XOTC:WKBT Quarterly Report 10-Q/A Filing - 6/30/2012

Effective Date 6/30/2012

.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No.1)

 

(Mark One)

 

  x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

or

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission File Number: 333-165684

 

WEIKANG BIO-TECHNOLOGY GROUP CO., INC.

 

(Exact name of small business issuer as specified in its charter)

 

Nevada   22-2816569

(State or other jurisdiction of incorporation or
organization)

  (IRS Employer identification No.)

 

No. 365 Chengde Street, Daowai District, Harbin

Heilongjiang Province, People’s Republic of China 150020

(Address of principal executive offices)

 

(86) 451- 88355530

 

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark 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  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨  No ¨

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 35,128,358 shares of common stock, $.00001 par value, were outstanding as of August 13, 2012.

 

 
 

 

EXPLANATORY NOTE

 

This Amendment No. 1 to Weikang Bio-Technology Group Co., Inc.’s (the “Company”) Quarterly Report on Form 10-Q for the period ended June 30, 2012 (“Form 10-Q”), as filed with the Securities and Exchange Commission on August 14, 2012, is being filed to furnish Exhibits 101 to the Form 10-Q as required by Rule 405 of Regulation S-T.  Exhibits 101 to this Amendment No. 1 to Form 10-Q furnish the following items in Extensible Business Reporting Language:  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Shareholder’s Equity and (v) the Notes to the Company’s Consolidated Financial Statements.

 

This Amendment No. 1 is also being also filed to correct the typographical error in the Consolidated Statements of Shareholders’ Equity on page 7, whereby the total value of “Balance at June 30, 2012” should read “121,761,559” instead of “127,761,559.”

 

No changes have been made to the Form 10-Q except as described above.  This Amendment No. 1 to Form 10-Q does not reflect subsequent events occurring after the original filing date of the Form 10-Q or modify or update in any way disclosures made in the Form 10-Q.

 

 
 

 

TABLE OF CONTENTS

 

    Page
  PART I—FINANCIAL INFORMATION  
Item 1. Financial Statements. 1
     
  Report of Registered Independent Public Accounting Firm 2
     
  Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 3
     
  Consolidated Statements of Income and Comprehensive Income for the six and three months ended June 30, 2012 and 2011 5
     
  Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 6
     
  Notes to Consolidated Financial Statements as of June 30, 2012 and December 31, 2011 and for the six months ended June 30, 2012 and 2011 8
     
  PART II—OTHER INFORMATION  
Item 6. Exhibits.  
   
SIGNATURES  

 

 
 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Weikang Bio-Technology Group Co., Inc.

 

Unaudited Consolidated Financial Statements

 

June 30, 2012 and December 31, 2011

 

(Stated in US Dollars)

 

Contents Pages
   
Report of Independent Registered Public Accounting Firm 2
   
Consolidated Balance Sheets 3 – 4
   
Consolidated Statements of Income 5
   
Consolidated Statements of Cash Flows 6
   
Consolidated Statements of Stockholders’ Equity 7
   
Notes to Consolidated Financial Statements  8 – 25

 

1
 

 

REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

 

To:The Board of Directors and Stockholders of

Weikang Bio-Technology Group Co., Inc.

 

We have reviewed the accompanying interim consolidated balance sheets of Weikang Bio-Technology Group Co., Inc. (“the Company”) as of June 30, 2012 and December 31, 2011, and the related statements of income, stockholders’ equity, and cash flows for the three and six months periods ended June 30, 2012 and 2011. These interim consolidated financial statements are the responsibility of the Company's management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with U.S. generally accepted accounting principles.

 

 

  /s/ WWC, P.C.
San Mateo, California WWC, P.C.
August 7, 2012 Certified Public Accountants

 

2
 

 

Weikang Bio-Technology Group Co., Inc.

Consolidated Balance Sheets

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

   Note  (Unaudited)
June 30,
2012
   (Audited)
December 31,
2011
 
Assets             
              
Current assets             
Cash and cash equivalents  2C  $81,507,925   $70,783,230 
Accounts receivable, net  2D,3   1,115,833    5,576,368 
Advance to suppliers and other receivables  4   4,142,350    4,426,613 
Inventory  2E, 5   621,687    1,024,467 
Deferred tax asset      37,051    37,192 
              
Total current assets      87,424,846    81,847,870 
              
Non-current assets             
Property and equipment, net  2F, 6   23,272,858    24,208,825 
Construction in progress  7   869,579    872,891 
Intangible assets  8   16,054,062    16,263,238 
              
Total non-current assets      40,196,499    41,344,954 
              
Total Assets     $127,621,345   $123,192,824 
              
Liabilities and Stockholders’ Equity             
              
Current liabilities             
Accounts payable     $23,245   $392,014 
Taxes payable  10   1,793,241    6,433,014 
Accrued expenses and other payables  11   623,739    739,797 
              
Total current liabilities      2,440,225    7,564,825 
              
Contingencies             
Deferred Tax Liability, net  12   3,419,561    3,528,521 
              
Total Liabilities     $5,859,786   $11,093,346 

 

See Accompanying Notes to the Consolidated Financial Statements and Accountant’s Report

 

3
 

 

Weikang Bio-Technology Group Co., Inc.

Consolidated Balance Sheets

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

   Note  (Unaudited)
June 30,
2012
   (Audited)
December 31,
2011
 
Stockholders’ Equity             
Common stock, $0.00001 par value; 100,000,000 shares authorized; 35,128,358 and 34,451,880 shares issued and outstanding at June 30, 2012 and December 31, 2011 respectively  14  $351   $344 
Additional paid in capital      31,206,170    28,660,289 
Statutory reserves  15   2,431,927    2,431,927 
Accumulated other comprehensive income      6,479,121    6,932,246 
Retained earnings      81,643,990    74,074,672 
              
Total stockholders’ equity      121,761,559    112,099,478 
              
Total Liabilities and Stockholders’ Equity     $127,621,345   $123,192,824 

 

See Accompanying Notes to the Consolidated Financial Statements and Accountant’s Report

 

4
 

 

Weikang Bio-Technology Group Co., Inc.

