General
Overview
We
are a Delaware holding company that uses our subsidiaries’ and variable interest entities’ vertically and horizontally
integrated production, distribution and sales channels to provide health and well-being focused plant-based products. Our products
are only sold domestically in China. We utilize modern engineering technologies and biotechnologies to produce, among other products,
Chinese herbal medicines, organic agricultural produce and specialized textiles. Our health and well-being focused plant-based
products business is divided into three major segments:
1.
Processing and distributing traditional Chinese herbal medicine products as well as other pharmaceutical products. This segment
is conducted through Ankang Longevity Group, which operates 66 cooperative retail pharmacies throughout Ankang, a city in southern
Shaanxi province, China, through which we sell directly to individual customers traditional Chinese medicinal products produced
by us as well as by third parties. Ankang Longevity Group also owns a factory specializing in decoction, which is the process by
which solid materials are heated or boiled in order to extract liquids, and distributes decoction products to wholesalers and pharmaceutical
companies around China. This segment accounted for approximately 38% of our revenues for the year ended June 30, 2019.
2.
Processing and distributing green and organic agricultural produce as well as growing and cultivating yew trees (taxus media).
We currently cultivate and sell yew mainly to large group and corporate customers, but do not currently process yew trees into
Chinese or Western medicines. This segment is conducted through the Company’s variable interest entities: the Zhisheng Group,
which comprises the following Chinese companies participating in our yew tree business: Shineco Zhisheng (Beijing) Bio-Technology
Co. (“Zhisheng Bio-Tech”), Yantai Zhisheng International Freight Forwarding Co., Ltd (“Zhisheng Freight”),
Yantai Zhisheng International Trade Co., Ltd (“Zhisheng Trade”), Yantai Mouping District Zhisheng Agricultural Produce
Cooperative (“Zhisheng Agricultural”), and Qingdao Zhihesheng Agricultural Produce Services, Ltd (“Qingdao Zhihesheng”).
This segment accounted for approximately 58% of our revenues for the year ended June 30, 2019. Zhisheng Agricultural has not had
any significant business activities and thus we have deregistered it in 2017. We have transferred all assets, rights and liabilities
to an affiliated entity, Zhisheng Freight.
3.
Developing and distributing specialized fabrics, textiles and other byproducts derived from an indigenous Chinese plant Apocynum
Venetum, grown in the Xinjiang region of China, and known in Chinese as “Luobuma” or “bluish dogbane”.
Our Luobuma products are specialized textile and health supplement products designed to incorporate traditional Eastern medicines
with modern scientific methods. These products are predicated on centuries-old traditions of Eastern herbal remedies derived from
the Luobuma raw material. This segment is channeled through the Company’s directly-owned subsidiary, Beijing Tenet-Jove Technological
Development Co., Ltd. (“Tenet-Jove”). This segment accounted for approximately 4% of our revenues for the year ended
June 30, 2019.
We
primarily market our health and wellbeing-focused products in China. At present, we do not sell any of our products in the United
States or Canada. China’s domestic pharmaceutical and healthcare products market is fast-growing but, in our opinion, underdeveloped.
We believe China’s healthcare sector has the capacity to develop even further. From pharmaceuticals to medical products
to general consumer health, China remains among the world’s most attractive markets, and by far the fastest-growing of all
the large emerging ones. Driving this growth is China’s aging population, increased incidence of chronic diseases, and a
material increase in investment from both domestic and foreign corporations. The growth also reflects the Chinese government’s
focus on healthcare as both a social priority (as witnessed in its late 2000s healthcare reforms) and a strategic priority (as
evidenced in the 12th five-year plan’s stated focus on growing the biomedical industry in the future).
History
and Corporate Structure
Shineco,
Inc. was incorporated under the laws of the State of Delaware on August 20, 1997 as Supcor, Inc. From 1997 to 2004, the Company’s
only activities were organizational ones, directed at developing its business plan and raising initial capital. On December 30,
2004, the Company acquired all of the issued and outstanding shares of Tenet-Jove, a company organized under the laws of the People’s
Republic of China on December 15, 2003 that operated in the fabrics and textile business, in exchange for restricted shares of
Shineco’s common stock; as a result, Tenent-Jove became our wholly-owned subsidiary. At that point, the sole operating business
of Tenet-Jove then became that of the Company. On June 9, 2005, we changed our name to Shineco, Inc.
On
April 19, 2017, Tenet-Jove established Xinjiang Tiankunrunze Biological Engineering Co., Ltd. (“Tiankunrunze”) and
owned a 65% equity interest in Tiankunrunze. On April 28, 2017, Tiankunrunze established Xinjiang Tianzhuo Technology Development
Co., Ltd. (“Tianzhuo”) with registered capital of RMB 10.0 million ($1,450,233). On May 22, 2017, Tiankunrunze established
Xinjiang Tianhuihechuang Agriculture Development Co., Ltd. (“Tianhuihechuang”) with registered capital of RMB 10.0
million ($1,452,294). On May 23, 2017, Tiankunrunze established Xinjiang Tianxintongye Biotechnology Development Co., Ltd. (“Tianxintongye”)
with registered capital of RMB 10.0 million ($1,451,615). Tianzhuo, Tianhuihechuang and Tianxintongye became subsidiaries of Tenet-Jove.
