Item 1.
BUSINESS.
Overview
Through
our PRC Operating Entities, Joway Health Industries Group Inc. (the “Company” or “Joway Health”) is engaged
in the manufacture, distribution and sale of tourmaline-related healthcare products. We are incorporated in the state of Nevada.
Our principal executive offices are located at No. 19. Baowang Road, Baodi Economic Development Zone, Tianjin City, PRC 301800.
Our website address is www.jowayhealth.com.
Corporate
History
Joway
Health Industries Group, Inc.
Until
October 1, 2010, we were a “shell company,” as such term is defined in Rule 12b-2 under the Securities Exchange Act
of 1934, as amended. We were originally formed as a Texas corporation on March 21, 2003 to acquire most of the assets and
certain liabilities of and succeed to the business of G2 Companies, Inc., (formerly Hartland Investment, Inc.), as an independent
recording company and artist management company. The acquisition of G2 Companies, Inc. was consummated on April 1, 2003.
On May 13, 2008, through a registered offering, we sold 1,284,574 shares of our common stock raising an aggregate of $128,457,
before costs of the Offering. Our common stock began trading on the Over-the-Counter Bulletin Board (“OTCBB”) under
the symbol “GTVI” on September 11, 2009. Prior to the Share Exchange Transaction, discussed below, we were a
development stage music recording, production and artist management company that had limited operations, primarily due to our
inability to raise sufficient capital.
On
September 28, 2010, Mr. Kepler, our former Chief Executive Officer and majority shareholder, sold to Crystal Globe Limited,
a British Virgin Islands company (“Crystal Globe”) 3,300,000 shares of common stock in the Company, which at that
time represented 68.97% of the issued and outstanding capital stock of the Company. In connection with the sale, Mr. Kepler
resigned as our sole officer and director and appointed Crystal Globe’s nominees, Mr. Jinghe Zhang, as our new President,
Chief Executive Officer and sole director and Mr. Yuan Huang as our new Chief Financial Officer, Secretary and Treasurer.
As a result, on September 28, 2010, there was a change in control of the Company.
On
October 1, 2010, as a result of a transaction with Dynamic Elite (the “Share Exchange”), Dynamic Elite became our
wholly-owned subsidiary and we ceased to be a shell company. Dynamic Elite is the holding company of all the equity of Tianjin
Junhe Management Consulting Co., Ltd. (“Junhe Consulting”).
Share
Exchange Transaction
On
October 1, 2010, we entered into a Share Exchange Agreement with Crystal Globe, the sole shareholder of Dynamic Elite International
Limited, pursuant to which Crystal Globe transferred all of its shares in Dynamic Elite to us in exchange for 15,215,426 shares
of our common stock. As a result, Dynamic Elite became our wholly-owned subsidiary and we ceased to be a shell company, and Crystal
Globe held a total of 18,515,426 shares (approximately 92.6%) of our issued and outstanding common stock.
The
Share Exchange was treated for accounting purposes as a reverse acquisition. Therefore, the Company’s financial statements
after the Share Exchange were those of Dynamic Elite and its subsidiaries and controlled companies on a consolidated basis, as
if the Share Exchange had been in effect retroactively for all periods presented.
Change
of State of Incorporation; Name Change
In
December 2010, the Company changed its jurisdiction of incorporation from the State of Texas to the State of Nevada and changed
its name to Joway Health Industries Group, Inc. In connection with these changes, the Company adopted new Articles of Incorporation
and Bylaws.
Dynamic
Elite
Dynamic
Elite was founded on June 2, 2010 under the laws of the British Virgin Islands by Crystal Globe and Evan Liu, the sole shareholder
of Crystal Globe, at the request of Mr. Jinghe Zhang. Mr. Liu is a friend of Mr. Jinghe Zhang. On September 15, 2010,
Dynamic Elite established a wholly-owned subsidiary — Tianjin Junhe Management Consulting Co., Ltd. (“Junhe Consulting”),
as a wholly foreign-owned enterprise (WOFE) under the laws of the PRC for the purposes of acquiring Tianjin Joway Shengshi Group
Co., Ltd. and engaging in the manufacture, distribution and sale of tourmaline products in China. Under Article 6 of the Law of
the People’s Republic of China on Wholly Foreign-Owned Enterprises, adopted April 12, 1986 at the 4th Sess. of the
6th National People’s Congress and as amended on October 31, 2000 (“PRC WOFE Law”) and Article 7 of the
Detailed Rules for the Implementation, any person or entity that intends to establish an enterprise in the PRC with foreign capital
is required to submit an application for examination and approval to the appropriate department under the State Council. On September 9,
2010, the local Tianjin City government issued a certificate of approval approving the foreign ownership of Junhe Consulting by
Dynamic Elite. Mr. Jinghe Zhang was appointed as the Executive Director of Junhe Consulting.
PRC
Operating Entities
All
of our business operations are conducted through our PRC Operating Entities. The chart below sets forth our corporate structure.
Joway
Shengshi
On
May 17, 2007, Mr. Jinghe Zhang, Mr. Lijun Si and Mr. Baogang Song founded Tianjin Joway Textile Co., Ltd. as a limited liability
company under the PRC law. On November 24, 2009, the company changed its name to Tianjin Joway Shengshi Group Co., Ltd. (“Joway
Shengshi”). The registered capital of Joway Shengshi is RMB 50,000,000 and its term of operation will expire on May 16,
2022. Mr. Jinghe Zhang is the Executive Director and General Manager of Joway Shengshi. On July 1, 2010, Mr. Lijun Si
transferred 4% of the equity interest in Joway Shengshi to Mr. Jinghe Zhang. As a result, Mr. Zhang owns 99% of the equity
interest in Joway Shengshi and Mr. Baogang Song owns the remaining 1% of the equity interest of Joway Shengshi. As of December
31, 2015 and 2014, Joway Shengshi was the sole shareholder of Joway Technology, Joway Decoration, and Shengtang Trading.
Joway
Technology
Joway
Technology was incorporated under PRC law on March 28, 2007, with a registered capital of RMB 1,100,000. Its term of operation
expires on March 27, 2017. It was formed to engage in intelligent engineering design and construction, development and sales
of electronics, water filters, and other similar products. Prior to July 25, 2010, Joway Shengshi held 90.91% of Joway Technology.
On July 25, 2010 Joway Shengshi acquired the remaining 9.09% of Joway Technology from Mr. Jingyun Chen for RMB 100,000 in
cash. As a result of the acquisition, Joway Shengshi became the sole shareholder of Joway Technology.
Joway
Decoration
Joway
Decoration was cofounded by Joway Shengshi and Mr. Jingyun Chen under PRC law on April 22, 2009, with a registered capital
of RMB 2,000,000. Its term of operation expires on April 21, 2019. It was formed to engage in the business of intelligent
electric heating project design and construction, development and sales of electronics technology and water filters, and the manufacture
and sales of wood products. Prior to July 9, 2010, Joway Shengshi owned 90% of Joway Decoration. On July 9, 2010, Joway
Shengshi entered into a share acquisition agreement with Mr. Jingyun Chen to acquire the remaining 10% of the shares of Joway
Decoration for RMB 200,000 in cash. As a result of the acquisition, Joway Shengshi became the sole shareholder of Joway Decoration.
Shengtang
Trading
Shengtang
Trading was cofounded by Joway Shengshi and Mr. Jingyun Chen under PRC law on September 18, 2009, with a registered capital
of RMB 2,000,000. Its term of operation expires on September 17, 2029. It was formed to engage in the business of importing
and exporting merchandise and technology; knitwear, biochemistry (excluding toxic chemicals and drugs), and the wholesale and
retail sale of hardware. Prior to July 28, 2010, Joway Shengshi owned 95% of Shengtang Trading. On July 28, 2010, Joway
Shengshi entered into a share acquisition agreement with Mr. Aiying Wang to acquire the remaining 5% of the shares of Shengtang
Trading for RMB 100,000 in cash. As a result of the acquisition, Joway Shengshi became the sole shareholder of Shengtang Trading.
VIE
Agreements
On
September 16, 2010, prior to the Share Exchange, Junhe Consulting, Dynamic Elite’s wholly owned subsidiary had entered
into a series of control agreements with Joway Shengshi and all of the owners of Joway Shengshi, which agreements allow Junhe
Consulting to control Joway Shengshi. Through our ownership of Dynamic Elite, Dynamic Elite’s ownership of Junhe Consulting
and Junhe Consulting’s agreements with Joway Shengshi, we believe that Joway Health controls Joway Shengshi and therefore,
we consolidate the results of operations of Joway Shengshi and its subsidiaries with ours as variable interest entities.
In
connection with the Share Exchange and as consideration for entering into the VIE Agreements, Mr. Jinghe Zhang and Mr. Baogang
Song, the shareholders of Joway Shengshi, entered into a Call Option Agreement with the sole shareholder of Crystal Globe, pursuant
to which the shareholders of Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an aggregate
price equal to $20,000 over the next three years. The Call Option vested as to 34% of the shares of Crystal Globe on April 2,
2011, and vests as to 33% on April 2 of 2012 and 2013. As a result, the shareholders of Joway Shengshi became the indirect
beneficial owners of the shares of the Company held by Crystal Globe.
Under
PRC law the acquisition of Joway Shengshi by Junhe Consulting must be structured as a cash transaction with the purchase price
based on the appraised value of the equity interest or assets to be sold. Neither Junhe Consulting nor Dynamic Elite had sufficient
cash to pay the appraised value of the equity interest or assets of Joway Shengshi. Alternatively, the shareholders of Joway Shengshi
entered into a series of contractual agreements (the “VIE Agreements”) which enabled Dynamic Elite to gain control
of Joway Shengshi and be entitled to receive 100% of the profits of Joway Shengshi and is obligated for 100% of the losses of
Joway Shengshi. As a result of the VIE agreements, we are able to consolidate Joway Shengshi’s financial statements, including
the results of operations, assets and liabilities of Joway Shengshi and its subsidiaries without triggering the regulatory requirements
of PRC law. Under PRC law the VIE Agreements are considered commercial transactions among legal entities and individuals, and
do not trigger the PRC requirements that apply to acquisitions, although the pledge by Joway Shengshi’s equity holders of
all their equity in Joway Shengshi to Junhe Consulting pursuant to the Equity Pledge Agreement (the “Equity Pledge”)
must be registered with the appropriate governmental agency. The Equity Pledge was registered with local administration department
for industry and commerce pursuant to the Section 1 of Article 226 of PRC Property Law passed by National People's Congress
on March 16, 2007.
Through
Junhe Consulting, we effectively and substantially control Joway Shengshi and its three wholly owned subsidiaries Joway Technology,
Shengtang Trading and Joway Decoration.
The
VIE Agreements include:
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a
Consulting Services Agreement through which Junhe Consulting has the right to advise, consult, manage and operate Joway Shengshi
and collect and own all of the net profits or losses of Joway Shengshi;
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an
Operating Agreement through which Junhe Consulting has the right to recommend director candidates and appoint the senior executives
of Joway Shengshi, approve any transactions that may materially affect the assets, liabilities, rights or operations of Joway
Shengshi, and guarantee the contractual performance by Joway Shengshi of any agreements with third parties, in exchange for
a pledge by Joway Shengshi of its accounts receivable and assets;
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a
Proxy Agreement under which the two shareholders of Joway Shengshi have vested their collective voting control over Joway
Shengshi to Junhe Consulting and may only transfer their respective equity interests in Joway Shengshi to Junhe Consulting
or its designee(s);
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an
Option Agreement under which the shareholders of Joway Shengshi have granted to Junhe Consulting the irrevocable right and
option to acquire all of their equity interests in Joway Shengshi with a consideration equal to the capital paid in by the
shareholders in the amount of RMB 50 million (approximately USD $7.52 million). As executive director of Junhe Consulting,
Mr. Jinghe Zhang has the power to exercise the option in his sole discretion; and
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an
Equity Pledge Agreement under which the owners of Joway Shengshi have pledged all of their rights, titles and interests in
Joway Shengshi to Junhe Consulting to guarantee Joway Shengshi’s performance of its obligations under the Consulting
Services Agreement.