Consolidated Statements of Income and Comprehensive Income

For the three and six month periods ended June 30, 2012 and 2011

(Stated in US Dollars)

 

      Six Months Ended June 30,   Three Months Ended June  30, 
   Note  2012   2011   2012   2011 
                    
Net sales  2J  $28,648,073   $45,222,922   $10,974,290   $17,064,833 
Cost of goods sold  2K   13,159,564    17,347,213    5,414,376    6,860,780 
Gross profit      15,488,509    27,875,709    5,559,914    10,204,053 
                        
Operating expenses                       
Selling      1,263,870    2,591,039    604,703    1,645,315 
General and administrative      3,482,127    4,567,323    2,889,405    2,999,994 
Research and development      -    -    -    - 
Total operating expenses      4,745,997    7,158,362    3,494,108    4,645,309 
                        
Income from operations      10,742,512    20,717,347    2,065,806    5,558,744 
                        
Non-operating income (expenses)                       
Interest income      190,491    126,200    97,153    75,781 
Other income      -    535,078         269,250 
Other expenses      (174)   (28,007)        (27,875)
Total non-operating income, net      190,317    633,271    97,153    317,156 
                        
Income before income tax      10,932,829    21,350,618    2,162,959    5,875,900 
Income tax  2I,13   3,363,512    6,300,857    1,173,328    2,132,200 
                        
Net income      7,569,317   $15,049,761    989,631   $3,743,700 
                        
Other comprehensive income                       
Foreign currency translation gain (loss)  2O   (453,123)   1,748,778    (584,350)   1,031,763 
                        
Comprehensive income     $7,116,194   $16,798,539   $405,281   $4,775,463 
                        
Basic earnings per share     $0.22   $0.48   $0.03   $0.12 
Diluted earnings per share     $0.22   $0.48   $0.03   $0.12 
                        
Basic weighted average shares outstanding  2Q   34,647,494    31,572,295    34,843,108    32,475,396 
Diluted weighted average shares outstanding  2Q   34,647,494    31,572,295    34,843,108    32,475,396 

 

See Accompanying Notes to the Consolidated Financial Statements and Accountant’s Report

 

5
 

 

Weikang Bio-Technology Group Co., Inc.

Consolidated Statements of Cash Flows

For the six month periods ended June 30, 2012 and 2011

(Stated in US Dollars)

 

   Six Months Ended June 30, 
   2012   2011 
         
Cash flows from operating activities:          
Net Income  $7,569,317   $15,049,761 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   994,829    610,064 
Stock compensation   2,545,887    3,384,243 
Changes in deferred tax   (95,836)   (44,523)
(Increase) decrease in current assets:          
Accounts receivable   4,451,692    (2,171,506)
Advance to suppliers and other receivables   268,379    (4,226,532)
Inventory   400,000    94,779 
Increase (decrease) in current liabilities:          
Accounts payable   (368,300)   574,840 
Unearned revenue   -    (535,078)
Accrued expenses and other payables   (113,564)   (763,755)
Taxes payable   (4,628,169)   (3,588,274)
           
Net cash provided by operating activities   11,024,235    8,384,019 
           
Cash flows from investing activities:          
Construction in progress   -    (148,477)
Acquisition of property and equipment   (507)   (18,752)
           
Net cash provided by (used in) investing activities   (507)   (167,229)
           
Cash flows from financing activities:          
Net proceeds from shares issued   -    2,016,900 
Advance to shareholder   -    (245,324)
Advance to related party   -    (21,403)
           
Net cash provided by financing activities   -    1,750,173 
           
Effect of exchange rate change on cash and equivalents   (299,033)   1,270,076 
           
Increase in cash and equivalents   10,724,695   $11,237,039 
           
Cash and equivalents, beginning of period   70,783,230    50,363,812 
           
Cash and equivalents, end of period  $81,507,925   $61,600,851 
           
Supplementary cash flow information:          
Income tax paid  $4,710,856   $9,113,542 
Interest paid   -   $- 

  

See Accompanying Notes to the Consolidated Financial Statements and Accountant’s Report

 

6
 

 

Weikang Bio-Technology Group Co., Inc.

Consolidated Statements of Stockholders’ Equity

For the year ended December 31, 2011 and the period ended June 30, 2012

(Stated in US Dollars)

  

   Shares   Amount   Additional
paid in
capital
   Statutory
reserves
   Other
comprehensive
income
   Retained
Earnings
   Total 
                             
Balance at January 1, 2011   29,963,551   $300    17,530,601    2,431,927    2,524,566    44,442,781    66,930,175 
Shares issued for capital contribution   938,329    9    2,016,900    -    -    -    2,016,900 
Shares issued for service providers   3,550,000    35    9,112,788    -    -    -    9,112,788 
Net Income   -    -    -    -    -    29,631,891    29,631,891 
Foreign currency translation gain   -    -    -    -    4,407,680    -    4,407,680 
Balance at December 31, 2011   34,451,880   $344   $28,660,289   $2,431,927   $6,932,246   $74,074,672   $112,099,478 
                                    
Balance at January 1, 2012   34,451,880   $344   $28,660,289   $2,431,927   $6,932,246   $74,074,672   $112,099,478 
Net Income   -    -    -    -    -    7,569,318    7,569,318 
Shares transferred to service providers   -    -    2,334,000    -    -    -    2,334,000 
Shares issued for settlement of litigation   676,478    7    211,881    -    -    -    211,881 
Foreign currency translation gain/(loss)   -    -    -    -    (453,125)   -    (453,125)
Balance at June 30, 2012   35,128,358   $351   $31,206,170   $2,431,927    6,479,121    81,643,990    121,761,559 

 

See Accompanying Notes to the Consolidated Financial Statements and Accountant’s Report

 

7
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

1.Organization and Description of Business

 

Weikang Bio-Technology Group Co., Inc., a Nevada corporation (“Weikang” or “the Company”) was incorporated on May 12, 2004 in Florida as Expedition Leasing, Inc. (“Expedition”). The Company reincorporated in Nevada and changed to its present name on July 12, 2008, pursuant to an acquisition of Sinary Bio-Technology Holdings Group, Inc. (“Sinary”), a Nevada corporation and Sinary’s wholly owned subsidiary, Heilongjiang Weikang Biotechnology Group Co., Ltd. (“Heilongjiang Weikang”), a limited liability company organized and existing under the laws of the People’s Republic of China (“PRC”). Upon completion of the transaction on December 7, 2007, Sinary and Heilongjiang Weikang became the Company’s wholly-owned subsidiaries. The Company develops, manufactures and distributes Traditional Chinese Medicine ("TCM") through Heilongjiang Weikang in the PRC.