On
June 9, 2017, the Company and its subsidiary Tiankunrunze have entered into a Strategic Cooperation Agreement with Beijing Zhongke
Biorefinery Engineering Technology Co., Ltd. (“Biorefinery”), a leading high-tech biomass refining company financially
backed by the Chinese Academy of Sciences Institute of Process Engineering, to establish the Institute of Chinese Apocynum Industrial
Technology Research (“ICAITR”). Pursuant to the Strategic Cooperation Agreement entered into on May 2, 2017 among
the three parties, Tiankunrunze, Shineco and Biorefinery agreed to establish the ICAITR and each will own 45%, 35% and 20% of
the equity interests of ICAITR, respectively. Shineco and Tiankunrunze will invest RMB 5.0 million ($737,745) as the registered
capital, and Biorefinery will invest technology such as the patent for “Steam Explosion Degumming” as well as other
resources.
As
of June 30, 2018, Tenet-Jove, through a series of contractual relationships, effectively controls and manages:
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Ankang
Longevity Pharmaceutical (Group) Co., Ltd. (“Ankang Longevity Group”), which owns a controlling interest in the following
Chinese companies participating in our traditional Chinese medicine business: Ankang Longevity Pharmaceutical (Group) Traditional
Chinese Medicine Decoction Pieces Co., Ltd. (“Ankang Longevity Decoction Pieces”), Ankang Longevity Pharmaceutical
Group Chain Co., Ltd. (“Ankang Longevity Chain”), and Ankang Longevity Pharmaceutical Group Pharmaceutical Industry
Co., Ltd. (“Ankang Longevity Industry”); and
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Zhisheng
Group, which comprises the following Chinese companies participating in our yew tree business: Shineco Zhisheng (Beijing)
Bio-Technology Co., Yantai Zhisheng International Freight Forwarding Co., Ltd, Yantai Zhisheng International Trade Co., Ltd,
and Qingdao Zhihesheng Agricultural Produce Services, Ltd.
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The
Company is also a majority shareholder of Tiankunrunze, Tianjin Tenet Huatai Technological Development Co., Ltd. (“Tianjin
Tenet Huatai”), and it owns 49% of Shaanxi Pharmacy Holding Group Ankang Longevity Pharmaceutical Co., Ltd. and Shaanxi
Pharmacy Sunsimiao Drugstores Ankang Chain Co., Ltd. through a joint venture with Shaanxi Pharmaceutical Group Pai’ang Medicine
Co. Ltd. (“Shaanxi Pharmaceutical Group”), a Chinese state-owned pharmaceutical enterprise.
Zhisheng
Agricultural has not had any significant business activities and thus we have deregistered it in 2017. We have transferred all
assets, rights and liabilities to an affiliated entity, Zhisheng Freight.
On
September 30, 2017, Tenet-Jove established Xinjiang Tianyitaihe Agriculture Development Co., Ltd. (“Tianyitaihe”)
with registered capital of RMB 10.0 million ($1,502,652). On September 30, 2017, Tenet-Jove also established Xinjiang Tianyirunze
Biotechnology Development Co., Ltd. (“Tianyirunze”) with registered capital of RMB 10.0 million ($1,502,652). Tianyitaihe
and Tianyirunze are wholly owned subsidiaries of Tenet-Jove.
Our
current corporate structure as of June 30, 2019 is as follows:
Contractual
Arrangements with Ankang Longevity Group or Zhisheng Group and their Owners
We
conduct our business through a combination of contractual arrangements with PRC operating companies and equity ownership of PRC
subsidiaries. In most cases, we have had to use contractual relationships because direct investment by foreign-owned companies
like our Delaware company is prohibited or restricted. In other cases we have elected to do so in spite of being permitted to
own such operating company directly. Where we operate our business through such contractual relationships, we are subject to risks
related to such operation.
The
principal regulation governing foreign ownership of businesses in the PRC is the Foreign Investment Industrial Guidance Catalogue,
effective as of April 10, 2015 (the “Catalogue”). The Catalogue classifies various industries into three categories:
encouraged, restricted and prohibited. Shineco is engaged in business in industries where direct foreign investment is expressly
prohibited: the preparation of traditional Chinese medicines in small pieces ready for decoction.
Due,
in part, to the regulations on foreign ownership of PRC businesses, neither we nor our subsidiaries own any equity interest in
Ankang Longevity Group or the Zhisheng Group. The foregoing companies are referred to herein as the “Controlled Companies.”
Instead, we control and receive the economic benefits of the Controlled Companies’ business operations through a series
of contractual arrangements. Tenet-Jove, each of the Controlled Companies and its shareholders have entered into a series of contractual
arrangements, also known as VIE Agreements. The VIE Agreements are designed to provide Tenet-Jove with the power, rights and obligations
equivalent in all material respects to those it would possess as the sole equity holder of each Controlled Company, including
absolute control rights and the rights to the assets, property and revenue and net income of each Controlled Company. Based on
a legal opinion issued by Dentons LLP to Tenet-Jove, the VIE Agreements constitute valid and binding obligations of the parties
to such agreements and are enforceable and valid in accordance with the laws of the PRC.
Each
of the types of VIE Agreements is described below and consist of, for each of Ankang Longevity Group and the Zhisheng Group, (a)
exclusive business cooperation agreements, (b) timely reporting agreements, (c) equity interest pledge agreements, (d) exclusive
option agreements, and (e) powers of attorney. As an overview, these agreements taken together are designed to allow the Company
to manage the operations of each of the Controlled Companies and to receive all of the net income of such Controlled Companies
in return therefor. To secure our interest in the Controlled Companies, the equity interest pledges and option agreements and
the powers of attorney are designed to allow us to step in and convert our contractual interest into an equity interest in the
event we determine that doing so is warranted. Finally, the timely reporting agreement is designed to ensure that we have timely
access to the financial and other information from the Controlled Companies that we require in order to prepare regulatory and
other filings.