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Terms
of the VIE Agreements
Consulting
Agreement
Under
the Consulting Agreement, Joway Shengshi retained Junhe Consulting to (i) provide general advice and assistance relating
to the management and operation of Joway Shengshi’s business; (ii) provide general advice and assistance with respect
to employment and staffing issues, including recruiting and training of management personnel, administrative personnel and other
staff, establishing an efficient payroll management system, and relocation assistance; (iii) provide business development
advice and assistance; and (iv) such other advice and assistance as may be agreed upon by the parties. In return, Joway Shengshi
agreed to pay Junhe Consulting quarterly a consulting fee in an amount equal to all of Joway Shengshi’s net income for that
quarter within fifteen (15) days after receipt of Joway Shengshi’s quarterly financial statements. Joway Shengshi shall
cause the owners of Joway Shengshi to pledge their equity interests in Joway Shengshi to Junhe Consulting to secure the payment
of the foregoing consulting fee.
Joway
Shengshi is subject to a number of covenants typical for this type of transaction, including the obligation to provide monthly,
quarterly and annual reports, and other information requested by Junhe Consulting. In addition, Joway Shengshi is subject to a
number of negative covenants, including the agreement that it will not (i) issue, purchase or redeem any equity or debt,
or equity or debt securities; (ii) create, incur, assume or suffer to exist any liens upon any of its property or assets
(except certain enumerated liens); (iii) wind up, liquidate or dissolve its affairs or enter into any transaction of merger
or consolidation, or sale of all or substantially all of its assets; (iv) declare or pay any dividends; (v) incur, assume
or suffer to exist any indebtedness, (other than certain enumerated exceptions); (vi) lend money or credit or make advances
to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution
to, any other Person, except receivables in the ordinary course of business; (vii) enter into any transaction or series of
related transactions, whether or not in the ordinary course of business, with any of its affiliates or related parties, other
than on terms and conditions substantially as favorable to Joway Shengshi as would be obtainable in a comparable arm’s-length
transaction; (viii) make any expenditure for fixed or capital assets (including, without limitation, expenditures for maintenance
and repairs which are capitalized in accordance with generally accepted accounting principles in the PRC and capitalized lease
obligations) during any quarterly period which exceeds the aggregate the amount contained in the budget; (ix) amend or modify
or change its Articles of Association or business license, or any agreement entered into by it, with respect to its capital stock,
or enter into any new agreement with respect to its capital stock; or (x) engage (directly or indirectly) in any business
other than those types of business prescribed within the business scope of its business license.
The
Consulting Agreement may be terminated by Junhe Consulting for any reason at any time. In addition, the Consulting Agreement may
be terminated by Junhe Consulting by written notice in the event of a material breach by Joway Shengshi which, in the case of
breach of a non-financial obligation, has not been remedied within fourteen (14) days following the receipt of such written
notice. Either party may terminate the Consulting Agreement by written notice to the other party if (i) the other party becomes
bankrupt or insolvent or is the subject of proceedings or arrangements for liquidation or dissolution or ceases to carry on business
or becomes unable to pay its debts as they become due; (ii) if the operations of Junhe Consulting are terminated; or (iii) if
circumstances arise which materially and adversely affect the performance or the objectives of the Consulting Agreement.
Operating
Agreement
Under
the Operating Agreement, Junhe Consulting agreed to guarantee Joway Shengshi’s performance of contracts, agreements or transactions
with third parties in consideration for the pledge by Joway Shengshi to Junhe Consulting of all of Joway Shengshi’s assets.
In addition, Joway Shengshi and its shareholders agreed that Joway Shengshi would not, without the prior written consent of Junhe
Consulting, enter into any transactions which may materially affect the assets, obligations, rights or the operations of Joway
Shengshi (excluding transactions entered into in the ordinary course of business and the lien obtained by relevant counter parties
due to such agreements), including transactions involving (i) the borrowing of money or assumption of any debt; (ii) the
sale or purchase from any third party any asset or right, including, but not limited to, any intellectual property rights; (iii) the
provision of any guarantees to any third parties using its assets or intellectual property rights; or (iv) the assignment
of any business agreements to any third party. Joway Shengshi and its shareholders also agreed to appoint to Joway Shengshi’s
board of directors, and Joway Shengshi’s General Manager, Chief Financial Officer, and other senior officers those persons
recommended or selected by Junhe Consulting.
Voting
Rights Proxy Agreement
Under
the Proxy Agreement, the Shareholders irrevocably granted to Junhe Consulting, for the maximum period of time permitted by law,
all of their voting rights as shareholders of Joway Shengshi. In addition, the Shareholders agreed not to transfer their equity
interest in Joway Shengshi to any third party (other than Junhe Consulting or a designee of Junhe Consulting). The Proxy Agreement
may not be terminated without the unanimous consent of all Parties, except Junhe Consulting, which may terminate the Proxy Agreement
with or without cause on thirty (30) days prior written notice.
Option
Agreement
Under
the Option Agreement, the Shareholders irrevocably granted to Junhe Consulting or its designee an exclusive option to purchase
at any time, to the extent permitted under PRC Law, all or a portion of the Shareholders’ Equity Interest in Joway Shengshi
for a price equal to the capital paid in by the Shareholders on a pro rata basis in accordance with the percentage of the Shareholders’
Equity Interest acquired, subject to applicable PRC laws and regulations.
Equity
Pledge Agreement
Under
the Equity Pledge Agreement, the Shareholders pledged all of their right, title and interest in their equity interests in Joway
Shengshi to Junhe Consulting to guarantee Joway Shengshi’s performance of its obligations under the Consulting Services
Agreement. The pledge expires two (2) years after the satisfaction by Joway Shengshi of all of its obligations under the
Consulting Services Agreement. During the term of the Equity Pledge Agreement, Junhe Consulting is entitled to vote, control,
sell, or dispose of the Pledged Collateral in the event the Company does not perform its obligations under the Consulting Services
Agreement. In addition, Junhe Consulting is entitled to collect any and all dividends declared or paid in connection with the
Pledged Collateral.
Through
these contractual arrangements, we have the ability to substantially influence the daily operations and financial affairs of Joway
Shengshi and to receive, through our subsidiaries, all of its profits. As a result, we are considered the primary beneficiary
of Joway Shengshi and its operations, and Joway Shengshi and its subsidiaries are deemed to be our variable interest entities.
Accordingly, we are able to consolidate into our financial statements the results, assets and liabilities of Joway Shengshi and
its subsidiaries.
Call
Option Agreement
As
part of the reorganization of Joway Shengshi, Mr. Liu and the shareholders of Joway Shengshi entered into a Call Option Agreement,
pursuant to which the shareholders of Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an
aggregate price equal of $20,000 over the next three years. In addition, the Option Agreement also provides that Mr. Liu
shall not dispose any of the shares of Crystal Globe without consent of Mr. Zhang and Mr. Song. Upon the consummation
of the Share Exchange Transaction, Crystal Globe became the principal shareholder of Joway Health (f/k/a G2 Ventures, Inc.) and
Mr. Zhang and Mr. Song became indirect beneficial owners of the shares in Joway Health held by Crystal Globe pursuant
to this Call Option Agreement.
Business
Description
We
are, through our PRC Operating Entities, engaged in the manufacture and sales of tourmaline-related healthcare products. As of
December 31, 2015, we had 74 employees. Our principal executive offices are located at No. 19 Baowang Road, Baodi Economic
Development Zone, Tianjin, PRC 301800.
Introduction
to Tourmaline
Tourmaline
is a crystal silicate mineral compounded with elements such as aluminum, iron, magnesium, sodium, lithium, or potassium. Tourmaline
is classified as a semi-precious stone and the gem comes in a wide variety of colors. (Source: http://en.wikipedia.org/wiki/Tourmaline)
Tourmaline
has the ability to become its own source of electric charge, as it is both pyroelectric, as well as piezoelectric. When it is
put under pressure or when it is dramatically heated or cooled, tourmaline creates an electrical charge capable of emitting far
infrared rays (“FIR”) and negative ions. (Source: http://www.globalhealingcenter.com/tourmaline.html)
FIRs are
invisible waves of energy capable of penetrating deep into the human body. Negative ions are atoms that have a negative electric
charge. FIRs and negative ions are perceived to have certain health benefits. (Source: http://www.globalhealingcenter.com/tourmaline.html)
Because
it is a permanent source of FIRs and negative ions, tourmaline is perceived to have certain health benefits (Source: Niwa Institute
for Immunology, Japan. Int J. Biometeorol 1993 Sep; 37(3) 133-8). In view of its perceived health benefits, tourmaline has been
used to manufacture a wide range of healthcare products, including apparel, bedding, water purifiers, sauna rooms, and personal
care products.
While
tourmaline has perceived health benefits, the actual benefits of tourmaline to human health are unknown. The full efficacy of
tourmaline to human health requires further significant clinical study. We are not aware of any formal clinical studies which
have validated the health benefits of tourmaline.
We
purchase liquid tourmaline from domestic companies which, in turn, import it from South Korea. Liquid tourmaline is readily available
and its price has remained relatively stable. We have not experienced any shortage in tourmaline but as a precaution, we closely
monitor its price and have several back-up suppliers.
China’s
Tourmaline Health-Related Products Market
The
use of tourmaline in health-related products in China began in 2001. Although more and more companies are producing tourmaline
health-related products every year, the market for these products in China is still in its infancy and highly fragmented. (Source:
2010-2012 China's tourmaline market and investment prospects research report, Institute of China Uniway Economics, August, 2010).
Currently,
there are numerous kinds of tourmaline health-related products on the market, including tourmaline clothes, tourmaline mattresses,
tourmaline water machines, etc. In China, users of tourmaline health-related products are typically middle-aged and elderly
people and demand for tourmaline health-related products is still relatively low compared to the size of the Chinese population.
We
believe that the main challenge for the tourmaline health-related product companies is market development rather than competition.
With rising living standards, increasing disposable income, higher health consciousness and the greater awareness of the health
benefits of tourmaline, we believe that the tourmaline health products market will grow rapidly in the next few years.
Manufacturing
Process
We
have two manufacturing processes.
One
manufacturing process consists of applying or infusing raw textiles with liquid or granular tourmaline and then producing products
from these tourmaline-infused textiles. This process is used to produce Male and Female Underpants, Tourmaline Scarves and Tourmaline
Pillowcases.
Our
second manufacturing process consists of applying or infusing already finished products with liquid or granular tourmaline. We
purchase finished products, such as clothing, bedding, and mattresses and then, using one or more of the techniques described
below, coat and/or infuse the products with liquid or granular tourmaline.
We
coat or infuse liquid or granular tourmaline into our products using one or more of the following methods:
The
Spray Method
We
use special high-pressure nozzles to spray liquid tourmaline onto the surface of the product. Through this process, the tourmaline
particles attach onto the surface of the product. We then use a high-temperature ironing machine to embed the tourmaline particles
into the fibers of the product. This method is used in the manufacture of large pieces of textile products, such as mattresses.
The
Dip Method
We
completely immerse fabrics into liquid tourmaline and then stir the fabrics in the liquid tourmaline to ensure the tourmaline
particles attach to the surface of the fabrics. Finally, we embed the tourmaline particles into the fibers by applying heat with
our special high-temperature ironing machine. This method is used in the manufacture of smaller products, such as underwear,
scarves, and shirts.
The
Filling Method
We
fill the products with tourmaline particles. This method is used to make activated water machines and other water treatment products.
The
three methods mentioned above are keys to our manufacturing process. We protect our manufacturing methods via confidentiality
agreements entered into between us and our employees. Pursuant to the confidentiality agreement, the employees are prohibited
from unlawfully revealing and using our confidential technology during his/her term of employment and ten years after the termination
of employment.
Our
Products and Services
We
primarily manufacture the following three series of tourmaline-related healthcare products:
1.
Healthcare
Knit Goods Series
For
the fiscal years ended December 31, 2015 and 2014, our healthcare knit goods series of products accounted for approximately 30.6%
and 28.2% of our annual sales revenue, respectively. This series of products is comprised of tourmaline treated mattresses, bed
linen, underwear, and shirts. We use either the spray or dip method to embed tourmaline particles into the fabric of this series
of products.
Set
forth below is a list of our major healthcare knit goods products, the trademarks or marks under which they are marketed and the
manufacturing method employed:
No.