 

On December 7, 2007, the Company (as Expedition) entered into a Share Exchange Agreement (the “Exchange Agreement”) with Sinary Bio-Technology Holdings Group, Inc., a Nevada corporation (“Sinary”) and Weili Wang, its sole shareholder, pursuant to which the Company issued 24,725,200 shares of common stock to Weili Wang for all of the common shares of Sinary. Concurrently, Sinary paid $650,000 to certain former shareholders of the Company, who surrendered 24,725,200 shares of the Company’s common stock held by them to the Company for cancellation. This payment was advanced to Sinary by Yin Wang (the “Advance”). As a result, Weili Wang owned 98% of the Company after the share exchange. On the Closing Date, Sinary became a wholly-owned subsidiary of the Company and Mr. Yin Wang was appointed the Company’s Chief Executive Officer and Chairman of the Board.

 

Prior to the acquisition of Sinary, the Company was a non-operating public shell corporation. Pursuant to Securities and Exchange Commission (“SEC”) rules, the merger or acquisition of a private operating company into a non-operating public shell corporation with nominal net assets is considered a capital transaction, rather than a business combination. Accordingly, for accounting purposes, the transaction was treated as a reverse acquisition and recapitalization. Transaction costs incurred in the reverse acquisition were expensed.

 

Sinary was incorporated under the laws of the State of Nevada on August 31, 2007. On October 25, 2007, Sinary entered into an Equity Interests Transfer Agreement (the “Transfer Agreement”) with Yin Wang and Wei Wang, the stockholders of Heilongjiang Weikang, a limited liability company in the PRC, (the “Heilongjiang Shareholders”) to acquire 100% of the equity interests of Heilongjiang Weikang for 57 million Renminbi (“RMB”), or approximately $7.6 million (the “Acquisition Price”).

 

On August 6, 2010, Sinary and Yin Wang and Wei Wang, entered into a Settlement Agreement and Release pursuant to which Yin Wang and Wei Wang waived their rights to payment of both the Acquisition Price of approximately $7.6 million and the Advance of $650,000 and contributed the Acquisition Price and the Advance to the Company's capital.

 

Heilongjiang Weikang was incorporated in Heilongjiang Province, PRC, on March 29, 2005, and was formerly known as Heilongjiang Province Weikang Bio-Engineering Co., Ltd. Heilongjiang Weikang develops, manufactures and distributes TCM in the PRC.

 

On July 22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued and outstanding equity interests of Tianfang (Guizhou) Pharmaceutical Co., Ltd. (“Tianfang”), a Chinese LLC, for $15,000,000, pursuant to a stock transfer agreement entered into on June 30, 2008 by and among Heilongjiang Weikang, Tianfang, and Tianfang’s two shareholders: Beijing Shiji Qisheng Trading Co., Ltd., a Chinese LLC (“Shiji Qisheng”) and Tri-H Trade (U.S.A.) Co., Ltd., a California corporation (“Tri-H”, and together with Shiji Qisheng collectively as the “Selling Shareholders”).

 

Tianfang was incorporated in Guizhou Province, PRC, in 1998. Tianfang is engaged in the development, manufacture and distribution of over the counter (“OTC”) pharmaceuticals. The Company has expanded its market share to the southern part of China through the acquisition of Tianfang.

 

8
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

On January 6, 2010, Weili Wang formed Lucky Wheel Limited (“Lucky Wheel”), a British Virgin Islands corporation and issued to herself 10,000 ordinary shares or 100% of the issued and outstanding share capital of Lucky Wheel. In June 2010 Ms. Weili Wang transferred 22,925,200 of her shares of the Company’s common stock (82% of the Company’s issued and outstanding common stock) to Lucky Wheel. On May 5, 2010, Ms. Weili Wang and Yin Wang entered into a Call Option Agreement (the “Option Agreement”), pursuant to which Weili Wang granted Yin Wang an irrevocable and unconditional option to purchase all of her ordinary shares of Lucky Wheel (the “Option Shares”) for U.S. $0.10 per ordinary share for a total of $1,000. Mr. Wang has the right to purchase 34% of the Option Shares on December 31, 2010 and 33% on December 31, 2011 and December 31, 2012, respectively. The Option Agreement expires June 29, 2015. If and when the option is fully exercised, Yin Wang will become the sole shareholder of Lucky Wheel whose sole asset is 22,925,200 shares of the Company’s common stock. Mr. Wang is expected to use his personal funds to pay for the Option Shares.

 

In connection with the transactions described in the Transfer Agreement, on November 9, 2007, the Heilongjiang Office of the State Administration for Industry and Commerce registered Sinary as the 100% owner of Heilongjiang Weikang’s registered capital and issued a foreign invested enterprise business license (the “FIE Business License”) to Heilongjiang Weikang. The initial FIE Business License was valid until June 30, 2010. On March 12, 2010, the Harbin City of Administration for Industry and Commerce extended the FIE Business License until November 9, 2027.

 

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

 

The consolidated interim financial information as of June 30, 2012 and for the six and three month periods ended June 30, 2012 and 2011 have been prepared without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with U.S. GAAP have not been included. The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, previously filed with the SEC.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of June 30, 2012, its consolidated results of operations and cash flows for the six and there month periods ended June 30, 2012 and 2011, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

2.Summary of Significant Accounting Policies

 

  A. Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Sinary, and the results of operations of Weikang, Sinary’s wholly-owned subsidiary; and Tianfang. All significant inter-company accounts and transactions were eliminated in consolidation.

 

9
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

  B. Use of Estimates

 

In preparing financial statements in conformity with United States Generally Accepted Accounting Principles (“US GAAP”), management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates.

 

  C. Cash and Equivalents

 

For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents.

 

  D. Accounts Receivable

 

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Based on management’s analysis noted above, the Company made allowance for bad debts of $292,379 and $293,493 at June 30, 2012 and December 31, 2011, respectively. 

 

  E. Inventory

 

Inventories are valued at the lower of cost or market with cost determined on a moving weighted average basis. Costs of work in progress and finished goods are comprised of direct material cost, direct production cost and an allocated portion of production overhead.