The
controlling shareholders of the Company and the VIEs could cancel these agreements or permit them to expire at the end of the
agreement terms, as a result of which the Company would not retain control of the VIEs.
The
following is a summary of the common contractual arrangements that provide us with effective control of our VIEs and that enable
us to receive substantially all of the economic benefits from their operations.
Exclusive
Business Cooperation Agreements
Tenet-Jove
entered into an Exclusive Business Cooperation Agreement with Zhisheng Bio-Tech, Ankang Longevity Group, and Qingdao Zhihesheng
on February 24, 2014, December 31, 2008, and May 24, 2012, respectively, and with each of Zhisheng Freight, Zhisheng Trade, and
Zhisheng Agricultural on June 16, 2011. Zhisheng Agricultural has not had any significant business activities and thus we have
deregistered it in 2017. We have transferred all assets, rights and liabilities to an affiliated entity, Zhisheng Freight.
Tenet-Jove
is currently managing each Controlled Company pursuant to the terms of an Exclusive Business Cooperation Agreement.
Pursuant
to substantially identical Exclusive Business Cooperation Agreements between each Controlled Company and Tenet-Jove, Tenet-Jove
provides such Controlled Company with technical support, consulting services and other management services relating to its day-to-day
business operations and management, on an exclusive basis, utilizing its advantages in technology, human resources, and information.
Additionally, each Controlled Company has granted an irrevocable and exclusive option to Tenet-Jove to purchase from such Controlled
Company, any or all of its assets, to the extent permitted under applicable PRC law. Tenet-Jove may exercise, at its sole discretion,
the option to purchase from each Controlled Company any or all of such Controlled Company’s assets at the lowest purchase
price permitted by PRC law. Should Tenet-Jove exercise such option, the parties shall enter into a separate asset transfer or
similar agreement. Tenet-Jove shall own all intellectual property rights that are developed during the course of each Exclusive
Business Cooperation Agreement. For services rendered to each Controlled Company by Tenet-Jove under the agreement to which such
Controlled Company is a party, Tenet-Jove is entitled to collect a service fee calculated based on the time of services rendered
multiplied by the corresponding rate, which is approximately equal to the net income of such Controlled Company.
Each
Exclusive Business Cooperation Agreement shall remain in effect for ten years until it is extended or terminated by Tenet-Jove,
which may be done unilaterally, except in the case of gross negligence or fraud, in which case the Controlled Companies may terminate
the agreements. Pursuant to each such agreement, Tenet-Jove has absolute authority relating to the management of each Controlled
Company, including but not limited to decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational
functions. Although the Exclusive Business Cooperation Agreements do not prohibit related party transactions, the audit committee
of Shineco will be required to review and approve in advance any related party transactions, including transactions involving
Tenet-Jove or any Controlled Company.
Timely
Reporting Agreements
To
ensure each Controlled Company promptly provides all of the information that Tenet-Jove and the Company need to file various reports
with the SEC and other applicable regulatory authorities, a Timely Reporting Agreement was entered between each Controlled Company
and Shineco on July 3, 2014.
Under
the Timely Reporting Agreements, each Controlled Company agrees that it is obligated to make its officers and directors available
to Shineco and promptly provide all information required by Shineco so that Shineco can file all necessary SEC and other regulatory
reports as required.
Equity
Interest Pledge Agreements
Under
the Equity Interest Pledge Agreements among each Controlled Company (other than Zhisheng Agricultural, which is a cooperative
and thus has no equity interests that can be pledged), the shareholders of each such Controlled Company and Tenet-Jove, the shareholders
pledged all of their equity interests in each such Controlled Company to Tenet-Jove to guarantee the performance of such Controlled
Company’s obligations under the respective Exclusive Business Cooperation Agreement. Under the terms of each agreement,
in the event that the Controlled Company or its shareholders breach their respective contractual obligations under the Exclusive
Business Cooperation Agreement to which they are a party, Tenet-Jove, as pledgee, will be entitled to certain rights, including,
but not limited to, the right to collect dividends generated by the pledged equity interests. Each Controlled Company’s
shareholders also agreed that upon occurrence of any event of default, as set forth in the applicable Equity Interest Pledge Agreement,
Tenet-Jove is entitled to dispose of the pledged equity interest in accordance with applicable PRC laws. Each Controlled Company’s
shareholders further agree not to dispose of the pledged equity interests or take any actions that would prejudice Tenet-Jove’s
interest in the applicable Controlled Company.
Each
Equity Interest Pledge Agreement shall be effective until all payments due under the related Exclusive Business Cooperation Agreement
have been paid by the Controlled Company party thereto. Tenet-Jove shall cancel or terminate an Equity Interest Pledge Agreement
upon a Controlled Company’s full payment of fees payable under its applicable Exclusive Business Cooperation Agreement.
Exclusive
Option Agreements
Under
the Exclusive Option Agreements, shareholders of each of the Controlled Companies (other than Zhisheng Agricultural, which is
a cooperative and thus has no equity holders) irrevocably granted Tenet-Jove (or its designee) an exclusive option to purchase,
to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in each Controlled
Company. The option price is equal to the capital paid in by the applicable Controlled Company shareholders subject to any appraisal
or restrictions required by applicable PRC laws and regulations. The option purchase price shall increase in case the applicable
Controlled Company shareholders make additional capital contributions to such Controlled Company.
Each
agreement remains effective for a term of ten years and may be unilaterally renewed at Tenet-Jove’s election.