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Products
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Trademark/Mark
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Manufacturing Method
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Golden Mattress
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Spray Method
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Tourmaline Mattress
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Spray Method
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3
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Tourmaline Undergarment
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Dip Method
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4
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Tourmaline Bed Linens
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Spray Method
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5
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Tourmaline Male Shirts
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Dip Method
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6
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Tourmaline Pillow
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Spray Method
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2.
Daily
Healthcare and Personal Care Series
For
the fiscal years ended December 31, 2015 and 2014, our daily healthcare and personal care series of products accounted for approximately
19.3% and 21.9% of our annual sales revenue, respectively. This series is comprised of tourmaline-treated wrist protectors, knee
protectors, scarves, and shampoo and soap products. We use all three production methods to embed tourmaline particles into
these products. We believe these tourmaline-treated daily healthcare products and personal care products produce FIRs and negative
ions which have perceived health benefits.
Set
forth below is a list of our major products in the daily healthcare and personal care series, the trademarks or marks under which
they are marketed and the manufacturing method employed:
No.
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Products
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Trademark/Mark
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Manufacture Method
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1
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Tourmaline Waist Protector
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Spray Method
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2
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Tourmaline Scarves
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Dip Method
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3
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Tourmaline Shampoo
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Filling Method
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4
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Tourmaline Soap
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Filling Method
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5
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Tourmaline Toothpaste
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Filling Method
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3.
Wellness
House and Activated Water Machine
For
the years ended December 31, 2015 and 2014, our wellness house and activated water machine series of products accounted for approximately
50.1% and 49.9% of our annual sales revenue, respectively. This series of products is comprised mainly of tourmaline wellness
houses, foot sauna bucket, tourmaline activated water machines and drinking mugs. Our tourmaline wellness house resembles a regular
sauna room in which users experience heat sessions. However, the inner layer of our wellness house is coated with tourmaline,
which emits FIRs and negative ions when heated. We supply two types of wellness houses: one for family use, which is designed
to be installed in the corner of a room and can seat two to three people; the other is customized and constructed on site for
commercial bathrooms or spas according to their specifications. Our tourmaline activated water machines and drinking mugs are
infused tourmaline particles into filters. Our Foot Sauna Bucket is filled with tourmaline particles on the bottom. Tourmaline
is perceived to have certain health benefits.
Set
forth below is a list of our major products in the wellness house and activated water machine series, the trademarks or marks
under which they are marketed and the manufacturing method employed:
Return
Policy
It
is the Company’s normal commercial practice to only allow the return of goods that do not conform to the customer’s
order due to some occasional error in packaging or shipment. The return should be requested within seven days of purchase. Customers
may also request a free repair of defective products within 15 days of purchase. For products purchased more than 15 days
previously, we charge a service fee of 110% of the cost of repaired or replaced parts. During 2015 and 2014, we did not have sales
return occurred.
Services:
Wellness House Maintenance
Our
wellness house products generally carry a one-year warranty. When the warranty expires, we provide our customers the option to
engage us to service and maintain their wellness houses for a fee equal to 200% of the cost of the repaired or replaced parts.
There
has been very little demand for our wellness house maintenance services in 2015 and 2014.
Manufacturing
Facilities
Our
manufacturing facilities are located in Baodi District, Tianjin City, PRC, and occupy an area of approximately 2,500 square meters.
We have twelve employees engaged in manufacturing as of December 31, 2015. We had our own design team comprising five designers
who are responsible for designing new styles for our products every quarter. They are also responsible for product packaging design.
Customers
and Suppliers
Customers
Below
is a list of our top ten customers for the years 2015 and 2014, respectively.
Top
Ten Customers in 2015
No.
|
|
Name
|
|
Amount
(RMB)
|
|
|
Amount
(US$)
|
|
|
Products Sold
|
|
Percentage of Sales
|
|
1
|
|
Han Xiuqin Store
|
|
¥
|
916,364
|
|
|
$
|
146,851
|
|
|
Tourmaline Water Machine, Wellness House,
Tourmaline Mattress, etc.
|
|
|
4.4
|
%
|
2
|
|
Li Xue Store
|
|
|
779,379
|
|
|
|
124,898
|
|
|
Wellness House, Tourmaline Mattress,
Tourmaline Scarves, etc.
|
|
|
3.8
|
%
|
3
|
|
Wang Xiaojun Store
|
|
|
597,950
|
|
|
|
95,824
|
|
|
Tourmaline Scarves, Tourmaline Mattress,
Tourmaline Water Machine, etc.
|
|
|
2.9
|
%
|
4
|
|
Zhang Xingzhi Store
|
|
|
520,830
|
|
|
|
83,465
|
|
|
Tourmaline Mattress, Tourmaline Water
Machine, Sauna Bucket, etc.
|
|
|
2.5
|
%
|
5
|
|
Xu Xiangyun Store
|
|
|
512,251
|
|
|
|
82,090
|
|
|
Tourmaline Mattress, Tourmaline Pillow,
Tourmaline Water Machine, etc.
|
|
|
2.5
|
%
|
6
|
|
Liu Jinmiao Store
|
|
|
485,590
|
|
|
|
77,818
|
|
|
Tourmaline Mattress, Tourmaline Pillow,
Tourmaline Scarves, etc.
|
|
|
2.3
|
%
|
7
|
|
Zhang Xiangyue Store
|
|
|
472,998
|
|
|
|
75,800
|
|
|
Tourmaline Mattress, Tourmaline Pillow,
Foot Sauna Bucket, etc.
|
|
|
2.3
|
%
|
8
|
|
Cao Xueqin Store
|
|
|
445,964
|
|
|
|
71,467
|
|
|
Tourmaline Mattress, Sauna Bucket,
Tourmaline Water Machine, etc.
|
|
|
2.1
|
%
|
9
|
|
Tianjin Baicheng Yitong Technology Co., Ltd
|
|
|
417,400
|
|
|
|
66,890
|
|
|
Tourmaline Mattress, Tourmaline Water Machine,
Tourmaline Waist Protector, etc.
|
|
|
2.0
|
%
|
10
|
|
Ma Tiefeng Store
|
|
|
412,585
|
|
|
|
66,118
|
|
|
Tourmaline Water Machine, Tourmaline Mattress,
Tourmaline Scarves, etc.
|
|
|
2.0
|
%
|
|
|
|
|
¥
|
5,561,311
|
|
|
$
|
891,221
|
|
|
|
|
|
26.8
|
%
|
Top
Ten Customers in 2014
No.
|
|
Name
|
|
Amount (RMB)
|
|
|
Amount (US$)
|
|
|
Products Sold
|
|
Percentage
of Sales
|
|
1
|
|
Xue Li Store
|
|
¥
|
593,542
|
|
|
$
|
96,539
|
|
|
Tourmaline Mattress, Wellness House,
Tourmaline Water Machine, etc.
|
|
|
5.7
|
%
|
2
|
|
Tiefeng Ma Store
|
|
|
551,951
|
|
|
|
89,774
|
|
|
Wellness House, Tourmaline Water Machine,
Tourmaline Mattress, etc.
|
|
|
5.3
|
%
|
3
|
|
Yun Lei Store
|
|
|
426,632
|
|
|
|
69,391
|
|
|
Foot Sauna Bucket,
Tourmaline Water Machine, etc.
|
|
|
4.1
|
%
|
4
|
|
Tianjin Zhongwei Hongtu Technology Co., Ltd
|
|
|
333,565
|
|
|
|
54,254
|
|
|
Tourmaline Mattress,
Tourmaline Scarves, etc.
|
|
|
3.2
|
%
|
5
|
|
Xiangyue Zhang Store
|
|
|
297,090
|
|
|
|
48,321
|
|
|
Tourmaline Mattress,
Tourmaline Waist Protector, etc.
|
|
|
2.8
|
%
|
6
|
|
Lijuan Feng Store
|
|
|
264,530
|
|
|
|
43,026
|
|
|
Tourmaline Mattress,
Tourmaline Waist Protector, etc.
|
|
|
2.5
|
%
|
7
|
|
Xiangyun Xu Store
|
|
|
256,863
|
|
|
|
41,779
|
|
|
Tourmaline Mattress, Foot Sauna Bucket, etc.
|
|
|
2.5
|
%
|
8
|
|
Lanli Zheng Store
|
|
|
228,462
|
|
|
|
37,159
|
|
|
Tourmaline Mattress,
Tourmaline Undergarment, etc.
|
|
|
2.2
|
%
|
9
|
|
Yuanbin Wang Store
|
|
|
181,564
|
|
|
|
29,531
|
|
|
Tourmaline Mattress,
Tourmaline Waist Protector, etc.
|
|
|
1.7
|
%
|
10
|
|
Xingzhi Zhang Store
|
|
|
157,391
|
|
|
|
25,599
|
|
|
Tourmaline Mattress,
Tourmaline Undergarment, etc.
|
|
|
1.5
|
%
|
|
|
|
|
¥
|
3,291,590
|
|
|
$
|
535,373
|
|
|
|
|
|
31.5
|
%
|
Our main customers are franchisees
that are authorized to sell our products exclusively. None of our customers accounted for more than 10% of our annual sales revenue
in 2015 and 2014.
Suppliers
Below is a list of our top ten
suppliers in 2015 and 2014, respectively.
Top Ten Suppliers
in 2015
No.
|
|
Name
|
|
Amount
(RMB)
|
|
|
Amount
(US$)
|
|
|
Product Purchased
|
|
Percentage
of Purchase
|
|
1
|
|
Shenzhen Josen Industry Co., Ltd
|
|
¥
|
1,112,094
|
|
|
$
|
178,217
|
|
|
Wellness House for family use
|
|
|
14.8
|
%
|
2
|
|
Shenzhen Ainuowei Electronics Co., Ltd.
|
|
|
982,991
|
|
|
|
157,528
|
|
|
Food Sauna Bucket
|
|
|
13.1
|
%
|
3
|
|
Tianjin Zhengxinglong Packing Products Co., Ltd.
|
|
|
796,689
|
|
|
|
127,673
|
|
|
Package
|
|
|
10.6
|
%
|
4
|
|
Hangzhou Siluhua Home textile Co., Ltd.
|
|
|
463,210
|
|
|
|
74,231
|
|
|
Bedding Article
|
|
|
6.2
|
%
|
5
|
|
Beijing Quanfu Wood Products Co., Ltd.
|
|
|
460,800
|
|
|
|
73,845
|
|
|
Wellness House Materials
|
|
|
6.1
|
%
|
6
|
|
Jiangsu Meimiao Environmental Protection Technology Co., Ltd.
|
|
|
291,350
|
|
|
|
46,690
|
|
|
Wellness House Materials
|
|
|
3.9
|
%
|
7
|
|
Lianyungang Dongguang Floor Heating Co., Ltd.
|
|
|
274,925
|
|
|
|
44,058
|
|
|
Wellness House Materials
|
|
|
3.7
|
%
|
8
|
|
Hangzhou Tiger Water Treatment Equipment Co., Ltd.
|
|
|
249,490
|
|
|
|
39,982
|
|
|
Water Machine Materials
|
|
|
3.3
|
%
|
9
|
|
Suzhou Jinmao Daily Chemicals Co., Ltd.
|
|
|
227,865
|
|
|
|
36,516
|
|
|
Toothpaste
|
|
|
3.0
|
%
|
10
|
|
Penglai Huakang Healthcare Product Co., Ltd.
|
|
|
197,807
|
|
|
|
31,699
|
|
|
Xin-Nao-Ling Fish Oil Soft Gel and
Zhi-Li-Bao Fish Oil Soft Gel
|
|
|
2.6
|
%
|
|
|
|
|
¥
|
5,057,221
|
|
|
$
|
810,439
|
|
|
|
|
|
67.3
|
%
|
Top
Ten Suppliers in 2014
No.
|
|
Name
|
|
Amount (RMB)
|
|
|
Amount (US$)
|
|
|
Product Purchased
|
|
Percentage of Purchase
|
|
1
|
|
Shanghai Dilin International Trading Co., Ltd.
|
|
¥
|
390,000
|
|
|
$
|
63,433
|
|
|
Food Sauna bucket
|
|
|
16.3
|
%
|
2
|
|
Penglai Huakang Healthcare Product Co., Ltd.
|
|
|
236,396
|
|
|
|
38,450
|
|
|
Xin-Nao-Ling Fish Oil Soft Gel and Zhi-Li-Bao
Fish Oil Soft Gel
|
|
|
9.9
|
%
|
3
|
|
Tianjin Hezhi Pharmaceutical Co., Ltd.