 

  F. Property and Equipment

 

Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for all assets with estimated lives, as follows:

 

Building 20 years
Vehicle 5 years
Office Equipment 3-7 years
Production Equipment    3-10 years

 

  G. Land Use Right

 

Right to use land is stated at cost less accumulated amortization. Amortization is provided using the straight-line method over 50 years.

 

10
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

  H. Impairment of Long-Lived Assets

 

We evaluate the recoverability of long-lived assets with finite lives in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 360-10-35, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. When events or changes in circumstances indicate the carrying amount of an asset may not be recoverable based on estimated undiscounted cash flows, the impairment loss would be measured as the difference between the carrying amount of the asset and its fair value based on the present value of estimated future cash flows. Fair value is generally determined by the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, as of June 30, 2012 and December 31, 2011, there were no significant impairments of its long-lived assets.

  

  I. Income Taxes

 

The Company uses FASB ASC Topic 740, “Accounting for Income Taxes”, which requires recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are considered as the tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

  

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amount of the positions that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely to be realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interests associated with unrecognized tax benefits are classified as interest expenses and penalties are classified in selling, general and administrative expenses in the statements of income. At June 30, 2012 and December 31, 2011, the Company did not take any uncertain positions that would necessitate recording of tax related liability.

 

  J. Revenue Recognition

 

The Company's revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (SAB) 104 (codified in FASB ASC Topic 480). Sales revenue is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all the relevant criteria for revenue recognition is met are recorded as unearned revenue.

 

Sales revenue consists of the invoiced value of goods, which is net of value-added tax (“VAT”). All of the Company’s products are sold in the PRC and are subject to Chinese VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their end product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.

 

11
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

Sales and purchases are recorded net of VAT collected and paid. VAT taxes are not affected by the income tax holiday.

 

Sales returns and allowances was $0 for the six and three months ended June 30, 2012 and 2011. The Company does not provide unconditional right of return, price protection or any other concessions to its dealers or other customers.

   

  K. Cost of Goods Sold

 

Cost of goods sold consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the production of products. Write-down of inventory to the lower of cost or market is also recorded in cost of goods sold.

 

  L. Concentration of Credit Risk

 

Cash includes cash on hand and demand deposits in accounts maintained within the PRC and the US. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits for the banks located in the US. Balances at financial institutions within the PRC are not covered by insurance. As of June 30, 2012 and December 31, 2011, the Company had no deposit in the bank located in US which was in excess of federally insured limits; the Company had $81,498,732 and $70,783,230 deposits in the banks in China, respectively. The Company’s financial institutions in China are reputable banks and majority owned by the Chinese government. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

 

Financial instruments that potentially subject the Company to credit risk consist primarily of cash, accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its clients' financial condition and customer payment practices to minimize collecting risk on accounts receivable.

 

The operations of the Company are located in the PRC. Accordingly, the Company's business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, as well as by the overall performance of the PRC’s economy.

 

  M. Statement of Cash Flows

 

In accordance with FASB ASC Topic 230, “Statement of Cash Flows”, cash flows from the Company's operations are calculated based upon local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.

 

12
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

  N. Fair Value of Financial Instruments

 

For certain of the Company’s financial instruments, including cash and equivalents, accounts and other receivables, accounts and other payables, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities. ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

 

  Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 

  Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

  Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.

 

As of June 30, 2012 and December 31, 2011, the Company did not identify any assets and liabilities that were required to be presented on the balance sheet at fair value.

 

  O. Foreign Currency Translation and Comprehensive Income (Loss)

 

The Company’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated into United States Dollars ("USD" or “$”) as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income".

 

Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.

 

The Company uses FASB ASC Topic 220, “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except the changes in paid-in capital and distributions to stockholders due to investments by stockholders. Comprehensive income for the six and three months ended June 30, 2012 and 2011 included net income and foreign currency translation adjustments.

 

13
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

  P. Stock-Based Compensation

 

The Company accounts for its stock-based compensation in accordance with FASB ASC Topic 718 and 505, “Share Based Payment”. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

 

  Q. Basic and Diluted Earnings per Share (EPS)

 

Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similarly to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted net earnings per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. For the six and three months ended June 30, 2012 and 2011, there were no dilutive shares outstanding due to anti-dilutive feature. The following table presents a reconciliation of basic and diluted earnings per share for the six and three months ended June 30, 2012 and 2011:

 

   Six Months Ended June 30, 
   2012   2011 
Net income  $7,569,317   $15,049,761 
           
Weighted average shares outstanding – basic   34,647,494    31,572,295 
           
Weighted average shares outstanding – diluted   34,647,494    31,572,295 
           
Earnings per share – basic  $0.22   $0.48 
Earnings per share - diluted  $0.22   $0.48 

 

   Three Months Ended June 30, 
   2012   2011 
Net income  $989,631   $3,743,700 
           
Weighted average shares outstanding – basic   34,843,108    32,475,396 
           
Weighted average shares outstanding – diluted   34,843,108    32,475,396 
           
Earnings per share – basic  $0.03   $0.12 
Earnings per share - diluted  $0.03   $0.12 

 

14
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

  R. Segment Reporting

 

FASB ASC Topic 280, "Disclosures about Segments of an Enterprise and Related Information" requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manners in which management disaggregates a company.

FASB ASC Topic 280 has no effect on the Company's financial statements as substantially all of the Company's operations are conducted in one industry segment.

  

  S. New Accounting Pronouncements

 

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement will not have a material impact on its financial statements.

 

As of June 30, 2012, there are no other recently issued accounting standards not yet adopted that would have a material effect on the Company’s consolidated financial statements

 

3. Accounts Receivable

 

   6/30/2012   12/31/2011 
Accounts receivable  $1,408,212   $5,869,861 
Less: Allowance for doubtful accounts   (292,379)   (293,493)
   $1,115,833   $5,576,368 

 

    6/30/2012     12/31/2011  
Allowance for bad debt:                
Beginning balance   $ (293,493 )   $ -  
Additions to allowance     -       (293,493 )
Effect of exchange rate change     (1,114 )     -  
Ending balance   $ (292,379 )   $ (293,493 )

 

The Company offers credit terms of between 30 to 60 days to most of their customers.

