exchange of stock was treated as a recapitalization of Kirshner with the former shareholders of the Company retaining 7,030,669 or approximately 12.5% of the outstanding stock. The consolidated financials statements reflect the change in the capital structure of the Company due to the recapitalization and the consolidated financial statements reflect the operations of the Company and its subsidiaries for the periods presented. Linkwell was founded on June 22, 2004, as a Florida corporation. On June 30, 2004, Linkwell acquired 90% of Shanghai Likang Disinfectant High-Tech Company, Ltd. ("Likang") through a stock exchange.The transaction in which Linkwell acquired the 90% interest in Likang resulted in the formation of a U.S. holding company by the shareholders of Likang, as it did not result in a change in the underlying ownership interest of Likang. Likang is a science and technology enterprise founded in 1988. Likang is involved in the development, production, marketing and sale, and distribution of disinfectant health care products. Likang's products are utilized by the hospital and medical industry in China. Likang has developed a line of disinfectant product offerings. Likang regards the hospital disinfecting products as the primary segment of its business. Relying on its research and development strength, unique technology and the competitive advantages of the numerous professional staff rooms of Second Military Medical University, it has developed and manufactured several series products in the field of skin mucous disinfection, hand disinfection, surrounding articles disinfection, medical instruments disinfection and air disinfection. On June 30, 2005, the Company's Board of Directors approved an amendment of its Articles of Incorporation to change the name of the Company to Linkwell Corporation. The effective date of the name change was after close of business on August 16, 2005. Basis of presentation The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The consolidated financials statements of the Company include the accounts of its wholly-owned subsidiary, Linkwell Tech Group, Inc., and its 90%-owned subsidiary, Likang. All significant inter-company balances and transactions have been eliminated. F-7 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates in 2005 and 2004 include the allowance for doubtful accounts, stock-based compensation, the useful life of property and equipment and intangible assets, and the valuation of derivative liabilities. Fair value of financial instruments The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, customer advances, loans and amounts due from related parties approximate their fair market value based on the short-term maturity of these instruments. Accounts receivable The Company has a policy of reserving for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At December 31, 2005, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amount of $13,343. Inventories Inventories, consisting of raw materials and finished goods related to the Company's products are stated at the lower of cost or market utilizing the first-in, first-out method. Property and equipment Property and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Advances from customers Advances from customers at December 31, 2005 of $126,199 consist of prepayments from third party customers to the Company for merchandise that had not yet shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods, in compliance with its revenue recognition policy. F-8 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment of long-lived assets In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," The Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset's estimated fair value and its book value. The Company did not consider it necessary to record any impairment charges during the year ended December 31, 2005. Income taxes The Company files federal and state income tax returns in the United States for its domestic operations, and files separate foreign tax returns for the Company's Chinese subsidiaries. Income taxes are accounted for under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Income (loss) per common share In accordance with SFAS No. 128 "Earnings Per Share," Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Diluted loss per common share is not presented because it is anti-dilutive. The Company's common stock equivalents at December 31, 2005 include the following: Convertible preferred stock 18,753,450 Warrants and options 35,009,865 ------------------ 53,763,315 ================== Revenue recognition The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. The following policies reflect specific criteria for the various revenues streams of the Company: The Company's revenues from the sale of products are recorded when the goods are shipped, title passes, and collectibility is reasonably assured. The Company's revenues from the sale of products to related parties are recorded when the goods are shipped which correlates with the shipment by the related parties to its customers, at which time title passes, and collectibility is reasonably assured. The Company receives sales order on a just-in-time basis from the related party. Generally, the related party does not hold the Company's inventory. If the related party has inventory on hand at the end of a reporting period, the sale is reversed and the inventory is included on the Company's balance sheet. F-9 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Concentrations of credit risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions in the US and in