|
|
|
177,061
|
|
|
|
28,799
|
|
|
Health food
|
|
|
7.4
|
%
|
4
|
|
Beijing Quanfu Wood Products Co., Ltd.
|
|
|
173,600
|
|
|
|
28,236
|
|
|
Wellness House Materials
|
|
|
7.3
|
%
|
5
|
|
Hangzhou Tiger Water Treatment Equipment Co., Ltd.
|
|
|
140,000
|
|
|
|
22,771
|
|
|
Tourmaline Water Machine Materials
|
|
|
5.9
|
%
|
6
|
|
Tianjin Zhengxinglong Packing Products Co., Ltd.
|
|
|
135,911
|
|
|
|
22,106
|
|
|
Package
|
|
|
5.7
|
%
|
7
|
|
Shenyang Dongxu Floor Heating Co., Ltd.
|
|
|
123,581
|
|
|
|
20,100
|
|
|
Wellness House Materials
|
|
|
5.2
|
%
|
8
|
|
Yuyao Tianqin water-purification equipment Co., Ltd.
|
|
|
72,000
|
|
|
|
11,711
|
|
|
Tourmaline Water Machine Materials
|
|
|
3.0
|
%
|
9
|
|
Shanghai Meicheng Cosmetics Co., Ltd.
|
|
|
46,840
|
|
|
|
7,619
|
|
|
Shampoo
|
|
|
2.0
|
%
|
10
|
|
Tianjin Zengsen Commerce & Trade Co., Ltd.
|
|
|
40,908
|
|
|
|
6,654
|
|
|
Wellness House Materials
|
|
|
1.7
|
%
|
|
|
|
|
¥
|
1,536,297
|
|
|
$
|
249,879
|
|
|
|
|
|
64.4
|
%
|
In
2015, two major suppliers accounted for 14.8% and 13.1%, respectively of our annual raw materials purchases and in 2014 another
two major suppliers accounted for 16.3% and 9.9%, respectively of our annual raw materials purchases. We do not have long term
contracts with any of our suppliers since the raw materials we use are readily available on the market at generally stable prices.
Franchise
Stores
Approximately
71% and 72% of our annual sales in 2015 and 2014, respectively, were made to our franchisees.
As
of December 31, 2015, there were approximately 137 franchise stores across the PRC that were authorized to sell our products exclusively.
Set forth below is a geographical breakdown of the franchise stores:
Region
|
|
Number of
Franchise
Stores
|
|
Northeastern
China (Liaoning, Jilin, Heilongjiang)
|
|
13
|
|
Northern
China (Beijing, Tianjin, Hebei, Shanxi, Inner Mongolia)
|
|
74
|
|
Eastern
China (Shanghai, Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi)
|
|
14
|
|
Southern
China (Guangdong, Hainan, Guangxi)
|
|
11
|
|
Central
China (Henan, Hubei, Hunan)
|
|
15
|
|
Southwestern
China (Chongqing, Sichuan, Guizhou, Yunnan, Tibet)
|
|
10
|
|
|
|
|
|
Total
|
|
137
|
|
We
use multiple criteria to select our franchisees, including financial condition, sales network, sales personnel, and facilities.
Generally we approve applicants that meet a minimum working capital requirement of RMB 40,000 and have the requisite business
facilities and resources.
We
typically enter into a standard franchising agreement with the applicant. Pursuant to the agreement, the franchisee is authorized
to sell our products exclusively at a predetermined retail price. In exchange, we provide them with products at a discounted price,
geographical exclusivity, and marketing, training and technological support. The franchisee is also required to adhere to certain
standards of product merchandising, promotion and presentment. No initial franchise fees are required from the franchisee, nor
is the franchisee required to pay any continuing royalties. The agreement is generally for a term of three years and is renewable
on the mutual agreement of both parties.
Cooperative
Contract on Investment in Establishing Joway Hezhi Pharmaceutical Co., Ltd.
On
August 28, 2011, one of our subsidiaries, Joway Shengshi, and Tianjin Hezhi Pharmaceutical Co., Ltd. (referred to herein
as “Tianjin Hezhi”) entered into a Cooperative Contract, pursuant to which Joway Shengshi and Tianjin Hezhi established
a new company named Tianjin Joway Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Joway Hezhi”) with a registered
capital of RMB 20,000,000. Joway Hezhi was incorporated on October 21, 2011 with initial registered capital of RMB 5,000,000.
Joway Hezhi will engage in the production and distribution of Chinese-Western preparations, health food, healthcare products,
medical instruments and plain food. On October 11, 2011, Joway Shengshi contributed RMB 1,500,000 in consideration for 30%
of the equity in Joway Hezhi. Pursuant to the Cooperative Contract, Joway Shengshi has the obligation to contribute to Joway Hezhi
an additional capital of RMB 4,500,000 and 51 mu or approximately 3,400 square meter land use rights. On June 26, 2014, Joway
Hezhi returned all of our investment in the amount of RMB 1,500,000 after being failed to finish its early preparatory period
for three years. We received no gain or loss from this withdrawal.
Marketing
and Sales
Our
primary marketing strategies are directed towards both our franchisees and end users, and the marketing efforts of our franchisees
are directed towards end users. The Company assists franchisees on monthly product introduction seminars, which are open to both
our franchisees and to the general public. We also host an annual conference and three quarterly conferences, which are open to
both our franchisees and to the general public as well. In 2015 and 2014, we held our annual and quarterly conferences in Tianjin
City and did not charge entrance fees.
The
franchise stores are responsible for the cost of organizing the monthly product introduction seminars and meetings and we are
responsible for the travel expenses of our employees who attend these meetings and seminars to explain and promote our various
product lines. There are on average 20 such seminars and meetings each month nationwide. Generally, we choose the venue for the
product seminars and meetings based on market prospects, sales volume and the extent of meeting preparation. During the year ended
December 31, 2015, we held product seminars and meetings in approximately 57 cities in the PRC.
Generally,
we are responsible for the cost of annual and quarterly conferences. In 2015 and 2014, we incurred costs related to annual and
quarterly conferences of $171,508 (RMB 1,070,226) and $51,158 (RMB 314,527), respectively.
Below
is a breakdown of our marketing expenses in the fiscal years 2015 and 2014.
|
|
2015
|
|
|
2014
|
|
Expenses
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
Promotion
|
|
¥
|
1,248,681
|
|
|
$
|
200,106
|
|
|
¥
|
944,080
|
|
|
$
|
153,554
|
|
Printing
|
|
|
113,567
|
|
|
|
18,200
|
|
|
|
62,000
|
|
|
|
10,084
|
|
Travelling
|
|
|
1,296,007
|
|
|
|
207,690
|
|
|
|
774,553
|
|
|
|
125,980
|
|
Training
|
|
|
41,800
|
|
|
|
6,699
|
|
|
|
334,600
|
|
|
|
54,422
|
|
Salaries
|
|
|
1,105,885
|
|
|
|
177,222
|
|
|
|
712,304
|
|
|
|
115,856
|
|
Total
|
|
¥
|
3,805,940
|
|
|
$
|
609,917
|
|
|
¥
|
2,827,537
|
|
|
$
|
459,896
|
|
For
the fiscal year 2015, we have a marketing and sales budget of $462,057 (RMB 3,000,000), of which, $154,019 (RMB 1,00,000) is budgeted
for our 2016 annual and quarterly conference, $154,019 (RMB 1,000,000) for sales personnel, and the remainder for travel, training
and other expenses of our sales and marketing department.
Seasonality
Because
our products are for daily use, seasonal variations do not have meaningful impact on the market demand for our products.
Competition
Competitive
Environment
China’s
tourmaline health products market is highly segmented and is in the stage with great demand.
However,
given the highly segmented nature of the market, we are unable to locate any information on the size of the tourmaline healthcare-related
market in China. Currently, Japanese and Korean companies are leaders in tourmaline technology. However, they have not yet developed
a sizeable market share for their products in the PRC (Source: 2010-2012 China's tourmaline market and investment prospects research
report, Institute of China Uniway Economics, August 2010). Therefore, we believe that there is a great opportunity for us to create
demand and market share and establish ourselves as a leader in the tourmaline-related healthcare products field.
Our
Competitors
Our
major competitors in the PRC are as follows:
|
●
|
Hanya
Nano Technology Co., Ltd. operates in Changsha, Hunan province, PRC. They mainly focus on manufacturing tourmaline sauna rooms
and tourmaline health products.
|
|
|
|
|
●
|
Harbin
Handu Tourmaline Nano Technology Development Co., Ltd. operates in PRC. They mainly focus on manufacturing tourmaline sauna
rooms and tourmaline health products.
|
Our
Competitive Advantages
We
believe that by leveraging the following strengths, we can effectively compete and enhance our market position:
|
●
|
Brand
Advantage: We are one of the first companies to manufacture, distribute and sell tourmaline health-related products in the
PRC and we believe that our trademark, “Joway”, is the most established and well-known brand in the market.
|
|
●
|
Technology
Advantage: We possess several patents for tourmaline health-related products. We also invest a significant amount of time
and expense in new product research and development.
|
|
●
|
Sales
Channels Advantage: As of December 31, 2015, we had approximately 137 franchise stores in most of the big cities in the PRC
and we continue to expand our franchise network. We believe our extensive franchisee network will assure that our sales continue
to grow.
|
|
|
|
|
●
|
Talent
Advantage: We have recruited additional employees in the fields of marketing, franchise and training, who have several years
of relevant experience in their previous careers. We plan to focus the efforts of these individuals to enhance our marketing
and sales.
|
|
|
|
|
●
|
Public
Relation Advantage: We enjoy the benefits of a membership at China Health Care Association and China Home Textile Association. For
example, as a member, we are entitled to obtain the fist-hand technology related to tourmaline and apply such technology to
our business when necessary.
|
|
|
|
|
●
|
New
Material is listed in the state development strategies in the State Council Report in 2015 by Premier Li Keqiang. Tourmaline
is defined as New Material and Tourmaline Processing Technology is designated as New Material Application Technology.
|
Business
Strategy
We
believe the market for tourmaline health-related products in the PRC will grow rapidly. In order to benefit from the market opportunities,
we plan to implement the following strategies:
|
●
|
We
will focus on expanding our sales and franchise network in the PRC. Over the past few years, most of our franchises are located
in north of China, our target is to cover the most provinces in China especially the southern part in which economy remains
high development.
|
|
|
|
|
●
|
We
will continue to expand our product offerings and seek to optimize our product portfolio to include more products with higher
profit margins. For example, we believe that tourmaline daily health-related products, water treatment products, tourmaline
home accessories and tourmaline environmentally friendly paint have more profit potential and we plant on investing more research
and development dollars into developing these products.
|
|
|
|
|
●
|
We
intend to improve our operations, exploit our competitive strengths, and look for ways to expand our business, including through
the acquisition of other existing businesses.
|
|
|
|
|
●
|
We
have participated in the Tourmaline Application Committee in 2015. Our goal is to improve the purity of tourmaline and diversify
tourmaline products related to our daily lives.
|
Research
and Development
As
of December 31, 2015, we had two employees engaged in research and development activities. Our research and development focus
on developing new products in the daily health-related, tourmaline products, including tourmaline undergarment, tourmaline scarf
and shawl, wellness room for family use.
During
2015 and 2014, we spent $53,689(RMB 335,025) and $29,745 (RMB 182,879), respectively, on research and development activities.
The following is a breakdown of our research and development expenses for 2015 and 2014 as well as our budget for 2015.
|
|
2015
|
|
|
2014
|
|
|
2016 (Budget)
|
|
Item
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
Equipment
|
|
|
20,353
|
|
|
|
3,262
|
|
|
|
3,178
|
|
|
|
517
|
|
|
|
20,000
|
|
|
|
3,080
|
|
Samples
|
|
|
14,347
|
|
|
|
2,299
|
|
|
|
16,029
|
|
|
|
2,607
|
|
|
|
20,000
|
|
|
|
3,080
|
|
Travel Expense
|
|
|
2,732
|
|
|
|
438
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,000
|
|
|
|
462
|
|
Salary
|
|
|
269,860
|
|
|
|
43,246
|
|
|
|
133,841
|
|
|
|
21,769
|
|
|
|
250,000
|
|
|
|
38,505
|
|
Inspection Fee
|
|
|
27,733
|
|
|
|
4,444
|
|
|
|
29,831
|
|
|
|
4,852
|
|
|
|
30,000
|
|
|
|
4,621
|
|
Total
|
|
|
335,025
|
|
|
|
53,689
|
|
|
|
182,879
|
|
|
|
29,745
|
|
|
|
323,000
|
|
|
|
49,748
|
|
Intellectual
Property
We
regard our trademarks, trade secrets, patents and similar intellectual property as critical factors to our success. We rely on
patent, trademark and trade secret law, as well as confidentiality and license agreements with certain of our employees, customers
and others to protect our proprietary rights.