Powers
of Attorney
Under
the Powers of Attorney, the shareholders of each Controlled Company authorize Tenet-Jove to act on their behalf as their exclusive
agent and attorney with respect to all rights as shareholders of the respective Controlled Companies, including but not limited
to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s rights, including voting, that shareholders
are entitled to under the laws of China and the Articles of Association, including but not limited to the sale or transfer or
pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative,
the executive director, supervisor, the chief executive officer and other senior management members of the respective Controlled
Companies.
Our
Products and Operations
Our
health and well-being focused plant-based products business is divided into three major segments:
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Processing
and distributing traditional Chinese herbal medicine products as well as other pharmaceutical products. This segment is conducted
by the Company’s VIE, Ankang Longevity Group.
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2.
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Planting,
processing and distributing green and organic agricultural produce as well as growing and cultivating yew trees (taxus media).
This segment is conducted through the Company’s VIEs, the Zhisheng Group.
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3.
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Developing
and distributing specialized fabrics, textiles and other byproducts derived from an indigenous Chinese plant Apocynum Venetum,
known in Chinese as “Luobuma” or “bluish dogbane”. This segment is channeled through the Company’s
directly-owned subsidiary, Tenet-Jove.
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The
details of each business segment are described as follows:
Ankang
Longevity Group
The
companies of this segment, Ankang Longevity Group, operates 66 cooperative retail pharmacies throughout Ankang, a city in southern
Shaanxi province, PRC, through which we sell directly to individual customers traditional Chinese medicinal products produced
by us as well as by third parties. This group also processes more than 600 kinds of Chinese medicinal herbal products such as
medicines for bone and joint pain, arthritis, respiratory infections and insomnia, and distribute such products through an established
Chinese domestic sales and distribution network, including more than 20 pharmaceutical companies and more than 50 hospitals throughout
China. In May, 2013, Ankang Longevity Group has established a joint venture with a large state-owned domestic pharmacy chain group,
Shaanxi Pharmaceutical Group Pai’ang Medicine Co. Ltd.. As part of the joint venture, Ankang Longevity Group contributed
13 retail pharmacies— operating as Sunsimiao Pharmacies— to the joint venture while retaining 66 retail pharmacies
whereby Ankang Longevity Group acts as a franchisor. We also provide evaluation and diagnostic services by on-site doctors at
pharmacies to support and drive our Chinese medicine product sales. The operations of this segment are focused in the northwest
region of Mainland China, particularly Shaanxi province. This segment accounts for approximately 38% of our revenues.
Ankang
Longevity Group has built a scalable decocting-free Chinese herbal medicine manufacturing facility that passed the Good Manufacturing
Practice (“GMP”) certification in 2009 and was recognized as a Key Agricultural Industrialization Companies by the
Shaanxi Provincial Government. The facility covers an area of over 4,000 square meters and is equipped with an advanced toxic
herbal medicine treatment production line and herbal medicine testing instruments.
Ankang
Longevity Group has recently acquired land use rights to use 8,200 acres of selenium-rich farmland and woodland in Ziyang County,
China to grow our Chinese medicine and other plant products.
Zhisheng
Group
The
Company’s other VIEs, which form the Zhisheng Group and include Zhisheng Bio-Tech, Zhisheng Freight, Zhisheng Trade and
Qingdao Zhihesheng, engage in the business of organic agricultural products, principally yew trees, as well as providing logistics
services for all of the agricultural products we produce. Since 2013, this segment is focusing its efforts on the growing and
cultivation of yew trees (taxus media), small evergreen trees that can be used for the production of anti-cancer medication
as well as ornamental bonsai trees, which are known to have the effect of purifying indoor air quality. We currently cultivate
and sell yew trees but do not currently process yew into Chinese or Western medicines. The entities composing the Zhisheng Group
are currently focusing on researching, developing and cultivating organic produce, yew ecological products and other native plants.
The operations of this segment are focused in the East region of Mainland China, principally Shandong Province, and in Beijing
where we have newly developed over 100 acres of modern greenhouses for cultivating yew and other plants. This segment accounts
for approximately 58% of our revenues.
Tenet-Jove
Through
Tenet-Jove and Tianjin Tenet Huatai, the Company develops and distributes specialized textiles and health supplements derived from
a native Chinese plant Apocynum venetum, grown in the Xinjiang region of China and known in Chinese as “Luobuma”
or “bluish dogbane” and referred to herein as Luobuma. This plant has traditionally been used in China both internally
and externally for centuries to treat high blood pressure, depression, dizziness, pain, insomnia, and other common ailments. The
stems of Luobuma serve as raw material for fiber used in textile production, and the leaves serve as raw material for pharmaceutical
drugs. This segment accounts for approximately 4% of our revenues.
The
companies of this segment, Tenet-Jove and Tianjin Tenet Huatai, specialize in Luobuma sourcing and developing Luobuma byproducts.
With rich experience and broad channels in the Chinese domestic market, we believe that we are one of the leaders in Luobuma textile
sales in China. This segment’s operations are focused in the north region of Mainland China, mostly carried out in Xinjiang
and Tianjin. Our Luobuma products are specialized textile and health supplement products designed to incorporate traditional Eastern
medicines with modern scientific methods. These products are predicated on centuries-old traditions of Eastern herbal remedies
derived from the Luobuma raw material.
In
addition to developing textile products, we expect to use our high-pressure steam degumming process to extract other Luobuma byproducts
we intend to commercialize and distribute: flavonoids, xylooligosaccharides (XOS), edible pectin, fiberboard, and organic fertilizer.