 

4. Advances to Suppliers and Other Receivables

 

Advances to suppliers and other receivables at June 30, 2012 and December 31, 2011 were as follows:

 

    6/30/2012     12/31/2011  
Prepaid IR expense   $ 34,390     $ 72,500  
Advance to suppliers     4,107,405       4,353,369  
Other     555       744  
Total   $ 4,142,350     $ 4,426,613  

 

15
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

5. Inventory

 

Inventory at June 30, 2012 and December 31, 2011 was as follows:

 

    6/30/2012     12/31/2011  
Raw materials   $ 85,554     $ 299,271  
Work in progress     -       233,820  
Packing materials     428,060       265,822  
Finished goods     108,073       225,554  
Total   $ 621,687     $ 1,024,467  

 

6. Property and Equipment, net

 

Property and equipment consisted of the following at June 30, 2012 and December 31, 2011:

 

    6/30/2012     12/31/2011  
Building   $ 24,087,182     $ 24,178,930  
Building improvements     984,913       988,664  
Production equipment     2,579,775       2,589,602  
Office furniture and equipment     231,681       232,056  
Vehicles     133,053       133,559  
      28,016,604       28,122,811  
Less: Accumulated depreciation     (4,743,746 )     (3,913,986 )
    $ 23,272,858     $ 24,208,825  

 

Depreciation for the six months ended June 30, 2012 and 2011 was $846,955 and $467,474, respectively.

 

Depreciation for the three months ended June 30, 2012 and 2011 was $423,492 and $232,201, respectively.

 

7. Construction in Progress

 

At June 30, 2012 and December 31, 2011, construction in progress consisted of the payment for constructing a manufacturing line for producing licorice flavonoids. The construction was substantially completed at the end of 2011. However, the manufacturing line is in the process of final inspection before put in use.

 

16
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

8. Intangible Assets

 

Intangible assets consisted of the following at June 30, 2012 and December 31, 2011:

 

    6/30/2012     12/31/2011  
Land use right   $ 13,242,993     $ 13,293,435  
Goodwill arising from acquisition of Tianfang     3,866,726       3,881,455  
Software and internet domain     8,675       8,708  
      17,118,394       17,183,598  
Less: Accumulated amortization     (1,064,332 )     (920,360 )
    $ 16,054,062     $ 16,263,238  

 

All land in the PRC is government owned and cannot be sold to any individual or company. However, the government grants users a “land use right” to use the land. The Company has the right to use the land for 50 years and amortizes the right on a straight-line basis over 50 years.

 

Amortization for the six months ended June 30, 2012 and 2011 was $154,524 and $142,590, respectively. Amortization for the three months ended June 30, 2012 and 2011 was $77,262 and $71,751, respectively. Amortization for the next five years from June 30, 2012 is expected to be $310,000, $295,000, $295,000, $295,000 and $295,000, respectively.

 

9. Major Customers and Vendors

 

There were no customers who accounted for over 10% of the Company’s total sales for the six and three months ended June 30, 2012 and 2011.

 

Four venders provided 53% of the Company’s purchases of raw materials for the six months ended June 30, 2012. Each vendor accounted for 19%, 12%, 11% and 11% of the purchases. The Company did not have accounts payable to these vendors at June 30, 2012.

 

Three vendors provided 45% of the Company’s purchases of raw materials for the six months ended June 30, 2011.  Each vendor accounted for 18%, 17%, and 10% of the purchases. At June 30, 2011 the total payable balance due to these three vendors was $349,047.

 

Three venders provided 59% of the Company’s purchases of raw materials for the three months ended June 30, 2012. Each vendor accounted for 33%, 13% and 13% of the purchases. The Company did not have accounts payable to these vendors at June 30, 2012.

 

Two vendors provided 38% of the Company’s purchases of raw materials for the three months ended June 30, 2011.  Each vendor accounted for 27%, and 11% of the purchases. The Company did not have accounts payable to these vendors at June 30, 2011.

 

17
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

10. Taxes Payable

 

Taxes payable consisted of the following at June 30, 2012 and December 31, 2011:

 

    6/30/2012     12/31/2011  
Income taxes   $ 1,344,972     $ 4,960,139  
Value added taxes     352,935       1,310,687  
Sales tax payable     55,337       55,548  
Other     39,997       106,640  
    $ 1,793,241     $ 6,433,014  

  

11. Other Payables and Accrued Expenses

 

Accrued expenses consisted of the following at June 30, 2012 and December 31, 2011:

  

    6/30/2012     12/31/2011  
Sales commission   $ 620,025     $ 622,387  
Accrued expenses     3,631       26,035  
Auditing     -       83,173  
Other payables     83       8,202  
    $ 623,739     $ 739,797  

 

12. Deferred Tax Asset (Liability)

 

Deferred tax represented differences between the tax basis and book basis of property, equipment and land use right.

 

At June 30, 2012 and December 31, 2011, deferred tax asset (liability) consisted of the following:

 

    6/30/2012     12/31/2011  
Deferred tax asset on bad debt allowance - current   $ 37,051     $ 37,192  
Deferred tax asset (net) on property and equipment and land use right for basis differences since acquisition of Heilongjiang Weikang and Tianfang – noncurrent   $ 458,427     $ 364,238  
Deferred tax asset arising from the acquisition of Heilongjiang Weikang - noncurrent     31,977       32,099  
Deferred tax liability arising from the acquisition of Tianfang - noncurrent     (3,909,965 )     (3,924,858 )
Deferred tax liability, net - noncurrent   $ (3,419,561 )   $ (3,528,521 )

 

13. Income Taxes

 

Weikang and Sinary were incorporated in the US and have net operating losses (NOL) for income tax purposes. Weikang and Sinary had NOL carry forwards for income taxes $16,843,913 and $1,180,572 at June 30, 2012, respectively, which may be available to reduce future years’ taxable income as NOL; NOLs can be carried forward up to 20 years from the year the loss is incurred. Management believes the realization of benefits from these losses is uncertain due to Weikang and Sinary’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.