The
trademarks we currently use include the “Joway” trademark, which is owned by our President, Chief Executive Officer
and director, Mr. Jinghe Zhang. We are permitted to use the “Joway” trademark pursuant to a license agreement with
Mr. Jinghe Zhang dated December 1, 2009 for a term of ten years. The agreement is renewable at the end of its respective
term. There is no license fees to Mr. Jinghe Zhang for the use of the trademark.
Set
forth below is a detailed description of the trademarks we use.
Mark
|
|
|
Registration/ Application No.
|
|
|
Class
|
|
Effective
Date
|
|
Expiration
Date
|
|
Owner/Applicant
|
|
|
|
4794111
|
|
|
Class
24:
Fabrics.
Textiles
and textile goods, not included in other classes; bed and table covers.
|
|
February 21,
2009
|
|
February
20, 2019
|
|
Jinghe Zhang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6104256
|
|
|
Class
3:
Cosmetics and Cleaning Preparations.
Bleaching
preparations and other substances for laundry use; cleaning, polishing, scouring and abrasive preparations; soaps; perfumery,
essential oils, cosmetics, hair lotions; dentifrices.
|
|
March 21,
2010
|
|
March 20,
2020
|
|
Tianjin Joway Shengshi Group Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6104253
|
|
|
Class
11:
Environmental control apparatus.
Apparatus
for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply and sanitary purposes.
|
|
February 14,
2010
|
|
February 13,
2020
|
|
Tianjin Joway Shengshi Group Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8467175
|
|
|
Class
30:
Staple foods.
Coffee,
tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and
confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces (condiments); spices; ice.
|
|
July
21, 2011
|
|
July 20, 2021
|
|
Tianjin
Joway Shengshi Group Co., Ltd.
|
|
|
|
8236524
|
|
|
Class
24:
Fabrics.
Textiles and textile goods, not included in other classes; bed and table covers.
|
|
April 28, 2011
|
|
April 27, 2021
|
|
Tianjin Joway
Shengshi Group Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8029052
|
|
|
Class 5:
Pharmaceuticals.
Pharmaceutical, veterinary and sanitary preparations; dietetic substances adapted for medical use, food for babies; plasters, materials for dressings; material for stopping teeth, dental wax; disinfectants; preparations for destroying vermin; fungicides, herbicides.
|
|
April 14, 2011
|
|
April 13, 2021
|
|
Tianjin
Joway Shengshi Group Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8029009
|
|
|
CLASS
2:
Paints
Paints, varnishes, lacquers; preservatives against rust and against deterioration of wood; colorants; mordants; raw natural resins; metals in foil and powder form for painters, decorators, printers and artists.
|
|
April 14, 2011
|
|
April
13, 2021
|
|
Tianjin
Joway Shengshi Group Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8236733
|
|
|
Class
30:
Staple foods.
Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces (condiments); spices; ice.
|
|
December 14, 2011
|
|
December
13, 2021
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8236538
|
|
|
Class
24:
Fabrics.
Textiles and textile goods, not included in other classes; bed and table covers.
|
|
June 7, 2011
|
|
June 6,
2021
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8236684
|
|
|
Class
11:
Environmental control apparatus.
Apparatus for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply and sanitary purposes
|
|
June 21, 2011
|
|
June 20, 2021
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8236641
|
|
|
Class
3:
Cosmetics and Cleaning Preparations
Bleaching preparations and other substances for laundry use; cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.
|
|
May 28, 2011
|
|
May
27, 2021
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11275200
|
|
|
Class
30:
Staple foods.
Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces (condiments); spices; ice.
|
|
December 28, 2013
|
|
December
27, 2023
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11232054
|
|
|
Class
33:
Alcoholic beverages.
Fruit extracts [alcoholic], aperitifs, distilled beverages, cider, digesters [liqueurs and spirits], wine, clear wine, alcoholic beverages [except beer] and sake.
|
|
December 14, 2013
|
|
December
13, 2023
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
11203446
|
|
|
Class
5:
Pharmaceuticals.
Glue ball, Reducing tea, air purifying preparations, mosquito-repellent incense, sanitary pads, sanitary towels, antisepsis paper and babies' diapers.
|
|
December 7, 2013
|
|
December
6,
2023
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16579737
|
|
|
Class
3:
Cosmetics and Cleaning Preparations.
Bleaching preparations and other substances for laundry use; cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.
|
|
Registration
Application Accepted on March 27, 2015
|
|
Tianjin
Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16579738
|
|
|
Class
3:
Cosmetics and Cleaning Preparations.
Cleansing lotion, cleanser, facial mask, cosmetics, complexion cream, wrinkle cream.
|
|
Registration
Application Accepted on March 27, 2015
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16966456
|
|
|
Class
3:
Cosmetics and Cleaning Preparations.
Cleansing lotion, cleanser, facial mask, cosmetics, complexion cream, wrinkle cream.
|
|
Registration
Application Accepted on May 15, 2015
|
|
Tianjin
Joway Shengshi Group Co., Ltd
|
Currently,
the patents the Company is using are owned by our Chief Executive Officer, Mr. Jinghe Zhang. Pursuant to a license agreement
with our President, Chief Executive Officer and director, Mr. Jinghe Zhang, we are permitted to use the following five patents
for free from December 1, 2009 to the expiration date of each patent.
No.
|
|
Product
|
|
Type
|
|
|
Patent No.
|
|
Application Date
|
|
Effective Date
|
|
Term
|
|
Owner &
Inventor
|
1
|
|
Water Purifier
|
|
|
Utility
Model
|
|
|
ZL200720014571.6
|
|
September 17,
2007
|
|
October 29, 2008
|
|
Ten years
|
|
Jinghe Zhang
|
2
|
|
Tourmaline Undergarment
|
|
|
Utility
Model
|
|
|
ZL200720015434.4
|
|
October 22, 2007
|
|
July 16, 2008
|
|
Ten years
|
|
Jinghe Zhang
|
3
|
|
Tourmaline Mattress
|
|
|
Utility
Model
|
|
|
ZL200720015435.9
|
|
October 22, 2007
|
|
December 24, 2008
|
|
Ten years
|
|
Jinghe Zhang
|
4
|
|
Tourmaline Wellness House
|
|
|
Utility
Model
|
|
|
ZL200720014570.1
|
|
September 17, 2007
|
|
July 16, 2008
|
|
Ten years
|
|
Jinghe Zhang
|
5
|
|
Drinking Water Purifier
|
|
|
Design
|
|
|
ZL200730011189.5
|
|
September 17, 2007
|
|
April 1, 2009
|
|
Ten years
|
|
Jinghe Zhang
|
Insurance
We
maintain product liability insurance policies for claims resulting from personal injury or damage to property caused by our water
machine. We also maintain limited insurance coverage for our vehicles. The total product liability insurance coverage for our
water machines is RMB 1,000,000 ($162,649). We do not carry property insurance on our buildings, facilities, and major operating
assets, but on our vehicles, and we do not have any business interruption insurance due to the limited availability of this type
of coverage in the PRC. During 2015 and 2014, we had no product liability claims.
Employees
As
of December 31, 2015, the Company, including its subsidiaries, had a total of 74 full time employees.
Joway
Shengshi
As
of December 31, 2015 Joway Shengshi had 39 full-time employees based in Tianjin City, PRC. There are no collective bargaining
contracts covering any of our employees. We believe our relationship with our employees is satisfactory.
Below
is a breakdown of Joway Shengshi’s employees:
Departments
|
|
Number of
Employees
|
|
Management
|
|
|
17
|
|
Sales
|
|
|
3
|
|
Distribution
|
|
|
2
|
|
Production
|
|
|
7
|
|
Research and development
|
|
|
1
|
|
Franchising
|
|
|
6
|
|
Finance
|
|
|
3
|
|
Joway
Decoration
As
of December 31, 2015, Joway Decoration had 31 full-time employees based in Tianjin City, PRC. There were no collective bargaining
contracts covering any of our employees. We believe our relationship with our employees is satisfactory.
Below
is a breakdown of Joway Decoration’s employees:
Departments
|
|
Number of
Employees
|
|
Management
|
|
|
12
|
|
Sales
|
|
|
4
|
|
Distribution
|
|
|
5
|
|
Production
|
|
|
5
|
|
Research and development
|
|
|
4
|
|
Franchising
|
|
|
1
|
|
Shengtang
Trading
As
of December 31, 2015, Shengtang Trading had 4 full-time employees based in Tianjin, PRC. There were no collective bargaining contracts
covering any of our employees. We believe our relationship with our employees is satisfactory.
We
are required to contribute a portion of our employees’ total salaries to the PRC government’s social insurance funds,
including pension insurance, medical insurance, unemployment insurance, work-related injury insurance, and maternity insurance,
in accordance with relevant regulations. We have purchased work injury insurance and medical insurance for all our employees.
Effective
January 1, 2008, the PRC introduced a new labor contract law that enhances rights for the nation's workers, including open-ended
work contracts and severance pay. The legislation requires employers to provide written contracts to their workers, restricts
the use of temporary laborers and makes it harder to lay off employees. It also requires that employees with fixed-term contracts
be entitled to an indefinite-term contract after a fixed-term contract is renewed twice. Although the new labor contract law will
increase our labor costs, we do not anticipate there will be any significantly effects on our overall profitability in the near
future since such amount was historically not material to our operating cost
.
Management anticipates this may be a step
toward improving candidate retention for skilled workers.
Government
Regulations and Compliance with Applicable Laws
Below
is a list of agencies which may have jurisdiction over our business:
Agency
|
|
Functions
|
State
Food and Drug Administration (“CFDA”)(1)
|
|
Supervise
the entire process from research and development, manufacturing, and distribution to utilization of drugs; supervise and coordinate
the safety management of food, health food and cosmetics and organize investigations of serious accidents.
|
|
|
National
Development and Reform Commission (“NDRC”)
|
|
Make
strategic and mid- to long-term plans for the PRC healthcare industry; regulate drug prices; manage disaster relief funds
and carry out healthcare development projects sponsored by the government.
|
|
|
Ministry
of Commerce (“MOFCOM”)
|
|
Formulate
regulations and policies on foreign trade, foreign direct investments, consumer protection, and market competition; negotiate
bilateral and multilateral trade agreements.
|
|
|
Ministry
of Science and Technology (“MST”)
|
|
Lay
out science and technology development plans and policies; draft relevant regulations and rules and guarantee implementation
of regulations and rules
|
|
|
|
General
Administration of Quality Supervision, Inspection and Quarantine (“AQSIQ”)
|
|
Manage
national quality, metrology, entry-exit commodity inspection, entry-exit health quarantine, entry-exit animal and plant quarantine,
import-export food safety, certification, accreditation, and standardization, as well as enforce administrative laws
|
|
|
State
Administration of Taxation (“SAT”)
|
|
Draft
tax regulations and implementation rules and propose tax policies.
|
|
|
State
Administration of Foreign Exchange (“SAFE”)
|
|
Make
regulations and policies governing foreign exchange market activities and manage state foreign exchange reserves.
|
(1)
|
The
PRC State Food and Drug Administration is responsible for (i) regulating the research and development, manufacturing,
distribution and utilization of drugs; (ii) supervising and coordinating the safety management of food, health food and
cosmetics; and (iii) investigating serious accidents with respect to the foregoing. The products we manufacture are not
regulated by the CFDA as they are not drugs, diet supplements or food consumed by humans. There are no existing laws or regulations
in China governing the manufacture and sale of tourmaline health care products such as those sold by the Company nor are there
any inspection requirements applicable to our products.
|
We
act as a distributor for four edible products including
Xin-Nao-Ling Fish Oil Soft Gel
and
Zhi-Li-Bao Fish Oil Soft
Gel
, which are subject to CFDA regulation. These products are manufactured by Penglai Huakang Healthcare Industries, Ltd.,
Tianjin Hezhi Pharmaceutical Co., Ltd.., and Jilin Luwang Sanbao Biological Technology Co., Ltd., which all have obtained the
necessary manufacturing licenses and certifications from the CFDA.