China. Almost all of the Company's sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk. For the year ended December 31, 2005 and 2004, sales to related parties accounted for 36% and 40% of net revenues, respectively. Comprehensive income The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income". Comprehensive income is comprised of net income and all changes to the statements of stockholders' equity, except those due to investments by stockholders', changes in paid-in capital and distributions to stockholders. Shipping costs Shipping costs are included in selling and marketing expenses and totaled $101,205 and $76,908 for the years ended December 31, 2005 and 2004, respectively. Advertising Advertising is expensed as incurred. Advertising expenses for the years ended December 31, 2005 and 2004 was not material. Stock-based compensation Through December 31, 2005, the Company accounts for stock options issued to employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation cost is measured on the date of grant as the excess of the current market price of the underlying stock over the exercise price. Such compensation amounts are amortized over the respective vesting periods of the option grant. The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation -Transition and Disclosure", which permits entities to provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-valued based method defined in SFAS No. 123 had been applied. The Company accounts for stock options and stock issued to non-employees for goods or services in accordance with the fair value method of SFAS 123. F-10 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Non-employee stock based compensation The cost of stock based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in Emerging Issues Task Force Issue ("EITF") 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18"). Registration rights agreements The Company has adopted View C of EITF 05-4 "Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF 00-19" ("EITF 05-4"). Accordingly, the Company classifies as liability instruments, the fair value of registration rights agreements when such agreements (i) require it to file, and cause to be declared effective under the Securities Act, a registration statement with the SEC within contractually fixed time periods, and (ii) provide for the payment of liquidating damages in the event of its failure to comply with such agreements. Under View C of EITF 05-4, (i) registration rights with these characteristics are accounted for as derivative financial instruments at fair value and (ii) contracts that are (a) indexed to and potentially settled in an issuer's own stock and (b) permit gross physical or net share settlement with no net cash settlement alternative are classified as equity instruments. At December 31, 2005, the Company recorded a registration rights penalty expense of $44,000, which has been included on the accompanying consolidated balance sheet in accounts payable and accrued expenses. Foreign currency translation Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in determining net income or loss. The functional and reporting currency is the U.S. dollar. The functional currency of the Company's Chinese subsidiary is the local currency. The financial statements of the subsidiary are translated into United States dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented because the Chinese dollar (RMB) fluctuates with the United States dollar. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. The cumulative translation adjustment and effect of exchange rate changes on cash at December 31, 2005 was $20,668. Research and development Research and development costs are expensed as incurred. These costs primarily consist of cost of material used and salaries paid for the development of the Company's products and fees paid to third parties. Research and development costs for the years ended December 31, 2005 and 2004 were approximately $36,000 and $76,000, respectively, and are included in cost of sales. F-11 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent accounting pronouncements In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. FAS No. 123R is effective for the first fiscal year beginning after December 15, 2005. The Company believes the adoption of this pronouncement may have a material effect its financials position, In April 2005, the Securities and Exchange Commission's Office of the Chief Accountant and its Division of Corporation Finance has released Staff Accounting Bulletin (SAB) No.107 to provide guidance regarding the application of FASB Statement No. 123 (revised 2004), Share-Based Payment. Statement No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SAB 107 provides interpretative guidance related to the interaction between Statement No. 123R and certain SEC rules and regulations, as well as the staff's views regarding the valuation of share-based payment arrangements for public companies. In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe that the adoption of SFAS 154 will have a significant effect on its financial statements. F-12 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent accounting pronouncements (continued) On June 29, 2005, the EITF ratified Issue No. 05-2, "The Meaning of `Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, `Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.'" EITF Issue 05-2 provides guidance on determining whether a convertible debt instrument is "conventional" for the purpose of determining when an issuer is required to bifurcate a conversion option that is embedded