The traditional method of degumming Luobuma only produces Luobuma fiber, whereas our high-pressure steam degumming process produces
these five additional Luobuma byproducts. Flavonoids are organic compounds widely distributed in plants, and flavonoid-rich Luobuma
extract can be used in the manufacture of many pharmaceuticals. Xylooligosaccharides, or XOS, is a sugar that can be used as a
food additive that provides various health benefits like lowering glucose levels. Pectin is a thickener and stabilizer used in
food, beverages and cosmetics, as well as a gelling agent for jellies. Fiberboard is a type of engineered wood alternative that
is made out of Luobuma fibers; it is used widely for furniture manufacturing and packaging.
Product
Descriptions
Traditional
Chinese Medicines
Our
Ankang Longevity Group manufactures hundreds of Chinese medicinal herbal products and decoction pieces such as medicines for bone
and joint pain, arthritis, respiratory infections, insomnia, as well as many other common ailments. We distribute such products
through an established Chinese domestic sales and distribution network, including through more than 20 pharmaceutical wholesale
companies and more than 50 hospitals throughout China, as well as through our own and cooperative retail pharmacies. In addition
to distributing Chinese medicinal herbal products, we also distribute many popular Western medicines we purchase from outside
parties through our wholesale and retail channels so that we can offer a good variety of products to meet customer demands. In
the second quarter of 2013, this group entered the pharmaceutical retailing industry through a joint venture with another large
domestic pharmacy chain group, Shaanxi Pharmaceutical Group. Ankang’s main products include the following traditional Chinese
medicines:
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Polygonum
cuspidatum or Japanese knotweed, which is ingested to treat colds, digestive diseases, hepatitis and Cholecystitis (gallbladder
inflammation);
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Salvia
mint, which is ingested to improve microcirculation;
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Tianma,
which is ingested to treat Rheumatoid arthritis;
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Eucommia,
which is ingested for bone and join pain;
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Radix,
which is ingested to treat respiratory infections;
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Schisandra
shrub, which is ingested to treat insomnia; and
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Berberis
shrub, which is used as a raw material for antibiotics.
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Yew
Trees
Currently,
through our Zhisheng Group VIEs, we sell ornamental yew trees and yew cuttings to third parties. We also rent ornamental yew trees
to companies who desire the environmental benefits of natural plants in their workplaces. Until recently we were primarily engaged
in the production, distribution and sale of agricultural products, including the planting and processing of organic fruits and
vegetables, such as tomatoes, eggplants, string beans, peppers as well as certain popular fruits in China like blueberries and
wine grapes, but those operations have been temporarily scaled back due to stiff competition and a change of our internal policy
in favor of the expansion of our yew tree business.
As
our inventories of young yew trees mature, our long-term goals are particularly focused on the extraction of paclitaxel or taxol,
which is derived from certain species of yew trees including those we grow. Taxol, a broad-spectrum mitotic inhibitor used in
cancer chemotherapy, can be extracted from mature yew trees. As a mitotic inhibitor, taxol adheres to rapidly dividing cancerous
cells during mitosis (cell division) and interferes with the division process. It may suppress tumor growth through regulating
microtubule stabilization, inducing apoptosis and adjusting immunologic mechanism. Taxol is also used for the prevention of restenosis,
which is the narrowing of blood vessels. In the treatment of certain soft tissue cancers, such as breast cancer, taxol is given
for early stage and metastatic breast cancer after combination anthracycline and cytoxan therapy and is also given as treatment
to shrink a tumor before surgery. It can also be used together with a drug called Cisplatin to treat advanced ovarian cancer and
non-small cell lung cancer, or “NSCLC.” The U.S. Food and Drug Administration approved taxol as the primary and secondary
treatment for NSCLC. There are other generally accepted protocols for the use of taxol as a cancer drug alone or in combination
with other drugs depending upon the diagnosis, staging and type of cancer, as well as a patient’s medical history, tolerances
and allergies, among other relevant factors. Taxol is usually sold to large pharmaceutical companies to be used in their products,
which can be used to treat patients with lung, ovarian, breast, head and neck cancer, and advanced forms of Kaposi’s sarcoma.
Tenet-Jove
Textiles
Our
company’s scientists and other Chinese researchers have brought modern scientific methods to the study of Luobuma, and have
determined that Luobuma fibers have an increased tendency to radiate light at the “far infrared” end of the light
spectrum, with wavelengths measuring between 8-15 microns (referred to as “FIR”). Based on Chinese scientific studies
some believe that Luobuma’s FIR-radiating qualities exert a positive effect on various functions of the human body, including
cellular metabolism. For this reason, we have marketed and sold these products utilizing such technology. These products are popular
with Chinese customers seeking the perceived benefits of traditional Chinese medicine.
For
example, according to a report by the College of Science of Tianjin University, tests conducted by the PRC’s National Institute
of Metrology have reported that the radiance rate of far infrared light from Luobuma fiber is 84%, 2 to 4 times higher than that
from cotton and other natural fibers. The same tests found that the FIR radiance rate from our proprietary bio-ceramic powder
reaches 91%. Healthful benefits have been observed at radiance rate levels above 70%. Based on these observations about FIR radiance,
we have developed textiles that our customers can wear and from which we believe they can receive those health benefits commonly
associated with Chinese herbal remedies.