 

18
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

Heilongjiang Weikang and Tianfang are governed by the Income Tax Law of the PRC concerning the private enterprises that are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

 

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the six months ended June 30, 2012 and 2011:

 

    2012     2011  
US statutory rates     34.0 %     34.0 %
Tax rate difference     (11.2 )%     (10.6 )%
Valuation allowance for US NOL     8.1 %     6.1 %
Other     (0.2 )%     - %
Tax per financial statements     30.7 %     29.5 %

 

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended June 30, 2012 and 2011:

 

    2012     2011  
US statutory rates     34.0 %     34.0 %
Tax rate difference     (19.7 )%     (12.9 )%
Valuation allowance for US NOL     40.3 %     15.2 %
Other     (0.4 )%     - %
Tax per financial statements     54.2 %     36.3 %

 

The provisions for income taxes for the six months ended June 30, 2012 and 2011 consisted of the following:

 

    2012     2011  
Income tax expense - current   $ 3,459,348     $ 6,345,380  
Income tax benefit - deferred     (95,836 )     (44,523 )
Total income tax expenses   $ 3,363,512     $ 6,300,857  

 

The provisions for income taxes for the three months ended June 30, 2012 and 2011 consisted of the following:

 

    2012     2011  
Income tax expense - current   $ 1,221,483     $ 2,155,444  
Income tax benefit - deferred     (48,155 )     (23,244 )
Total income tax expenses   $ 1,173,328     $ 2,132,200  

 

19
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

14. Stockholders’ Equity

 

Common Stock with Warrants Issued for Cash

 

Private Placement in January 2010

 

On January 20, 2010, the Company entered into Subscription Agreements with "accredited" investors (or “the Investors”). Pursuant to the Subscription Agreements, the Investors purchased 1,470,588 shares of Company common stock at $1.70 per share. The Company raised $2,500,000 in gross proceeds and received net proceeds of $2,047,500. In connection with the Financing the Company paid the following: (i) $150,000 to an Investment Relations escrow account, (ii) $250,000 in placement agent fees, and (iii) $52,500 in offering expenses, including legal fees.

 

The Investors received one Series A Warrant and one Series B Warrant for every $8.00 invested in the Company under the Purchase Agreement. Series A Warrants grant the holder the right to purchase shares of Common Stock at $3.00 per share. Series B Warrants grant the holder the right to purchase shares of Common Stock at $5.00 per share. At the closing the Investors received Series A Warrants to purchase 312,500 shares of Common Stock and Series B Warrants to purchase 312,500 shares of Common Stock.

 

The Series A and Series B Warrants expire January 20, 2013. The Warrants provide for antidilution adjustments to the exercise price for certain convertible securities issued with conversion prices lower than the Warrants' exercise price. The warrants are exercisable into a fixed number of shares. Accordingly, the warrants are classified as equity instruments. The Company accounted for the warrants issued to the investors and placement agents based on the fair value method under ASC Topic 505.The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The value of the Warrants was $1,212,000.

 

In connection with the Financing, the Company entered into an Investor Relations Escrow Agreement, pursuant to which the Company established an escrow account of $150,000 which may be allocated and released to investor relations firms for marketing purposes at the sole discretion of a representative of the Investors. The Company paid $150,000 to an IR firm for it to provide IR services over two years. For 2010, the Company recorded $71,096 as an IR expense. During the year ended December 31, 2011, the Company recorded the remaining portion of $78,904 as an IR expense.

 

In addition the Company issued the following securities: (i) Series A Warrants to purchase 73,528 shares of Common Stock to placement agents, (ii) Series B Warrants to purchase 73,528 shares of Common Stock to placement agents, (iii) 180,000 shares of Common Stock to an investor relations firm, (iv) 600,000 shares of Common Stock to a consultant for business development and capital markets advice, and (v) 7,000 shares of Common Stock for legal services. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The value of the Warrants was $285,000.

 

In connection with the financing, the Company also issued 27,000 shares to several legal counsels and 200,000 shares to a consultant, First Trust China Ltd. The fair value of the shares based on the market price at the date of the financing of $397,000, was recorded as financing expense of the issuance of equity as a charge to additional paid in capital.

 

Private Placement in December 2010

 

In December, 2010, the Company sold in a series of private placement a total of 286,249 Units, each unit comprised (i) four shares of common stock,  (ii) a three-year warrant to purchase one share of common stock at an exercise price of $3.60 per share (the “Series C Warrant”), and (iii) a three-year warrant to purchase one share of common stock at an exercise price of $4.80 per share (The “Series D Warrant”), for $2,747,973. The Company received net proceeds of $1,976,413. In connection with the Financing the Company paid the following: (i) $299,777 in placement agents’ fees, (ii) $150,000 to an Investment Relations escrow account, and (iii) $321,783 offering expenses, including legal fees, financing consultant fees and bank account management fees. The Company recorded $77,500 as IR expense during the year ended December 31, 2011.

 

20
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

The Series C and Series D Warrants described above which expire at December 2013 issued to the investors are immediately exercisable and have a term of three years. Such warrants may be exercised cashless in the event that there is no effective registration statement providing for the resale of the common stock. The exercise prices of the Warrants are subject to customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like.  Additionally, for a period of three years following the final closing of the private placement, anti-dilution protection shall be afforded the investors,  The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The fair value of the Warrants was $974,322.

 

In connection with the private placement transactions, the Company issued placement agents three-year warrants to purchase an aggregate of 93,232 shares of common stock at $2.40 per share, immediately exercisable, as consideration of services. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The fair value of the Warrants was $187,979.

 

Private Placement in January 2011

 

On January 28, 2011, the Company sold in a private placement 234,582 Units, each unit comprised of (i) four shares of common stock, (ii) a three-year warrant to purchase one share of common stock at $3.60 per share (the “Series C Warrant”), and (iii) a three-year warrant to purchase one share of common stock at $4.80 per share (The “Series D Warrant”), for $2,252,000. The Company received net proceeds of $2,016,900. In connection with the financing, the Company paid $225,000 in placement agents’ fees.

 

The Series C and Series D Warrants issued to the investors and the placement agents are immediately exercisable and have a term of three years. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The fair value of the Warrants was $889,764.

 

In connection with the private placement transaction, the Company issued placement agents three-year warrants to purchase an aggregate of 75,000 shares of common stock at an exercise price of $2.40 per share, immediately exercisable, as consideration of services. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 100% and term of 3 years. The fair value of the Warrants was $167,619.