in convertible debt in accordance with SFAS 133. Issue No. 05-2 is effective for new instruments entered into and instruments modified in reporting periods beginning after June 29, 2005. The adoption of this pronouncement did not have a material effect on the Company's financial statements. In September 2005, the EITF issued EITF Issue No. 05-4, "The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, `Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.'" EITF 05-4 provides guidance to issuers as to how to account for registration rights agreements that require an issuer to use its "best efforts" to file a registration statement for the resale of equity instruments and have it declared effective by the end of a specified grace period and, if applicable, maintain the effectiveness of the registration statement for a period of time or pay a liquidated damage penalty to the investor. The Company has adopted view C of this pronouncement. Accordingly, the Company has bifurcated registration rights from their related free standing financial instruments and recorded them at fair value. In September 2005, the FASB ratified the Emerging Issues Task Force's ("EITF") Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues," which addresses whether a modification to a conversion option that changes its fair value affects the recognition of interest expense for the associated debt instrument after the modification and whether a borrower should recognize a beneficial conversion feature, not a debt extinguishment if a debt modification increases the intrinsic value of the debt (for example, the modification reduces the conversion price of the debt). This issue is effective for future modifications of debt instruments beginning in the first interim or annual reporting period beginning after December 15, 2005. The Company is currently in the process of evaluating the effect that the adoption of this pronouncement may have on its financial statements. In September 2005, the FASB also ratified the EITF's Issue No. 05-8, "Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature," which discusses whether the issuance of convertible debt with a beneficial conversion feature results in a basis difference arising from the intrinsic value of the beneficial conversion feature on the commitment date (which is recorded in the shareholder's equity for book purposes, but as a liability for income tax purposes), and, if so, whether that basis difference is a temporary difference under FASB Statement No. 109, "Accounting for Income Taxes." This Issue should be applied by retrospective application pursuant to Statement 154 to all instruments with a beneficial conversion feature accounted for under Issue 00-27 included in financial statements for reporting periods beginning after December 15, 2005. The Company is currently in the process of evaluating the effect that the adoption of this pronouncement may have on its financial statements. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. F-13 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Restatement As a result of a review of its financial statements, management has determined that the Company's deposits - related party of $333,675 as previously reflected on its consolidated balance, is not a deposit and should be part of accounts receivable - related party. Additionally, the Company disclosed its note to consolidated financial statements that this deposit was to be applied to the purchase of a building from a related party in February 2006. Management has determined that this deposit of $333,675 was applied to the purchase of a building from related party in August 2005. The change in presentation of the Company's deposit -related party has the effect of increasing current assets by $333,675 and decreasing long-term assets by $333,675 as of December 31, 2005. Additionally, this change in presentation changed the Company's cash flow statement, increasing cash used in operations by $333,675 and reducing cash used in investing activities by $333,675. This change in presentation of the Company's deposit - related party did not have any impact on the Company's consolidated statement of operations, earnings per share, and consolidated statement of shareholders equity. NOTE 2 - INVENTORIES At December 31, 2005, inventories consisted of the following: Raw materials $ 262,882 Work in process 33,306 Finished goods 794,613 -------------- 1,090,801 Less: reserve for obsolescence (122,577) -------------- $ 968,224 ============== NOTE 3 - PROPERTY AND EQUIPMENT At December 31, 2005, property and equipment consist of the following: Useful Life Office equipment and furniture 5-7 Years $ 104,369 Autos and trucks 10 Years 119,364 Manufacturing equipment 7 Years 131,221 Building and land 20 Years 465,952 Leasehold improvements 5 Years 3,280 ----------- 824,186 Less accumulated depreciation (137,952) ----------- $ 686,234 ============ For the year ended December 31, 2005 and 2004, depreciation expense amounted to $42,373 and $34,483, respectively. F-14 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 4 - LOANS PAYABLE Loans payable consisted of the following at December 31, 2005: Note to De Chang Credit Union due on May 18, 2006 with interest at 6.70% per annum. Secured by equipment $ 221,954 Note to De Chang Credit Union due on September 30, 2006 with interest 6.70% per annum. Secured by equipment 61,654 Note to De Chang Credit Union due on March 9, 2006 with interest at 6.70% per annum. Secured by equipment. Repaid in March 2006 98,646 Note to Agriculture Bank of China due on December 7, 2006 with interest at 6.70% per