Tenet-Jove
first commercially developed the natural FIR-radiant properties of the Luobuma plant in 1997. We refer to this natural Luobuma
fiber as a “Second Generation” FIR textile. The “First Generation” of FIR-radiant textiles initially became
popular in China around 1989, when manufacturers learned to add 3% of a FIR-radiant inorganic material to synthetic fibers comparable
to nylon or polyester. This “First Generation” FIR material employs a relatively low level of technology and has relatively
few perceived or measurable health benefits. The “Second Generation” FIR textiles we have developed are softer, smoother
and more breathable natural fibers that are not as prone to static electricity as the low technology “First Generation”
FIR-radiant textiles.
Our
Luobuma fabrics have been a success in the Chinese domestic market and have also received numerous awards. The technology applied
to our Luobuma-based FIR Therapeutic Clothing and Textile Products has received a “Special Golden Award” from the
China National Intellectual Property Bureau at China’s National Patent and Brand Expo. Our products under the brand name
of “Tenethealth” have also been honored with the title of “Consumer’s Favorite Products” by the
Chinese Consumer Association.
The
fibers of natural Luobuma FIR materials can contain up to 32 medicinal compounds, many of which are familiar to practitioners
of traditional Chinese medicine. In addition, our processes for manufacturing Luobuma textiles produce a fabric that is smooth,
air-permeable, and soft. By combining a product that is familiar to PRC consumers seeking the benefits of traditional Chinese
medicine with quality and comfort, we believe we are innovative and have chosen a product that has great commercial potential
in the Chinese textile market.
Tenet-Jove
Product Development
We
have developed what we term a “Third Generation” of FIR textiles under a contract with the Institute of Process Engineering
at the Chinese Academy of Sciences, one of the leading scientific institutions in China. Our research and development has focused
on adding nanotechnology enhancements to our Luobuma textile products, in which we use small-scale nanotechnology to embed or
impregnate our Luobuma-fiber textiles with other FIR-radiant materials, bio-ceramic materials, or other Chinese herbal remedies.
Using these nanotechnology methods, we have developed and marketed health-promoting textile goods that are impregnated with FIR-radiant
materials or other Chinese herbal remedies, which are then absorbed through the wearer’s skin. We believe these “Third
Generation” FIR textiles will better combine the health benefits of Luobuma with an even softer, more natural cotton-like
fabric that will be popular with Chinese consumers.
The
Company presently produces approximately 100 “Third Generation” FIR textile products. These textile products include:
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Infrared bedding sets (including various pillows, comforters, and sheets);
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Infrared underwear, T-shirts, and socks;
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Infrared knee and shin pads, waist supports and other protective clothing; and
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Far
Infrared body wraps or protectors (for the ankle, elbow, wrist, and knee).
|
All
our textile products are made of Luobuma-based fibers and are impregnated with bio-ceramic powder, which contains various minerals
such as halloysite. Both the fiber and the bio-ceramic powder are developed with the Company’s patented, proprietary techniques.
Manufacturing
and Production Facilities
We
have formed strategic alliances with several certified knitting and clothing manufacturers throughout China in order to produce
our Luobuma products. We assign them limited manufacturing jobs and require certain conditions, including protecting our proprietary
techniques and meeting our rigid quality standards. We are in preliminary negotiations to build a new facility in Kuerle, Xinjiang
Uyghur Autonomous Region, China to exploit our steam explosion Luobuma fiber production technology.
In
2013, we began large-scale operations in newly leased, energy efficient greenhouses aggregating 50,000 square meters in Beijing
and have temporarily scaled back our operations in our former greenhouses located in Shandong Province. At this time, we rent
our greenhouses in Shandong Province to local farmers. Our current greenhouse facilities are used primarily for the cultivation
of yew trees and other decorative plants and trees. These state-of-the-art facilities allow us to better regulate light, temperate,
humidity and other conditions within the greenhouse as well as to significantly increase the number of plants that can be housed
in a particular greenhouse footprint. To a lesser degree, we expect these current greenhouses will reduce our manual labor costs
associated with our greenhouse operations by approximately 25%. Rather than competing on price, which has become increasingly
difficult in the Chinese market, we expect that technological and productivity advances from our new greenhouses will improve
our competitive position within our agricultural segment, but there can be no guarantee that we will experience such advances,
or if we do, that such advances would improve our competitive position.
Ankang
Longevity Group has an approximately 4,000 square meter production factory and an approximately 2,000 square meter production
facility in Ankang City, Shaanxi Provice, China, which are used for production of decoction pieces.
Our
Strategy for Research and Development
|
●
|
To
keep our products proprietary and patented;
|
|
●
|
To
focus on our core existing product lines: Chinese herbal medicines and pharmaceutical sales, yew cultivation, Luobuma-based products,
and FIR technology;
|
|
●
|
To
commit to further development of our Luobuma byproducts, houpu magnolia products, and selenium-enriched herbs and plants; and
|
|
●
|
To
build strategic alliances with universities and scientific institutions, which will allow us exposure to advanced technologies,
excellent researchers and scientists and we believe will lower the costs and timing of the development of new products.
|
Tenet-Jove
specializes in developing Luobuma products and combining FIR technology with natural herbal medicines. We estimate that there
are large supplies of Luobuma in China, especially Xinjiang Province. In China, Luobuma can grow as high as 3.6 meters. In the
first year after planting, Luobuma can be harvested once during that year; thereafter, it can be harvested twice per year before
or at the beginning of the flowering period in June and a second time around September. Currently, we believe China’s Luobuma
supplies are largely undeveloped. The Company’s future success will depend on improving its techniques to industrialize
Luobuma by developing new Luobuma-derived products such as improved Luobuma functional fiber and various Luobuma nutritional supplements,
which can be marketed and distributed through the Company’s Ankang Longevity business segment.