 

21
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

Following is a summary of the warrant activity:

 

   Number of 
Shares
   Average 
Exercise 
Price per Share
   Weighted 
Average 
Remaining 
Contractual 
Term in Years
 
Outstanding at December 31, 2010   1,437,786    3.98    2.46 
Exercisable at December 31, 2010   1,437,786    3.98    2.46 
                
Granted – warrants to placement agents   75,000    2.40    3.00 
Granted – series C warrants   234,582    3.60    3.00 
Granted – series D warrants   234,582    4.80    3.00 
                
Outstanding at December 31, 2011   1,981,950    3.97    1.63 
Exercisable at December 31, 2011   1,981,950    3.97    1.63 
                
Exercised   -           
Forfeited   -           
Outstanding at June 30, 2012   1,981,950    3.97    1.13 
Exercisable at June 30, 2012   1,981,950    3.97    1.13 

 

Stock-Based Compensation and Deferred Compensation

 

On January 20, 2010, the Company issued 600,000 shares of Common Stock valued at $3.26 per share to several consultants for providing consulting services to the Company for a period of twelve-month. During the year ended December 31, 2010, the Company amortized $1,793,000 as stock-based compensation expense. During the year ended December 31, 2011, the Company amortized $163,000 as stock-based compensation expense.

 

On January 20, 2010, the Company issued 180,000 shares to an investor relation firm for providing IR services for a period of two-year; the stock was valued at $3.26 per share. During the years ended December 31, 2011 and 2010, the Company amortized $311,084 and $277,324 as stock-based compensation expense. The IR service was terminated during the third quarter of 2011.

 

During the first quarter of 2010, the Company issued 20,000 shares to one employee with stock valued at $3.26 per share. The Company recorded $65,200 stock-based compensation expense for the shares issued to this employee.

 

On April 7, 2010, the Company issued 40,000 shares common stock as annual compensation to four independent directors of the Company (10,000 shares each) for one-year service period with stock valued at $4.65 per share. The Company recorded $48,921 and $137,079 stock-based compensation during the years ended December 31, 2011 and 2010, respectively.

 

On July 28, 2010, the Company issued 40,000 shares common stock as compensation to a consulting company for a one-month business consulting service with stock valued at $3.18 per share. The Company recorded $127,200 as stock-based compensation during 2010.

 

On October 3, 2010, the Company issued 500,000 shares common stock as compensation to a consulting company for a one-month business consulting service with stock valued at $2.70 per share. The Company recorded $1,350,000 as stock-based compensation during 2010.

 

22
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

On November 18, 2010, the Company issued 29,167 shares common stock as compensation to a former vice president of the Company with stock valued at $3.20 per share. The Company recorded $93,334 as stock-based compensation during 2010.

 

On December 29, 2010, the Company issued 25,000 shares common stock as compensation to an investor relation company for a one-year IR service with stock valued at $2.90 per share. The Company recorded $71,904 and $596 stock-based compensation during the years ended December 31, 2011 and 2010, respectively. The IR service was terminated during the third quarter of 2011.

 

In December 2010, the Company issued 200,000 shares to a consulting company for a three-month business consulting services with Far East Strategies, LLC.  The stock was valued at $2.44 per share. The Company recorded $488,000 stock-based compensation during the year ended December 31, 2011.

 

On November 11, 2010, the Company issued 80,000 shares to a consultant for a one-month consulting service. The stock was valued at $3.20 per share. The Company recorded $256,000 stock-based compensation during the year ended December 31, 2010.

 

According to an investor relation agreement, the Company issued 5,000 shares to an IR firm on January 20, 2011 and January 24, 2011, respectively. The stock was valued at $3.35 and $3.90 per share (stock price at grant date). During 2011, the Company recorded $36,250 as stock-based compensation.

 

On April 2, 2011, the Company issued 1,500,000 shares to a consultant for three-month consulting service. The stock was valued at $2.95 per share. During 2011, the Company recorded $4,425,000 as stock-based compensation.

 

On July 3, 2011, the Company issued 1,500,000 shares to a consultant for a two-month consulting service. The stock was valued at $2.32 per share. During 2011, the Company recorded $3,480,000 as stock-based compensation.

 

On September 14, 2011, the Company issued 400,000 shares to a consulting firm for a three-month consulting service. The stock was valued at $2.00 per share. During 2011, the Company recorded $800,000 as stock-based compensation.

 

On October 1, 2011, the Company issued 60,000 shares to three independent directors (20,000 shares each). The stock was valued at $1.93 per share. During 2011, the Company recorded $115,582 as stock-based compensation.

 

On April 11, 2012, the Company issued 321,053 shares to four investors of the company for the settlement of anti-dilution litigation. The stock was valued at $0.35 per share. During the second quarter of 2012, the Company recorded $112,369 as stock-based compensation.

 

On May 6, 2012, one of the Company’s majority shareholders agrees to transfer a total of 7,780,000 shares of common stock of the Company to 55 consultants on behalf of the Company in consideration for services performed by the consultants. The stock was valued at $0.30 per share. The Company recorded $2,334,000 as consulting fee with corresponding account crediting to paid it capital during the second quarter of 2012.

 

On June 4, 2012, the Company issued 355,425 shares to two investors of the company for the settlement of anti-dilution litigation. The stock was valued at $0.28 per share. During the second quarter of 2012, the Company recorded $99,519 as stock-based compensation.

 

23
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

Option to legal counsel

 

On October 4, 2010, the Company granted stock options to its legal counsel to acquire 20,000 shares of the Company’s common stock, at $2.70 per share, vested immediately with a life of 3 years. The options were vested in the grant date. The fair value of the options was calculated using the following assumptions: estimated life of three years, volatility of 100%, risk free interest rate of 2.76%, and dividend yield of 0%. The grant date fair value of options was $35,132. The Company recorded $35,132 as stock-based compensation during 2010. The weighted remaining contractual term for the option was 1.26 years at June 30, 2012.

 

15. Statutory Reserves

 

Pursuant to the corporate law of the PRC effective on January 1, 2006, the Company is now only required to maintain one statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.

 

Surplus Reserve Fund

 

The Company’s Chinese subsidiaries are now only required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital. The Company’s Chinese subsidiaries are not required to make appropriation to other reserve funds and do not have any intentions to make appropriations to any other reserve funds. There are no legal requirements in the PRC to fund these reserves by transfer of cash to restricted accounts, and the Company’s Chinese subsidiaries do not do so.

 

The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

 

Common Welfare Fund

 

Common welfare fund is a voluntary fund that the Company can elect to transfer 5% to 10% of its net income to this fund. This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation. The Company did not contribute to this fund.