annum. Secured by equipment 246,615 ------------- Total 628,869 Less: current portion of loans payable (628,869) ------------ Loans payable, long-term $ - =============== NOTE 5 - DISCONTINUED OPERATIONS As noted in Note 12 - Subsequent Events, in January 2006, the Company sold 100% of the stock of its subsidiary, Aerisys Incorporated to Mr. Gary Verdier, the Company's former CEO, in exchange for assumption of all liabilities and obligation of Aerisys Incorporated. Accordingly, Aerisys is reported as a discontinued operation, and prior periods have been restated in the Company's financial statements and related footnotes to conform to this presentation. The assets and liabilities of Aerisys are presented in the balance sheet under the captions "Assets of discontinued operation" and "Liabilities of discontinued operation". The approximate carrying amounts of the major classes of these assets and liabilities as of December 31, 2005 are summarized as follows: Assets: Cash $ 4,815 Accounts receivable 5,141 ---------------- Assets of discontinued operation $ 9,956 =============== Liabilities: Due to related party 15,000 Deferred income 7,750 ---------------- Liabilities of discontinued operation $ 22,750 ================ F-15 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 5 - DISCONTINUED OPERATIONS (continued) The following table sets forth for the fiscal year indicated selected financial data of the Company's discontinued operations from date of acquisition (May 3, 2005) to December 31, 2005. 2005 ----------------- Revenues $ 34,245 Operating and other non-operating expenses 55,062 ----------------- Loss from discontinued operations $ (20,817) ================= NOTE 6 - RELATED PARTY TRANSACTIONS The Company's 90% owned subsidiary, Likang, is engaged in business activities with two affiliated entities. Shanghai Likang Meirui Pharmaceuticals High-Tech Company, Ltd. ("Meirui"), a company of which Shanghai Shanhai Group, Likang's minority shareholder, owns 68%, provides certain contract manufacturing of two products for Likang. Specifically, Meirui provides Likang with Ozone producing device equipment and Ultraviolet radiation lamp lights. In addition, under the terms of a two year agreement entered into in January 2005, Meirui produces the Lvshaxing Air Disinfectant Machine and Likang Surgery hand-washing table for Likang. In January 2005, Likang signed a two year agreement with Meirui to market its products to the retail/consumer market using Meirui's proprietary sales network which caters to the retail/consumer market in China. For the years ended December 31, 2005 and 2004, the Company recorded net revenues of $23,987 and $67,356 to Meirui, respectively. Additionally, for the years ended December 31, 2005 and 2004, the Company purchased product from Meirui amounting to $48,489 and $389,400, respectively. At December 31, 2005, Meirui owed Likang $1,718. In general, accounts receivable due from Meirui are payable in cash and are due within 4-6 months, which approximate normal business terms with unrelated parties. Shanghai Shanhai Group, who is the minority shareholder of Likang, is owned by Group Employee Share-holding Commission (16.25%) and Baoshan District Dachang Town South Village Economic Cooperation Club (83.75%). The Company leases its principal executive offices and warehouse space from Shanghai Shanhai Group for approximately $36,000 per year. Shanghai Shanhai Group also holds the land use permit for the principal executive office building. For the year ended December 31, 2005 and 2004, rent expense paid to this related party amounted to $32,660 and $37,962, respectively. Additionally, in January 2005, the Company borrowed $161,533 from Shanghai Shanhai Group for working capital purposes. The loan bears interest at 10% per annum and is payable on demand. For the year ended December 31, 2005, interest expense related to this note amounted to $16,282. Shanghai Likang Pharmaceuticals Technology Company, Limited, which is owned by Messrs. Xuelian Bian (90%) and Wei Guan (10%), the Company's officers and directors, sells the Company's products to third parties. For the years ended December 31, 2005 and 2004, the Company recorded net revenues of $1,933,043 and $1,698,923 to Shanghai Likang Pharmaceuticals Technology Company, Limited, respectively. At December 31, 2005, accounts receivable from sales due from Shanghai Likang Pharmaceuticals Technology Company, Limited was $536,977. In general, accounts receivable due from Likang are payable in cash and are due within 4-6 months, which approximate normal business terms with unrelated parties. Additionally, through December 31, 2005, the Company leased approximately 21,500 square feet of manufacturing space from Shanghai Likang Pharmaceuticals Technology Company, Limited for approximately $11,500 annually. In August 2005, the Company entered into an asset purchase agreement with Shanghai Likang Pharmaceuticals Technology Company, Limited and Mr. Bian under which the Company purchased this previously leased building for $333,675. The purchase price was paid for through a reduction of the related parties accounts receivable owed from Shanghai Likang Pharmaceuticals Technology Company, Limited. F-16 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 6 - RELATED PARTY TRANSACTIONS On December 28, 2005, the Company loaned $100,000 to Shanghai Likang Pharmaceuticals Technology Company, Limited for working capital purposes. The balance bears interest at 3% and was repaid in April 2006. For the fiscal year ended December 31, 2004, Likang made distributions to its shareholder, Shanghai