High-Pressure
Steam Degumming Process
We
currently produce an extensive line of Luobuma-based textile products; we have an exclusive patent on a Luobuma fiber yarn spinning
method. Large-scale production of Luobuma fiber products is generally difficult due to the limited yield of Luobuma fiber and
the high cost of obtaining that fiber. The current mainstream technology used to produce Luobuma fiber mainly uses chemical agents
to remove gum from Luobuma, which destroys Luobuma fiber and causes lower Luobuma fiber production and pollution and makes it
very difficult to extract other valuable by-products. A central technical challenge is how to quickly and efficiently remove the
gum and sap from the Luobuma plants so that only the natural fiber remains.
To
solve this technical challenge, in August 2006 we signed a technology development contract with the Institute of Process Engineering
at the Chinese Academy of Science (the “Institute of Process Engineering”), one of China’s leading scientific
institutes. Pursuant to our contract, we and the Institute of Process Engineering worked together to develop a high-pressure steam
degumming process for the mass production of Luobuma fiber, as well as its byproducts, which was completed in 2008. A literal
translation of the project name is “The Stream Steam Explosion Project.” Essentially, the project will develop a modern
material engineering method of quickly blasting a large amount of high-pressure steam into a large container filled with raw Luobuma
plants. The steam will remove the gum and sap and leave the fiber for use in textile production. The gum and sap and other Luobuma
byproducts will be washed out with the steam and collected in a separate place for other uses.
If
we can successfully implement our high-pressure steam degumming process, we expect that our annual yield of Luobuma fiber can
rise by over one hundredfold— from less than 200 tons to approximately 27,000 tons per year, and the cost of extracting
the fiber will be reduced by approximately 50%. For example, the older method of production might require 150 laborers to produce
one ton of Luobuma fiber in one day, whereas our high-pressure steam degumming process can utilize just 30 laborers to produce
15 tons of Luobuma fiber in one day. During the process, a certain amount of steam will be used, but unlike the traditional method
of degumming, our high-pressure steam degumming process discharges no hazardous byproducts of any kind, because the fiber will
be collected in one place, and the liquefied gum and sap and other material will be collected in another place to further separate
flavonoids, xylooligosaccharides (XOS), and edible pectin through biological reverse osmosis membrane. The remaining material
could be used to produce fiberboard and organic fertilizer, leaving no hazardous discharge or waste. We expect that this technique
will be relatively simple and convenient for us to operate with our advanced technology. Luobuma fiber produced by this technique
is more like cotton and more spinnable than before.
Intellectual
Property
Trademarks
We
regard our trademarks as an important part of our business due to the name recognition of our customers. Our subsidiary, Tenet-Jove,
has currently obtained 18 trademark registrations at the China Trademark Office and applying for another 7 trademarks covering
various categories of the company’s products. As of June 30, 2018, we are not aware of any valid claim or challenges to
our right to use our registered trademark or any counterfeit or other infringement to our registered trademark.
Patents
Currently,
the Company holds a patent in the People’s Republic of China for Luobuma fiber yarn preparation and an application method
(patent number: 201110429362.9), which serves as our core technology and its derivative applications for our Luobuma business.
Distribution
Network
We
sell our products through various distribution networks. Our traditional Chinese medicinal products and Western medicines are
largely sold through either our wholesale customers or our Ankang retail pharmacies — 13 pharmacies operating as Sunsimiao
Pharmacies and 66 pharmacies operated by third parties as Ankang Longevity Group Pharmacy cooperatives. Additionally, we sell
decoction pieces on the Anhui Bozhou Chinese medicine transaction market, to medical materials company, such as Qianhe Pharmaceutical
Industry Co. and to Chinese patent medicine factories, such as Wanxi Pharmaceutical Factory.
Our
Luobuma product distribution networks consists of four distributors who distribute our products to approximately 21 outlets, including
flagship stores, retail stores and sales counters. These distributors sell our products throughout mainland China, under our proprietary
brand name and “Tenethealth®” trademark. We also sell our Luobuma textile products online through third party
e-commerce websites, such as Taobao, Tmall and JD. Our yew trees and agricultural products are primarily sold through our sales
personnel and group and institutional sales. In 2013, the Company placed its Luobuma, traditional Chinese medicine and yew products
in a total of 144 retail stores and sales counters throughout China and on four e-commerce websites.
Our
sales and distribution strategy for our products focuses on expanding our distribution network of retail stores and sales counters
into all major provinces and cities of China. We also plan to use our current distribution network to introduce our newly developed
products into target markets more efficiently and effectively.
All
of these certified outlets operate independently, but they prominently display products mainly carrying our trade name “Tenethealth®”.
These independent retailers sell our products as well as other products.