Environmental
Regulations
The
major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and
Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation
Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise
Pollution. To date, the Company’s costs to comply with applicable environmental laws have been minimal.
According
to Article 32 of the PRC Environmental Protection Law, a project that may cause pollution to the environment cannot be undertaken
until an environmental impact statement has been approved by the applicable department of environmental protection administration.
In
March 2008, Joway Shengshi submitted an environmental impact statement with respect to the manufacturing of 300,000 sets of knitwear
annually to the Tianjin Baodi Environmental Protection Bureau. The environmental impact statement assesses the pollution that
the manufacturing is likely to produce and its impact on the environment. In addition, the report stipulates the preventive and
curative measures the company will undertake. Tianjin Baodi Environmental Protection Bureau approved the environmental impact
statement on March 12, 2008 and on April 22, 2009, the Tianjin Baodi Environmental Protection Bureau approved the manufacture
of 300,000 sets of knitwear annually.
The
Company’s production process does not produce industrial waste water or waste gas emissions of a type that is regulated
by current PRC laws and regulations. The Company’s other emissions, including noise, waste water, solid waste and atmospheric
pollutants meet regulatory standards. According to the Letter regarding Environment Protection of Tianjin Joway Shengshi Group
Co, Ltd. issued by Tianjin Baodi Environmental Protection Bureau dated August 6, 2014, Joway Shengshi complies with applicable
environmental protection laws and regulations and its discharge of pollutants meets with the standards of the state and Tianjin
City.
In
addition, Joway Shengshi obtained ISO 140001 International Environmental Management System Certification on January 15, 2009.
ISO 140001 was first published as a standard in 1996 and specifies the requirements for an organization’s environmental
management system. It applies to those environmental aspects over which an organization has control and where it can be expected
to have an influence. Joway Shengshi passed each annual inspection of the ISO 140001. Such Certification covers the production
and service of tourmaline health-related products such as underwear, bras, eyeshades, scarves, hats, kneepads, waist-protectors,
socks, bedding and daily commodities.
We
have not been named as a defendant in any legal proceedings alleging violation of environmental laws and have no reasonable basis
to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect
on our business, financial condition or results of operations due to any non-compliance with environmental laws.
To
date, the Company has not incurred any significant costs in connection with complying with PRC national or local environmental
laws.
Item 1A.
RISK FACTORS.
An
investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the
other information contained in this report before deciding to invest in our common stock.
Risks
Related To Our Business
The
purchase of many of our products is discretionary, and may be particularly affected by adverse trends in the general economy;
therefore challenging economic conditions may make it more difficult for us to generate revenue.
Our
business is affected by global, national and local economic conditions since many of the products we sell are discretionary and
we depend, to a significant extent, upon a number of factors relating to discretionary consumer spending in the PRC. These
factors include economic conditions and perceptions of such conditions by consumers, employment rates, the level of consumers'
disposable income, business conditions, interest rates, consumer debt levels, availability of credit and levels of taxation in
regional and local markets in the PRC where we sell such products. There can be no assurance that consumer spending on the
products we sell, will not be adversely affected by changes in general economic conditions in the PRC and globally.
The
success of our business depends on our ability to market and advertise the products we sell effectively.
Our
ability to establish effective marketing and advertising campaigns is the key to our success. Our advertisements promote
our corporate image, our merchandise and the pricing of such products. If we are unable to increase awareness of our brands
and our products, we may not be able to attract new customers. Our marketing activities may not be successful in promoting the
products we sell or pricing strategies or in retaining and increasing our customer base. We cannot assure you that our marketing
programs will be adequate to support our future growth, which may result in a material adverse effect on our results of operations.
If
we fail to maintain optimal inventory levels, our inventory holding costs could increase or cause us to lose sales, either of
which could have a material adverse effect on our business, financial condition and results of operations.
While
we must maintain sufficient inventory levels to operate our business successfully and meet our customers' demands, we must be
careful to avoid amassing excess inventory. Changing consumer demands, manufacturer backorders and uncertainty surrounding
new product launches expose us to increased inventory risks. Demand for products can change rapidly and unexpectedly, including
the time between when the product is ordered from the supplier to the time it is offered for sale. We carry a wide variety
of products and must maintain sufficient inventory levels of the products we sell. We may be unable to sell certain products
in the event that consumer demand changes. Our inventory holding costs will increase if we carry excess inventory. However,
if we do not have a sufficient inventory of a product to fulfill customer orders, we may lose orders or customers, which may adversely
affect our business, financial condition and results of operations. We cannot assure you that we can accurately predict consumer
demand and events and avoid over-stocking or under-stocking products.
We
may not be able to optimize the management of our distribution network or be successful in expanding our distribution network.
We
sell our products to our customers mainly through our franchise stores across the PRC. Any disruption in the operation of
our franchise stores distribution network could result in higher costs or longer lead times associated with distributing our products.
In addition, as it is difficult to predict accurate sales volumes in our industry, we may be unable to optimize our distribution
activities, which may result in excess or insufficient inventory, warehousing, fulfillment of logistics or value-added services,
or distribution capacity. In addition, failure to effectively control product damage or spoilage during the distribution process
could decrease our operating margins and reduce our profitability.
Our
operations would be adversely affected if third-party carriers were unable to transport our products on a timely basis.
Some
of our products are shipped through third party carriers. If a strike or other event prevented or disrupted these carriers
from transporting our products, other carriers may be unavailable or may not have the capacity to deliver our products to our
customers. If adequate third party sources to ship our products were unavailable at any time, our business would be adversely
affected.
There
may be shortages of, or price fluctuations with respect to, raw materials or components, which would cause us to curtail our manufacturing
or incur higher than expected costs.
We
purchase the raw materials and certain components we use in producing our products, and we may be required to bear the risk of
price fluctuations of raw materials or components. Shortages of raw materials and price fluctuations may occur in the future and
we may not be able to pass through a substantial portion of such raw material cost increases to our customers if we experience
significant supply disruptions or excess levels of industry capacity or due to other factors outside of our control, in which
case our profitability could suffer. Our ability to pass through raw material price increases may be limited by the level of industry
excess capacity, competitive practices and other regional-specific factors which are out of our control. In addition, if we experience
a shortage of materials or components, we may not be able to produce products for our customers in a timely fashion.
In
addition, the Dodd-Frank Act of 2010 requires the Securities and Exchange Commission (the “SEC”) to establish new
annual disclosure and reporting requirements for public companies to report their use of "conflict minerals" originating
from the Democratic Republic of Congo and its nine immediate neighbors. The current list of "conflict minerals" under
the Dodd-Frank Act includes gold, tantalum, tin and tungsten (although additional minerals may be added in the future). If tourmaline
is classified as a "conflict mineral" in the future, there may only be a limited pool of suppliers who provide conflict-free
tourmaline, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices.
If
we are unable to renew the leases of any of our property, our operations may be adversely affected.
We
do not directly own any land use rights over the properties we lease. We may lose our leases or may not be able to renew
them when they are due on terms that are reasonable or favorable to us. This may have adverse impact on our operations, including
disrupting our operations or increasing our cost of operations.
Counterfeit
products sold in the PRC could negatively impact our revenues, brand reputation, business and results of operations.
The
products we sell are also subject to competition from counterfeit products, which are healthcare products manufactured without
proper licenses or approvals and are fraudulently mislabeled with respect to their content and/or manufacturer. Counterfeit
products are generally sold at lower prices than authentic products due to their low production costs, and in some cases are very
similar in appearance to authentic products. Although the PRC government has recently been increasingly active in policing counterfeit
products, including counterfeit healthcare products, there is a lack of effective counterfeit product regulation control and enforcement
systems in the PRC. The proliferation of counterfeit products has grown in recent years and may continue to grow in the future. Despite
our implementation of quality controls, we cannot assure you that we would not be distributing or selling counterfeit products
inadvertently. Any accidental sale or distribution of counterfeit products can subject our company to fines, administrative penalties,
litigation and negative publicity, which could negatively impact our revenues, brand reputation, business and results of operations. Moreover,
the continued proliferation of counterfeit products and other products in recent years may reinforce the negative image of retailers
among consumers in the PRC. The continued proliferation of counterfeit products in the PRC could have a material adverse
effect on our business, financial condition, and results of operation.
The
required certificates, permits, and licenses related to our operations are subject to governmental control and renewal and failure
to obtain renewal will cause all or part of our operations to be terminated.
We
are subject to various PRC laws and regulations pertaining to our manufacture and sales of healthcare products. We have attained
certificates, permits, and licenses required for the operation of a healthcare products manufacturer and distributor. We
cannot assure you that we will have all necessary permits, certificates and authorizations for the operation of our business at
all times. Additionally, our certifications, permits and authorizations are subject to periodic renewal by the relevant government
authorities. We intend to apply for renewal of these certificates, permits and authorizations prior to their expiration. During
the renewal process, we will be re-evaluated by the appropriate governmental authorities and must comply with the then prevailing
standards and regulations which may change from time to time. In the event that we are not able to renew the certificates,
permits and licenses, all or part of our operations may be terminated. Furthermore, if escalating compliance costs associated
with governmental standards and regulations restrict or prohibit any part of our operations, it may adversely affect our operations
and profitability.
If
we become subject to product liability claims, personal injury claims or defective products our business may be harmed.
We
will be exposed to risks inherent in the manufacture and sales of healthcare products, such as the unintentional distribution
of counterfeit healthcare products. Furthermore, we may sell products which inadvertently have an adverse effect on the health
of individuals. Product liability claims may be asserted against us. Any product liability claim, product recall, adverse
side effects caused by improper use of the products we sell or manufacturing defects may result in adverse publicity regarding
us and the products we sell, which would harm our reputation. If we are found liable for product liability claims, we could be
required to pay substantial monetary damages in excess of insurance coverage amounts. Furthermore, even if we successfully defend
ourselves against this type of claim, we could be required to spend significant management, financial and other resources, which
could disrupt our business, and our reputation and our brand name may also suffer. In addition, we do not have any business interruption
insurance due to the limited coverage of any business interruption insurance in the PRC, and as a result, any business disruption
or natural disaster could severely disrupt our business and operations and significantly decrease our revenue and profitability.
The
failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working capital
levels, and results of operations.
Any
significant growth in the market for our products or our entry into new markets may require an expansion of our employee base
for managerial, operational, financial, and other purposes. As of December 31, 2015, we had approximately 74 full time employees. During
any growth, we may face problems related to our operational and financial systems and controls, including quality control and
delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued
future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate,
and motivate new employees.
Aside
from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need
increased liquidity to finance the purchase of raw materials and supplies, development of new products, and the hiring of additional
employees. For effective growth management, we will be required to continue improving our operations, management, and financial
systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that
will have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively
meet that demand and maintain the quality standards required by our existing and potential customers.
If
we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to
limit the scope of our operations.
If
adequate additional financing is not available on reasonable terms, we may not be able to undertake our expansion plans or purchase
additional equipment for our operations and we would have to modify our business plans accordingly. There is no assurance that
additional financing will be available to us.
In
connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital
to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including
(i) our profitability; (ii) the release of competitive products by our competitors; (iii) the level of our investment in
research and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot assure you that we
will be able to obtain capital in the future to meet our needs.
If
we cannot obtain additional funding, we may be required to: (i) limit our investments in research and development; (ii) limit
our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect
our business and our ability to compete.
Even
if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional
capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the
holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain
financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any
additional financing will be available to us, or if available, will be on terms favorable to us.
We
are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial
condition and results of operations.
Our
success is, to a certain extent, attributable to the management, sales and marketing, and operational and technical expertise
of certain key personnel. In addition, we will require an increasing number of experienced and competent executives and other
members of senior management to implement our growth plans. We do not maintain key-man insurance for members of our management
team because it is not a customary practice in the PRC. If we lose the services of any member of our senior management,
we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel,
which could severely disrupt our business and prospects.
We
are dependent on a trained workforce and any inability to retain or effectively recruit such employees, particularly distribution
personnel and regional retail managers for our business, could have a material adverse effect on our business, financial condition
and results of operations.