  

16. Contingencies

 

The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s operations may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

The Company’s sales, purchases and expense transactions are denominated in RMB and all of the Company’s assets and liabilities are also denominated in RMB. RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be conducted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to affect the remittance.

 

24
 

 

Weikang Bio-Technology Group Co., Inc.

Notes to Consolidated Financial Statements

As of June 30, 2012 and December 31, 2011

(Stated in US Dollars)

 

17. Goodwill

 

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with FASB ASC Topic 350, goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.

 

On July 22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued and outstanding equity interests of Tianfang for $15,000,000 (RMB 102,886,500). The total consideration for acquisition exceeded fair value of the net assets acquired by approximately $3,885,524. The excess was recorded as goodwill. Goodwill was recorded as intangible assets.  As of June 30, 2012, the Company concluded there was no impairment of goodwill.

 

25
 

 

PART II - OTHER INFORMATION

Item 6.  Exhibits.

 

(a) Exhibits

 

2.1   Share Exchange Agreement among Expedition Leasing Inc. (“Expedition Leasing”), certain stockholders of Expedition Leasing, Sinary Bio-Technology Holding Group, Inc. (“Sinary”) and the sole stockholder of Sinary dated December 7, 2007 (1)
2.2   Equity Transfer Agreement between Sinary and the owners of 100% of the registered equity of Heilongjiang Weikang Bio-Technology Group Co., Ltd. Dated October 25, 2007 (1)
2.3   Agreement and Plan of Merger dated as of June 4, 2008 between Expedition Leasing and Weikang (2)
3.1   Articles of Incorporation of Weikang (2)
3.2   Bylaws of Weikang (2)
4.1   Form of Series A and B Common Stock Warrant   (3)
4.2   Form of Series C Warrant  (5)
4.3   Form of Series D Warrant (5)
4.4   Form of warrants issued to the placement agents (5)
4.5   Form of Subscription Agreement, by and between Weikang Bio-Technology Group Company, Inc. and the investors. (5)
4.6   Form of Registration Rights Agreement, by and between Weikang Bio-Technology Group Company, Inc. and the investors. (5)
4.7   Form of Lock-Up Agreement (5)
10.1   Stock Transfer Agreement dated as of June 30, 2008 by and among Heilongjiang Weikang Bio-Technology Group Co., Ltd., Beijing Shiji Qisheng Trading Co., Ltd., Tri-H Trade (U.S.A.) Co., Ltd., and Tianfang (Guizhou) Pharmaceutical Co., Ltd. (4)
10.2   The Weikang Bio-Technology Group Company, Inc. 2008 Stock Incentive Plan (2)
10.3   Subscription Agreement dated January 20, 2010, between Weikang and the subscribers identified on the signature pages thereto  (3)
10.4   Investor Relations Escrow Agreement dated January 20, 2010, among Weikang, the escrow agent named therein and Opus Holdings Three, Ltd. (3)
10.5   Lease Agreement dated January 1, 2008 between Heilongjiang Weikang Bio-Technology Group and Harbin Dongfeng Pharmaceutical Corp. Ltd. relating to the lease of the workshop and technology for manufacturing royal jelly.(6)
10.6   Shell Company Purchase Agreement dated December 8, 2007 between the Company and Yin Wang relating the advance from an officer of the Company(6)
10.7   English translation of land use right certificate issued by Xiuwen County Land Bureau and Bureau of Real Estate Management of Guiyang City for the benefit of Tianfang (Guizhou) Pharmaceutical Co., Ltd., which expires December 9, 2051(6)
10.8   English translation of land use right certificate issued by Bureau of Land and Resources of Shuang-Cheng City for the benefit of Heilongjiang Weikang Bio-Technology Group, which expires April 8, 2055(6)
10.9   Make Good Securities Escrow Agreement, dated December 2, 2010, by and between Weikang Bio-Technology Group Company, Inc., Sichenzia Ross Friedman Ference LLP, as escrow agent, and Lucky Wheel Limited.(5)
10.10    Investor and Public Relations Escrow Agreement, dated December 2, 2010, by and between Weikang Bio-Technology Group Company, Inc., Sichenzia Ross Friedman Ference LLP, as escrow agent, and MidSouth Investor Fund LP, as representative for the investors.(5) 
10.11   Escrow Deposit Agreement, dated October 25, 2010 and amendment thereto dated November 24, 2010, by and between Weikang Bio-Technology Group Company, Inc., Hunter Wise Securities, LLC, and Signature Bank, as escrow agent. (5)
10.12   Office Building Purchase Agreement, dated September 20, 2011, by and between the Company and  Bin County Weicheng Rural Credit Cooperative
31.1   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2   Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 
 

 

101.INS   XBRL INSTANCE DOCUMENT**
101.SCH   XBRL TAXONOMY EXTENSION SCHEMA**
101.CAL   XBRL TAXONOMY EXTENSION CALCULATION LINKBASE**
101.DEF   XBRL TAXONOMY EXTENSION DEFINITION LINKBASE**
101.LAB   XBRL TAXONOMY EXTENSION LABEL LINKBASE**
101.PRE   XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE**

 

(1) Incorporated by reference from the Company’s Form 8-K filed with the SEC on December 10, 2007.

 

(2) Incorporated by reference from the Company’s Schedule 14C filed with the SEC on May 14, 2008.

 

(3) Incorporated by reference from the Company’s Form 8-K filed with the SEC on January 26, 2010.

 

(4) Incorporated by reference from the Company’s Form 8-K filed with the SEC on July 24, 2008.

 

(5) Incorporated by reference from the Company’s Form 8-K filed with the SEC on December 8, 2010

 

(6) Incorporated by reference from the Company’s Registration Statement on Form S-1 filed with the SEC on March 25, 2010.

 

(7) Incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2012.

 

* Furnished herewith.

 

** Filed herewith.

 

 
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

  WEIKANG BIO-TECHNOLOGY
GROUP COMPANY, INC.
 
     
     
Dated: August 30, 2012 By: /s/ Yin Wang  
    Yin Wang  
    Chief Executive Officer  
    (Principal Executive Officer)  
       
       
  By: /s/ Baolin Sun  
    Baolin Sun  
    Chief Financial Officer  
    (Principal Accounting & Financial Officer)  

 

 

 

 

XOTC:WKBT Quarterly Report 10-Q/A Filling

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XOTC:WKBT Quarterly Report 10-Q/A Filing - 6/30/2012
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