Shanhai Group and to Shanghai Likang Pharmaceuticals Technology Company, Limited, in the aggregate amount of $559,633. Shanghai Likang Pharmaceuticals Technology Company, Limited is owned by Messrs. Bian and Guan, our officers and directors. At December 31, 2005, the Company owed $15,000 to a shareholder of the Company for working capital advanced to the Company's subsidiary, Aerisys, The advances are non-interest bearing, are payable on demand, and are included in liabilities from discontinued operations on the consolidated balance sheet. NOTE 7 - SHAREHOLDERS' EQUITY Preferred Stock a) Series A Convertible Preferred Stock On May 11, 2005, the Company's Board of Directors approved the creation of 500,000 shares of Series A Convertible Preferred Stock having the following rights, preferences and limitations: (a) each share has a stated value of $.80 per share and no par value; (b) each share ranks equally with any other series of preferred stock designated by the Company and not designated as senior securities or subordinate to the Series A Convertible Preferred Stock,; (c) each share entitles the holder to receive a six percent (6%) per annum cumulative dividend when, as and if, declared by the Board of Directors of the Company; (d) these shares are convertible into shares of the company's Common Stock at a per share value of $.08 per share,; (e) the shares have no voting rights, and (f) the shares are not subject to redemption. On June 30, 2005, the Company completed an approximate $277,276 (net of fees of $23,000) financing consisting of 375,345 shares of its 6% Series A Preferred Stock, and common stock purchase warrants to purchase an additional 3,753,450 shares. Each warrant entitles the holder to purchase one share of common stock for a period of five years, at an exercise price of $.10 per share, subject to adjustment. The net proceeds from the transaction will be used for general working capital purposes. To the extent that the investors continue to own the 6% Series A Preferred Stock or warrants, the Company originally agreed to issue the investors additional shares and/or warrants to protect against the Company's future issuance of common stock or securities convertible into common stock at less than the $.08 per share conversion price of the preferred stock and/or $.10 per share exercise price of the warrants, respectively. Prior to December 31, 2005, this provision was waived by the investors. In addition, the Company also granted the holders piggy-back registration rights covering the shares of its common stock underlying the preferred stock and warrants. F-17 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 7 - SHAREHOLDER' EQUITY (continued) Preferred Stock (continued) On the date of issuance of the Series A Preferred Stock, the effective conversion price was at a discount to the price of the common stock into which it was convertible. In accordance with Emerging Issues Task Force ("EITF") 98-5 and EITF 00-27, the Series A Preferred Stock was considered to have an embedded beneficial conversion feature because the conversion price was less than the fair value of the Company's common stock. This beneficial conversion feature is calculated after the warrants have been valued with proceeds allocated on a relative value basis. This series A convertible Preferred was fully convertible at the issuance date, therefore the full amount of proceeds allocated to the Series A Preferred was determined to be the value of the beneficial conversion feature and was recorded as a deemed dividend with a corresponding credit to additional paid-in capital in the amount of $300,276. b) Series B 6% Cumulative Convertible Preferred Stock On December 28, 2005, the Company closed on a private placement with a group of accredited investors, for the sale of 1,500,000 shares of the Company's Series B 6% Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") along with warrants to purchase additional shares of the Company's common stock exempt from registration under the Securities Act in reliance on exemptions provided by Section 4(2) of that act and Regulation D. The 6% Convertible Preferred Stock was priced at $1.00 per share, and the Company received gross proceeds of $1,500,000. Each share of Series B Preferred Stock, as well as the value of all accrued by unpaid dividends, is convertible at the option of the holder into shares of the Company's common stock at a conversion price of $0.10 per share, provided that no holder has the right to convert his shares of Series B Preferred Stock if by virtue of such conversion the holder would become the beneficial owner of than 4.99% of the Company's common stock. This ownership limitation can be waived by the holder upon 61 days notice to the Company. The conversion price is subject to adjustment in the event of stock splits, reclassifications or stock dividends. Thus, if all of the shares of the Series B Preferred Stock were converted to common stock, an additional 15,000,000 shares of common stock would be issued. The shares of Series B Preferred Stock do not have any voting rights except as may be provided under Florida law. In connection with the sale of 1,500,000 shares of the Company's Series B Preferred Stock, the Company issued Class A Common Stock Purchase Warrants to purchase 15,000,000 shares of the Company's common stock at an exercise price of $0.20 per share and Class B Common Stock Purchase Warrants to purchase 15,866,665 (including 866,665 granted to placement agent) shares of its common stock at an exercise price of $0.30 per share. The Class A and Class B warrant exercise prices