We
must attract, recruit and retain a sizeable workforce of qualified and trained staff to operate our business. Our ability
to implement effectively our business strategy and expand our operations will depend upon, among other factors, the successful
recruitment and retention of highly skilled and experienced distribution personnel, regional retail managers and other technical
and marketing personnel. There is significant competition for qualified personnel in our business and we may not be successful
in recruiting or retaining sufficient qualified personnel consistent with our current and future operational needs.
We
rely on the high quality of customer service and any poor service may lead to adverse impact on our business.
Our
goal is to provide customer with first class service. It will be attained by the one-stop consultancy, analysis on feedback of
customer to provide information on customer’s potential demand, customer file system to introduce new product and promotion
policy. If we fail to supply high quality of customer service, we may incur considerable complaints from our customers and lose
loyalty of our customers, as a result, more and more customers may pursue competitors' products and our competitive ability may
drop correspondingly.
Our
Chinese operating companies maintain their books and records in accordance with PRC GAAP and, as a result, it involves a risk
of accuracy when our personnel convert the financial statements to U.S. GAAP.
Under
PRC law, our operating companies in China are required to maintain their books and records in accordance with PRC GAAP. We do
not retain an outside accounting firm or consultant to prepare our financial statements or to evaluate our internal controls over
financial reporting. Our Financial Manager prepares the U.S. GAAP financial statements and converts the financial statements prepared
under PRC GAAP into U.S. GAAP. Our CFO is responsible for supervising the preparation of our financial statements under PRC GAAP
and for reviewing such financial statements to ensure their accuracy and completeness. In addition, he is responsible for reviewing
the adjustments made to the financial statements to convert them into U.S. GAAP for SEC reporting requirements. Our CFO and CEO
are responsible for evaluating the effectiveness of our internal controls over financial reporting.
Our
company is at the early stage of adopting necessary financial reporting concepts and practices, including strong corporate governance,
internal controls and, computer, financial and other control systems. Most of our accounting and finance staff are not educated
and trained in U.S. GAAP and SEC reporting requirements, and we may have difficulty hiring new employees in the PRC with such
training. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account and corporate records and instituting business
practices that meet SEC reporting requirements. Therefore, we may, in turn, experience difficulties in implementing and maintaining
adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant
deficiencies or material weaknesses in our internal controls, which could impact the reliability of our financial statements and
prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies,
weaknesses or lack of compliance could have a materially adverse effect on our business.
Our
financial results may fluctuate because of many factors and, as a result, investors should not simply rely on our historical financial
data as indicative of future results.
Fluctuations
in operating results or the failure of operating results to meet the expectations of public market analysts and investors may
negatively impact the market price of our securities. Operating results may fluctuate in the future due to a variety of factors
that could affect revenues or expenses in any particular quarter. Fluctuations in operating results could cause the value
of our securities to decline. Investors should not rely on comparisons of results of operations as an indication of future
performance. As result of the factors listed below, it is possible that in future periods results of operations may be below
the expectations of public market analysts and investors. This could cause the market price of our securities to decline.
Factors that may affect our quarterly results include:
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vulnerability
of our business to a general economic downturn in the PRC;
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fluctuation
and unpredictability of the prices of the products we sell;
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changes
in the laws of the PRC that affect our operations;
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competition
from other healthcare products manufacturers and distributors; and
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our
ability to obtain necessary government certifications and/or licenses to conduct our business.
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We
are dependent on certain suppliers and a failure to continue to obtain our supplies from such suppliers may adversely affect our
business.
We
do not have any long-term supply contracts with our raw materials suppliers. Any significant fluctuation in price of our raw materials
could have a material adverse effect on the manufacturing cost of our products. We are subject to market conditions and although
raw materials are generally available and we have not experienced any raw materials shortage in the past, we cannot assure you
that the necessary materials will continue to be available to us at prices currently in effect or acceptable to us.
We
may have limited options in the short-term for alternative supplies if our suppliers fail for any reason, including their business
failure or financial difficulties, to continue the supply of raw materials. Moreover, identifying and accessing alternative sources
may increase our costs.
Risks
Related to Conducting Business in the PRC
Our
operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and
regulations, or the interpretations thereof, may have a material and adverse effect on our business.
The
PRC’s legal system is a civil law system based on written statutes. Unlike the common law system prevalent in the United
States, decided legal cases have little value as precedent in the PRC. There are substantial uncertainties regarding the interpretation
and application of PRC laws and regulations, including but not limited to, the laws and regulations governing our business, or
the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy
or criminal proceedings. The PRC government has been developing a comprehensive system of commercial laws, and considerable progress
has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization
and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because
of the limited volume of published cases and judicial interpretation and their lack of authority as precedents, interpretation
and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing
and proposed future businesses may also be applied retroactively.
Our
principal operating subsidiaries are regarded as foreign invested enterprises (“FIE”s) under PRC laws, and as a result
are required to comply with PRC laws and regulations, including laws and regulations specifically governing the activities and
conduct of FIEs. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on
our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion
in dealing with such a violation, including, without limitation:
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levying
fines;
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revoking
our business license, other licenses or authorities;
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requiring
that we restructure our ownership or operations; and
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requiring
that we discontinue any portion or all of our business.
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PRC
Labor Laws may adversely affect our results of operations.
On
January 1, 2008, the PRC government promulgated the Labor Contract Law of the PRC, or the New Labor Contract Law. The
New Labor Contract Law imposes greater liabilities on employers and significantly impacts the cost of an employer’s decision
to reduce its workforce. Further, it may require certain terminations to be based upon seniority and not merit. In the
event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability
to enact such changes in a manner that is most advantageous to our business or in a timely and cost effective manner, thus materially
and adversely affecting our financial condition and results of operations.
We
may not be able to comply with applicable Good Manufacture Practice (“GMP”) requirements and other regulatory requirements,
which could have a material adverse effect on our business, financial condition and results of operations.
We
are required to comply with applicable GMP regulations, which include requirements relating to quality control and quality assurance
as well as corresponding maintenance, record-keeping and documentation standards. Manufacturing facilities must be approved by
governmental authorities before we use them to commercially manufacture our products and are subject to inspection by regulatory
agencies. If we fail to comply with applicable regulatory requirements, including following any product approval, we may be subject
to sanctions, including:
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fines;
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product
recalls or seizure;
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injunctions;
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refusal
of regulatory agencies to review pending market approval applications or supplements to approval applications;
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total
or partial suspension of production;
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civil
penalties;
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withdrawals
of previously approved marketing applications; or
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criminal
prosecution.
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If
we fail to protect our intellectual property rights, it could harm our business and competitive position.
Our
business relies in part on intellectual properties to stay competitive in the market place. We rely on a combination of trademark
laws, patent law, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property rights
and the obligations we have to third parties from whom we license intellectual property rights. Nevertheless, these afford only
limited protection and policing unauthorized use of proprietary technology can be difficult and expensive. In addition, intellectual
property rights historically have not been enforced in the PRC to the same extent as in the United States, and intellectual property
theft presents a serious risk in doing business in the PRC. We may not be able to detect unauthorized use of, or take appropriate
steps to enforce our intellectual property rights and this could have a material adverse effect on our business, operating results
and financial condition.
Under
the new EIT Law, we may be classified a “resident enterprise” for PRC tax purposes, which may subject us to PRC enterprise
income tax for any dividends we receive from our PRC Operating Entities and to PRC income tax withholding for any dividends we
pay to our non-PRC shareholders.
On
March 16, 2007, the National People’s Congress (“NPC”) promulgated the Law of the People’s Republic
of China on Enterprise Income Tax, and the new EIT Law as amended became effective on January 1, 2008. In accordance with
the new EIT Law, the corporate income tax rate is set at 25% for all enterprises. However, certain industries and projects, such
as FIEs, may enjoy favorable tax treatment pursuant to the new EIT Law and its implementing rules.
Under
the new EIT Law, an enterprise established outside of the PRC whose “de facto management bodies” are located in the
PRC is considered a “resident enterprise” and is subject to the 25% enterprise income tax rate on its worldwide income.
The new EIT Law and its implementing rules are relatively new, and currently, no official interpretation or application of this
new “resident enterprise” classification is available. Therefore, it is unclear how tax authorities will determine
the tax residency of enterprises established outside of the PRC.
Most
of our management is currently based in the PRC. If the PRC tax authorities determine that our U.S. holding company is a “resident
enterprise” for PRC enterprise income tax purposes, we may be subject to an enterprise income tax rate of 25% on our worldwide
taxable income. The “resident enterprise” classification also could subject us to a 10% withholding tax on any dividends
we pay to our non-PRC shareholders if the relevant PRC authorities determine that such income is PRC-sourced income. In addition
to the uncertainties regarding the interpretation and application of the new “resident enterprise” classification,
the new EIT Law may change in the future, possibly with retroactive effect. If we are classified as a “resident enterprise”
and we incur these tax liabilities, our net income will decrease accordingly.
Our
ability to pay dividends is restricted by PRC laws.
Our
ability to pay dividends is primarily dependent on receiving distributions of funds from our PRC Operating Entities. Relevant
PRC statutory laws and regulations permit payments of dividends by our PRC Operating Entities only out of their retained earnings,
if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the
financial statements prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) differ
from those reflected in the statutory financial statements of our PRC Operating Entities.
The
principal laws, rules and regulations governing dividends paid by our PRC Operating Entities include the Company Law of the PRC,
Wholly Foreign Owned Enterprise Law and its Implementation Rules. Under these laws and regulations, our PRC Operating Entities
are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to its statutory
surplus reserve fund until the accumulative amount of such reserve reaches 50% of their respective registered capital. These reserve
funds are recorded as part of shareholders' equity but are not available for distribution to shareholders other than in the case
of liquidation. As a result of this requirement, the amount of net income available for distribution to shareholders will be limited.
Our
business is subject to a variety of environmental laws and regulations. Our failure to comply with environmental laws and regulations
may have a material adverse effect on our business and results of operations.
Since
the beginning of the 1980s, the PRC has formulated and implemented a series of environmental protection laws and regulations.
Our operations are subject to these environmental protection laws and regulations in the PRC. These laws and regulations impose
fees for the discharge of waste substances, permit the levy of fines and claims for damages for serious environmental offences
and allow the PRC government, at its discretion, to close any facility that fails to comply with orders requiring it to correct
or stop operations causing environmental damage. Our operations are in compliance with PRC environmental regulations in all material
aspects. The PRC government has taken steps and may take additional steps towards more rigorous enforcement of applicable environmental
laws, and towards the adoption of more stringent environmental standards. If the PRC national or local authorities enact additional
regulations or enforce current or new regulations in a more rigorous manner, we may be required to make additional expenditures
on environmental matters, which could have an adverse impact on our financial condition and results of operations. In addition,
environmental liability insurance is not common in the PRC. Therefore, any significant environmental liability claims successfully
brought against us would adversely affect our business, financial condition and results of operations.
PRC
regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict
or limit our ability to operate.
On
August 8, 2006, the PRC Ministry of Commerce (“MOFCOM”), joined by the State-owned Assets Supervision and
Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and
Commerce, the China Securities Regulatory Commission (“CSRC”) and the State Administration of Foreign Exchange (“SAFE”),
released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises
(the "Revised M&A Regulations"), which took effect on September 8, 2006. These new rules significantly
revised the PRC's regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. These
new rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming
MOFCOM as a key regulator for issues related to mergers and acquisitions in the PRC and requiring MOFCOM approval of a broad range
of merger, acquisition and investment transactions. Further, the new rules establish reporting requirements for acquisition
of control by foreigners of companies in key industries, and reinforce the ability of the PRC government to monitor and prohibit
foreign control transactions in key industries.
These
rules may significantly affect the means by which offshore-onshore restructurings are undertaken in the PRC in connection with
offshore private equity and venture capital financings, mergers and acquisitions. It is expected that such transactional
activity in the PRC in the near future will require significant case-by-case guidance from MOFCOM and other government authorities
as appropriate. It is anticipated that application of the new rules will be subject to significant administrative interpretation,
and we will need to closely monitor how MOFCOM and other ministries apply the rules to ensure its domestic and offshore activities
continue to comply with PRC laws. Given the uncertainties regarding interpretation and application of the new rules, we may need
to expend significant time and resources to maintain compliance. It is uncertain how our business operations or future strategy
will be affected by the interpretations and implementation of the SAFE notices and new rules. Our business operations or future
strategy could be adversely affected by the SAFE notices and the new rules. For example, we may be subject to more stringent
review and approval processes with respect to our foreign exchange activities.