are subject to adjustment pursuant to anti-dilution provisions on either a cash or cashless exercise basis. The warrants expire five years from the date of issuance. The Series B Preferred Stock ranks ahead of the common stock of the Company upon liquidation of the Company. The Series B Preferred Stock also ranks ahead of the common stock with respect to the payment of dividends. The shares pay cumulative dividends of 6% per annum beginning on October 31, 2006, which increases to 20% per annum if an "event of default", as defined in the agreement, has occurred. The dividends are payable in cash or at the Company's option shares of registered common stock. If the Company elects to pay dividends in the form of shares of its common stock, for purposes of the calculation the shares are valued at the average closing price of our common stock for the 10 trading days preceding the date of the dividend. In connection with the transaction, the Company filed a certificate of designation for the Series B Preferred Stock with the Florida Department of Corporations on December 8, 2005. This filing constituted an amendment to the Company's certificate of incorporation, designating the terms, rights and preferences of a new series of preferred stock of the Company. F-18 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 7 - SHAREHOLDER' EQUITY (continued) Preferred Stock (continued) The Company paid a due diligence fee of $65,000 in cash and Class B Warrants to purchase 866,665 shares of its common stock to certain of the investors who purchased securities in this offering. The net proceeds from the transaction will be used for working capital purposes. The Company agreed to file a registration statement covering the shares of common stock underlying the securities issued. In the event the registration statement is not filed by February 13, 2006 or does not become effective by June 28, 2006, the Company is required to pay liquidated damages in the amount of $30,000 per month until the deficiency is cured. The transaction documents also provide for the payment of liquidated damages to the investors in certain events, including the Company's failure to maintain an effective registration statement covering the resale of the common shares issuable upon conversion or exercise of the securities. In accordance with Emerging Issues Task Force ("EITF") 98-5 and EITF 00-27, the Series B Preferred was considered to have an embedded beneficial conversion feature because the conversion price was less than the fair value of the Company's common stock. This beneficial conversion feature is calculated after the warrants have been valued with proceeds allocated on a relative value basis. This Series B Convertible Preferred was fully convertible at the issuance date, therefore the full amount of proceeds allocated to the Series B Preferred was determined to be the value of the beneficial conversion feature and was recorded as a deemed dividend with a corresponding credit to additional paid-in capital in the amount of $1,500,000. The Company computes the fair value of the warrants using the Black-Scholes valuation model. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The assumptions used in this model to estimate fair value of the warrants granted are as follows: Warrants Exercise/Conversion Price $ 0.20 to $0.30 Fair Value of the Company's Common Stock $ 0.153 Expected life in years 5.0 Expected volatility 330% Expected dividend yield 0.0% Risk free rate 3.93% Calculated fair value per share $ 0.153 Common Stock On May 2, 2005, the Company issued 36,273,470 shares of its common stock to two individuals under the terms of a Share Exchange Agreement dated May 2, 2005. This transaction, which resulted in Linkwell becoming a wholly owned subsidiary of the Company, was exempt from registration under the Securities Act of 1933, as amended in reliance on an exemption provided by Section 4(2) of that Act. The participants were either accredited investors or non-accredited investors who had such knowledge and experience in financial, investment and business matters that they were capable of evaluating the merits and risks of the prospective investment in our securities. F-19 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 7 - SHAREHOLDER' EQUITY (continued) Common Stock (continued) On August 24, 2005 and effective September 1, 2005, the Company entered into a one-year agreement with China Direct Investments, Inc. to provide business development and management services. In connection with this agreement, the Company issued 2,000,000 shares of the Company's common stock. The Company valued these services using the fair value of common shares on grant date at $.08 per share and recorded deferred consulting expense of $160,000 to be amortized over the service period. For the year ended December 31, 2005, amortization of deferred consulting expense amounted to $53,333. Stock Options Effective June 28, 2005, the Company's Board of Directors authorized, approved and adopted its 2005 Equity Compensation Plan. The purpose of the plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give these persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. The Company has currently reserved 5,000,000 of its authorized but unissued shares of common stock for issuance under the plan, and a maximum of 5,000,000 shares may be issued, unless the plan is subsequently amended (subject to adjustment in the event of certain changes in our capitalization), without further action by its Board of Directors and stockholders, as required. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by the Company, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by the Company for other purposes. The plan is administered by the Company's Board of Directors or an underlying committee. The Board of Directors or the committee determines from time to time those officers, directors, key employees and consultants to whom stock grants or plan options are to be granted, the terms and provisions of the respective option agreements, the time or times at which such options shall be granted, the type of options to be granted, the dates such plan options become exercisable, the number of shares subject to each option, the purchase price of such shares and the form of payment of such purchase price. All other questions relating to the administration of the plan, and the interpretation of the provisions thereof and of the related option agreements are resolved by the Board or committee. Plan options may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified options. The Company's officers, directors, key employees and consultants are eligible to receive stock grants and non-qualified options under the plan; only the Company's employees are eligible to receive incentive options. In addition, the plan allows for the inclusion of a reload option provision which permits an eligible person to pay the exercise price of the option with shares of common stock owned by the eligible person and receive a new option to purchase shares of common stock equal in number to the tendered shares. Furthermore, compensatory stock grants may also be issued. F-20 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 7 - SHAREHOLDER' EQUITY (continued) Stock Options (continued) Any incentive option granted under the plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any incentive option granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The term of each plan option and the manner in which it may be exercised is determined by the Board of Directors or the committee, provided that no option may be exercisable more than ten years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant. The exercise price of non-qualified options shall be determined by the Board of Directors or the Committee, but shall not be less than the par value on the date the option is granted. The per share purchase price of shares issuable upon exercise of a Plan option may be adjusted in the event of certain changes in our capitalization, but no such adjustment shall change the total purchase price payable upon the exercise in full of options granted under the Plan. Unless the plan has been previously suspended or terminated by the Board of Directors, the plan, as it relates to grants of incentive stock options, terminates on June 28, 2015. Common Stock Warrants In June 2005, in connection with the preferred stock Series A Preferred Stock funding, the Company granted warrants to purchase 3,753,450 shares of its common stock at $0.10. The Warrants are exercisable for five years after the issue dates of the Warrants. In December 2005, in connection with the Company's Series B Preferred Stock funding, the Company granted warrants to purchase 15,000,000 shares of its common stock at $0.20 and 15,866,665 at $.30. The warrants are exercisable for five years after the issue dates of the Warrants. Stock warrant activity for the year ended December 31, 2005 is summarized as follows: Number of Weighted average shares exercise price --------- ---------------- Outstanding at December 31, 2004 389,750 $ 1.88 Granted 34,620,115 .24 Exercised - - ------------ --------------- Outstanding at December 31, 2005 35,009,865 $ 0.25 ============ ============== F-21 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 7 - SHAREHOLDER' EQUITY (continued) Common Stock Warrants (continued) The following table summarizes the Company's stock warrants outstanding at December 31, 2005: Warrants outstanding and exercisable --------------------------------------------- Weighted Weighted average average Range of remaining exercise exercise price Number life price ---------------- ------------ --------------- ----------- $0.75-2.50 359,750 1.70 $2.02 $ 0.10 3,753,450 4.50 $0.10 $ 0.20 15,030,000 4.90 $0.20 $ 0.30 15,866,665 5.00 0$.30 NOTE 8 - INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" "SFAS 109". SFAS 109 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. SFAS 109 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. The Company's subsidiaries in China are governed by the Income Tax Law of the People's Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the "PRC Income Tax Law"). Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership). The table below summarizes the differences between the Company's effective tax rate and the statutory federal rate as follows for years ended December 31, 2005 and 2004:
2005 2004 -------------------------- -------------------------- Computed "expected" provision $ 276,639 $ 227,220 State tax provision, net of federal effect 32,546 26,732 Effect of foreign income taxes (205,950) (144,220) Other permanent differences 73,942 - -------------------------- -------------------------- $ 177,177 $ 109,732 ========================== ==========================
F-22 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 9 - COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases office and manufacturing space under leases in Shanghai, China that expire through February 2011. Future minimum rental payments required under these operating leases are as follows: Year Ended December 31, --------------------------------------------- 2006 $109,572 2007 73,742 2008 41,078 2009 41,291 2010 41,291 2011 2,874 ------------- Total minimum lease payments $309,848 ============= For the years ended December 31, 2005 and 2004, rent expense amounted to $65,455 and $46,535, respectively. Litigation The Company is not a party to any pending legal proceeding. No federal, state or local governmental agency is presently contemplating any proceeding against the Company. No director, executive officer or affiliate of the Company or owner of record or beneficially of more than five percent of the Company's common stock is a party adverse to the company or has a material interest adverse to the Company in any proceeding. NOTE 10 - OPERATING RISK (a) Country risk Currently, the Company's revenues are primarily derived from the sale of line of disinfectant product offerings to customers in the Peoples Republic of China (PRC). The Company hopes to expand its operations to countries outside the PRC, however, such expansion has not been commenced and there are no assurances that the Company will be able to achieve such an expansion successfully. Therefore, a downturn or stagnation in the economic environment of the PRC could have a material adverse effect on the Company's financial condition. (b) Products risk In addition to competing with other manufacturers of disinfectant product offerings, the Company competes with larger US companies who have greater funds available for expansion, marketing, research and development and the ability to attract more qualified personnel. These US companies may be able to offer products at a lower price. There can be no assurance that the Company will remain competitive should this occur. F-23 LINKWELL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 10 - OPERATING RISK (c) Exchange risk The Company can not guarantee that the current exchange rate will remain steady, therefore there is a possibility that the Company could post the same amount of profit for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange rate of Remnibi converted to US dollars on that date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice. (d) Political risk Currently, PRC is in a period of growth and is openly promoting business development in order to bring more business into PRC. Additionally PRC allows a Chinese corporation to be owned by a United States corporation. If the laws or regulations are changed by the PRC government, the Company's ability to operate the PRC subsidiaries could be affected. NOTE 11 - FOREIGN OPERATIONS For the year ended December 31, 2005 and 2004, the Company derived all of its revenue from its subsidiaries located in the People's Republic of China. Identifiable assets by geographic areas as of December 31, 2005 is as follows: Identifiable Assets at December 31, 2005 --------------- United States $ 1,334,639 China 4,191,870 --------------- Total $ 5,526,509 ================ NOTE 12 - SUBSEQUENT EVENT In January 2006, the Company sold 100% of the stock of its subsidiary, Aerisys Incorporated to Mr. Gary Verdier, the Company's former CEO, in exchange for assumption of all liabilities and obligation of Aerisys Incorporated. The sale of the Company's Aerisys subsidiary did not have a material effect on the Company's results of operations or financial position. In January 2006, the Company issued China Direct Investments, Inc. three year common stock purchase warrants to purchase 2,125,000 shares of our common stock at an exercise price of $0.20 per share as additional compensation. F-24 EX-23 2 ex231.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 of Linkwell Corporation and the related prospectuses of our audit report dated March 25, 2006 except as to Note 1 - and the effects of the restatement discussed in Note 1 as to which the date is May 10, 2006, Restatements which is dated with respect to the consolidated balance sheet at December 31, 2005 and the consolidated statements of operations, shareholders' equity and cash flows of Linkwell Corporation and its subsidiaries for the years ended December 31, 2005 and 2004 in the Form 10-KSB for the year ended December 31, 2005. /s/ Sherb & Co., LLP Certified Public Accountants Boca Raton, Florida May 12, 2006 EX-31 3 ex311.txt EXHIBIT 31.1 RULE 13a-14(a)/15d-14(a) CERTIFICATION I, Xue Lian Bian, certify that: 1. I have reviewed this annual report on Form 10-KSB/A for the year ended December 31, 2005 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 annual 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. May 10, 2006 By: /s/ Xue Lian Bian -------------------- Xue Lian Bian, CEO, President and principal executive officer EX-31 4 ex312.txt EXHIBIT 31.2 RULE 13a-14(a)/15d-14(a) CERTIFICATION I, Xue Lian Bian, certify that: 1. I have reviewed this annual report on Form 10-KSB/A for the year ended December 31, 2005 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 annual 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. May 10, 2006 By: /s/ Xue Lian Bian -------------------- Xue Lian Bian, CEO, President and principal financial and accounting officer EX-32 5 ex321.txt 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 Annual Report of Linkwell Corporation (the "Company") on Form 10-KSB/A for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (the "Report"), I, Xue Lian Bian, CEO 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. /s/ Xue Lian Bian Xue Lian Bian, CEO, President, principal executive officer and principal financial and accounting officer May 10, 2006 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the company and will be retained by the company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----