The
foreign currency exchange rate between U.S. dollars and Renminbi (“RMB”) could adversely affect our reported financial
results and condition.
To
the extent that we need to convert U.S. dollars into RMB for our operational needs, our financial position and the price of our
common stock may be adversely affected should RMB appreciate against U.S. dollar at that time. Conversely, if we decide to
convert our RMB into U.S. dollars for the operational needs or paying dividends on our common stock, the dollar equivalent of
our earnings from our subsidiaries in the PRC would be reduced should U.S. dollar appreciate against RMB.
Until
1994, RMB experienced a gradual but significant devaluation against most major currencies, including dollars, and there was a
significant devaluation of RMB on January 1, 1994 in connection with the replacement of the dual exchange rate system with
a unified managed floating rate foreign exchange system. Since 1994, the value of RMB relative to U.S. dollar has remained
stable and has appreciated slightly against U.S. dollar. Countries, including the United States, have argued that RMB is artificially
undervalued due to the PRC's current monetary policies and have pressured the PRC to allow RMB to float freely in world markets. In
July 2005, the PRC government changed its policy of pegging the value of RMB to the U.S. dollar. Under the new policy, RMB
is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies. While the international
reaction to RMB revaluation has generally been positive, there remains significant international pressure on the PRC government
to adopt an even more flexible currency policy, which could result in further and more significant appreciation of RMB against
the dollar.
Restrictions
on currency exchange may limit our ability to utilize our revenues effectively and the ability of our PRC Operating Entities to
obtain financing.
Substantially
all of our revenues and operating expenses are denominated in RMB. Restrictions on currency exchange imposed by the PRC government
may limit our ability to utilize revenues generated in RMB to fund our business activities outside the PRC, if any, or expenditures
denominated in foreign currencies. Under current PRC regulations, RMB may be freely converted into foreign currency for payments
relating to “current account transactions,” which include among other things dividend payments and payments for the
import of goods and services, by complying with certain procedural requirements. Our PRC Operating Entities may also retain foreign
exchange in their respective current account bank accounts, subject to a cap set by SAFE or its local counterpart, for use in
payment of international current account transactions.
However,
conversion of RMB into foreign currencies and of foreign currencies into RMB, for payments relating to “capital account
transactions,” which principally includes investments and loans, generally requires the approval of SAFE and other relevant
PRC governmental authorities. Restrictions on the convertibility of the RMB for capital account transactions could affect the
ability of our PRC Subsidiary to make investments overseas or to obtain foreign exchange through debt or equity financing, including
by means of loans or capital contributions from us.
In
August 2008, SAFE promulgated Circular 142, a notice regulating the conversion by FIEs of foreign currencies into RMB by restricting
how the converted RMB may be used. Circular 142 requires that RMB converted from the foreign currency-denominated capital of a
FIE may only be used for purposes within the business scope approved by the applicable government authority and may not be used
for equity investments within the PRC unless specifically provided for otherwise. In addition, SAFE strengthened its oversight
over the flow and use of RMB funds converted from the foreign currency-denominated capital of a FIE. The use of such RMB may not
be changed without approval from SAFE, and may not be used to repay RMB loans if the proceeds of such loans have not yet been
used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the SAFE rules.
Any
existing and future restrictions on currency exchange may affect the ability of our PRC Subsidiary or affiliated entity to obtain
foreign currencies, limit our ability to utilize revenues generated in RMB to fund our business activities outside the PRC that
are denominated in foreign currencies, or otherwise materially and adversely affect our business.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our business.
We
are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments
to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the
purpose of obtaining or retaining business. We have operations, agreements with third parties and we make all of our sales in
China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized
payments or offers of payments by the employees, consultants, sales agents or distributors of our company and its affiliate, even
though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by
our employees, and we have implemented a policy to comply specifically with the FCPA. In spite of these efforts, our existing
safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors
of our company and its affiliate may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese
anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could
negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our
company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
If
we make equity compensation grants to persons who are PRC citizens, they may be required to register with SAFE. We may also
face regulatory uncertainties that could restrict our ability to adopt an equity compensation plan for our directors and employees
and other parties under PRC law.
On
April 6, 2007, SAFE issued the Operating Procedures for Administration of Domestic Individuals Participating in the Employee
Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, also known as Circular 78. It is not clear whether Circular
78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. For
any plans which are so covered and are adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all
participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In
addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they
participated in an overseas listed company's covered equity compensation plan prior to April 6, 2007. We intend to adopt
an equity compensation plan in the future and make option grants to our officers and directors, most of whom are PRC citizens.
Circular 78 may require our officers and directors who receive option grants and are PRC citizens to register with SAFE. We believe
that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming. If it
is determined that any of our equity compensation plans is subject to Circular 78, failure to comply with such provisions may
subject us and participants of our equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from
being able to grant equity compensation to our PRC employees. In that case, our ability to compensate our employees and directors
through equity compensation would be hindered and our business operations may be adversely affected.
Any
recurrence of severe acute respiratory syndrome (“SARS”), Avian Flu, or another widespread public health problem in
the PRC could adversely affect our operations.
A
renewed outbreak of SARS, Avian Flu or another widespread public health problem in the PRC, where all of our businesses are located
and where all of our sales occur, could have a negative effect on our operations. Our businesses are dependent upon our ability
to continue to efficiently distribute and sell our products. Such an outbreak could have an impact on our operations as a result
of:
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quarantines
or closure of our distribution center, which would severely disrupt our operations,
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the
sickness or death of our key officers and employees, and
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a
general slowdown in the PRC economy.
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Any
of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.
Adverse
changes in political, economic and other policies of the PRC government could have a material adverse effect on the overall economic
growth of the PRC, which could reduce the demand for our products and materially and adversely affect our competitive position.
All
of our business operations are conducted in the PRC, and all of our sales are currently made in the PRC. Accordingly, our business,
financial condition, results of operations and prospects are affected significantly by economic, political and legal developments
in the PRC. The PRC economy differs from the economies of most developed countries in many respects, including:
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the
extent of government involvement;
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the
level of development;
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the
growth rate;
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the
control of foreign exchange;
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the
allocation of resources;
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an
evolving regulatory system; and
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a
lack of sufficient transparency in the regulatory process.
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While
the PRC economy has experienced significant growth in the past 20 years, growth has been uneven, both geographically and among
various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For
example, our financial condition and results of operations may be adversely affected by government control over capital investments
or changes in tax regulations that are applicable to us.
The
PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC
government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership
of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the
productive assets in the PRC are still owned by the PRC government. The continued control of these assets and other aspects of
the national economy by the PRC government could materially and adversely affect our business. The PRC government also exercises
significant control over PRC economic growth through the allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the
PRC government to slow the pace of growth of the PRC economy could result in decreased expenditures by the users of our products,
which in turn could reduce demand for our products.
Moreover,
the political relationship between the United States, Europe, or other Asian nations and the PRC is subject to sudden fluctuation
and periodic tension. Changes in political conditions in the PRC and changes in the state of foreign relations are difficult to
predict and could adversely affect our operations or cause our products to become less attractive. This could lead to a decline
in our profitability.
Any
adverse change in the economic conditions or government policies in the PRC could have a material adverse effect on overall economic
growth and the level of healthcare investments and expenditures in the PRC, which in turn could lead to a reduction in demand
for our products and consequently have a material adverse effect on our businesses.
Because
our business is located in the PRC, we may have difficulty establishing adequate management, legal and financial controls, which
are required in order to comply with United States securities laws.
PRC
companies have historically not adopted a Western style of management and financial reporting concepts and practices, which includes
strong corporate governance, internal controls and, computer, financial and other control systems. In addition, we may have
difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors,
we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing
financial statements, books of account and corporate records and instituting business practices that meet Western standards. Therefore,
we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404
of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls
which could impact the reliability of its financial statements and prevent us from complying with the rules and regulations promulgated
by the Securities Exchange Commission (the “SEC”) and the requirements of the Sarbanes-Oxley Act of 2002 (“SOX”). Any
such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business.
Investors
may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in the
PRC based upon United States laws, including the federal securities laws or other foreign laws against us or our management.
All
of our current business operations are conducted in the PRC. Moreover, our president and all of our officers are nationals
and residents of the PRC. All the assets of these persons are located outside the United States and in the PRC. As a result, it
may not be possible to effect service of process within the United States or elsewhere outside the PRC upon these persons. In
addition, uncertainty exists as to whether the PRC courts would recognize or enforce judgments of United States courts obtained
against such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States
or any state thereof, or be competent to hear original actions brought in the PRC against us or such persons predicated upon the
securities laws of the United States or any state thereof.
If
we are found to be in violation of current or future PRC laws, rules or regulations regarding the legality of foreign investment
in the PRC with respect to our ownership structure, we could be subject to severe penalties.
We
currently conduct business operations solely in the PRC through our subsidiaries, in which we hold 100% equity ownership interest. We
are now a Nevada corporation. As a result, our subsidiaries in the PRC are regarded as FIEs under PRC law and we are subject to
PRC law limitations on foreign ownership of PRC companies. There are substantial uncertainties regarding the interpretation
and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our healthcare
products distribution and production businesses.
Accordingly,
it is possible that the relevant PRC authorities could, at any time, assert that any portion of our existing or future ownership
structure and businesses violate existing or future PRC laws, regulations or policies. It is also possible that the new laws
or regulations governing our business operations in the PRC that have been adopted or may be adopted in the future will prohibit
or restrict foreign investment in, or other aspects of, any of our PRC Operating Entities' and our current or proposed businesses
and operations. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental
reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied
retroactively.
The
PRC government has broad discretion in dealing with violations of laws and regulations, including:
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levying
fines;
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confiscating
our income;
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revoking
business and other licenses;
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requiring
us to discontinue any portion or all of our business;
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requiring
us to restructure our ownership structure or operations; and
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requiring
actions necessary for compliance.
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In
particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher
regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you that our current ownership and operating structure would not be found in violation of any current or future
PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure
our operations or cease to provide certain services. Any of these or similar actions could significantly disrupt our business
operations or restrict us from conducting a substantial portion of our business operations, which, in turn, could materially and
adversely affect our business, financial condition and results of operations.
Risks
Relating to Investment in Our Securities
An
active public market for our common stock may not develop or be sustained, which would adversely affect the ability of our investors
to sell their securities in the public market.
We
cannot predict the extent to which an active public market for our common stock will develop or be sustained.
Shares
eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount
of outstanding stock in the public marketplace could reduce the price of our common stock.
Holders
of a significant number of our shares and/or their designees may be eligible to sell our shares of common stock by means of ordinary
brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”),
subject to certain limitations. In general, pursuant to Rule 144, a non-affiliate stockholder (or stockholders whose shares
are aggregated) who has satisfied a six-month holding period, and provided that there is current public information available,
may sell all of its securities. Rule 144 also permits the sale of securities, without any limitations, by a non-affiliate
that has satisfied a one-year holding period. Any substantial sale of common stock pursuant to any resale prospectus or Rule 144
may have an adverse effect on the market price of our common stock by creating an excessive supply.
If
we fail to maintain effective internal controls, we may not be able to accurately report our financial results or prevent fraud,
and our business, financial condition, results of operations and reputation could be materially and adversely affected.
The
effectiveness of our internal controls is essential to the integrity of our business and financial results. Our public reporting
obligations currently place and are expected to continue to place a strain on our management, operational and financial resources
and systems. We have implemented measures to enhance our internal controls, and plan to take steps to further improve our internal
controls. We cannot assure you that the measures taken to improve our internal controls will be effective. If we fail to maintain
effective internal controls in the future, our business, financial condition, results of operations and reputation may be materially
and adversely affected.
Compliance
with changing regulation of corporate governance and public disclosure will result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public disclosure, including SOX and related SEC regulations,
have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public
markets and public reporting. Our management team will need to invest significant management time and financial resources
to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
We
do not foresee paying cash dividends in the near future.
We
do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend
to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities
if they require the investment to produce dividend income.