The
location and number of retail stores and sales counters selling our products, including all sales outlets (both those connected
with our major distributors (i.e., our most frequently used distributors) and other independent sellers), as of June 30, 2019
are listed below:
Location
|
|
Number of
Major Distributors
|
|
|
Number of
Sales Outlets
|
|
Liaoning
|
|
|
1
|
|
|
|
1
|
|
Jilin
|
|
|
1
|
|
|
|
1
|
|
Shandong
|
|
|
2
|
|
|
|
16
|
|
Jiangsu
|
|
|
2
|
|
|
|
6
|
|
Anhui
|
|
|
2
|
|
|
|
4
|
|
Shaanxi
|
|
|
5
|
|
|
|
94
|
|
Xinjiang
|
|
|
1
|
|
|
|
2
|
|
Sichuan
|
|
|
1
|
|
|
|
5
|
|
Guangdong
|
|
|
1
|
|
|
|
3
|
|
Tianjin
|
|
|
1
|
|
|
|
2
|
|
Beijing
|
|
|
1
|
|
|
|
4
|
|
Chongqing
|
|
|
1
|
|
|
|
3
|
|
Hubei
|
|
|
1
|
|
|
|
3
|
|
TOTALS
|
|
|
20
|
|
|
|
144
|
|
Sales
and Marketing
We
market Luobuma to consumers primarily by highlighting its unique characteristics— the material is soft like cotton, breathable
like hemp and is smooth to the touch like silk, and its FIR-radiating qualities are believed by some to exert a positive effect
on various functions of the human body. Very few other companies in China are involved with Luobuma fiber production, so we are
chiefly able to market our products against products of natural and man-made fibers that do not have the perceived advantages
of Luobuma. The small number of companies that are involved in Luobuma fiber production are still using the traditional, outdated
methods of producing Luobuma. We are the only company using advanced technologies. Tenet-Jove’s overall marketing strategy
includes:
|
●
|
Brand
marketing strategy, primarily through media publicity, product- and market-oriented strategy;
|
|
|
|
|
●
|
Distinguishing
Luobuma as a high-end, technologically advanced native Chinese product; and
|
|
|
|
|
●
|
Online
advertising, which includes online advertisements appearing on the sites where we sell our products, as well as social media
advertising, including Wechat, and direct e-mail solicitations.
|
Ankang
Longevity Group’s overall marketing strategy of its traditional Chinese medicine products focuses on promoting the Ankang
district’s place in traditional Chinese medicine history and its geographic location. First, Ankang City is located in the
Han River area between Qinling Mountain and Ba Mountain. Because of its geographic location and favorable climate, it is the principal
production location of the ancient Qin medicine, which dates from the Qin dynasty, the first imperial dynasty of China. This area
contains more than 1,200 types of herbs and plants used in traditional Chinese medicine and is home to 176 of the 282 types of
herbal medicine set forth in The Pharmacopoeia of the People’s Republic of China (PPRC), compiled by the Pharmacopoeia
Commission of the Ministry of Health of the PRC. The PPRC is the PRC’s official compendium of drugs, covering traditional
Chinese and western medicines. Second, the soil in Ankang City, especially in Ziyang County, which is located in Ziyang District
of Ankang City, contains large quantities of selenium. Because the selenium content of food is largely dependent on location and
soil conditions, which can vary widely, the tea, traditional Chinese medicines and raw materials produced and cultivated in Ankang
contain great amounts of selenium, which is a beneficial nutrient in foods and an important raw material for medicines. Ankang
Longevity Group has entered into an agreement with the local government in Ziyang County for the use of an approximately 8,200
acre selenium-rich parcel of farmland and woodlands for the cultivation of herbs and plants — principally houpu magnolia
and eucommia — used in traditional Chinese medicine. Selenium has also attracted attention because of its antioxidant properties;
antioxidants protect cells from damage.
Ankang
Longevity emphasizes the following marketing strategies:
|
●
|
A
focus on the excellent quality of its selenium Chinese herbal medicines;
|
|
|
|
|
●
|
Establishment
of a long-term supply relationships with pharmaceutical companies and hospitals nationwide; and
|
|
|
|
|
●
|
Developing
its Chinese herbal medicine wholesale market and e-commerce platform.
|
Finally,
the Zhisheng Group emphasizes the following marketing strategies:
|
●
|
Focusing
on the advanced growing conditions provided by our modern greenhouse operations and the potential pharmaceutical byproducts
of yew, especially paclitaxel or taxol; and
|
|
|
|
|
●
|
Brand
marketing to focus on our yew’s brand positioning.
|
In
October 2012, the Company, through its VIEs, Zhisheng Freight and Zhisheng Agricultural, entered into an agreement with an unrelated
third party, Zhejiang Zhen’Ai Network Warehousing Services Co., Ltd. (“Zhen’Ai Network”), to invest RMB
14.5 million (approximately $2.4 million) into the Tiancang Systematic Warehousing Project (“Tiancang Project”) operated
by Zhen’Ai Network in exchange for a 29% equity interest in this project upon completion. The Tiancang Project is an online
platform aiming to provide comprehensive warehousing and logistic solutions for various companies’ e-commerce needs. The
Company expects to increase its distribution channels through this platform as well as to benefit from boosting its own revenue
by providing synergetic logistic and warehousing services using its existing facilities and a service team in the Eastern port
city of Qingdao.
Currently,
the Company’s sales are generated through the following five major channels:
|
1.
|
Retail
stores and sales counters. We mainly sell our Luobuma related products through sales counters and medicine through our pharmacy
chain stores.
|
|
|
|
|
2.
|
Sales
to group or institutional customers. We mainly sell our organic agricultural products and yew trees to group or corporate
customers.
|
|
|
|
|
3.
|
Seminars
and conferences. Because a majority of new consumers need to learn about our new products before buying them, it becomes very
important and effective for us to organize or sponsor seminars and events to present healthcare knowledge while introducing
and selling our products to new users.
|
|
|
|
|
4.
|
Wholesale.
We mainly sell our decocting-free Chinese herbal medicines to large Chinese medicine resellers and pharmaceutical companies.
|
|
|
|
|
5.
|
E-commerce.
We mainly sell the Luobuma related products through Tmall and Taobao to underdeveloped regions in China, Taiwan and Macau.
We are currently one of only three certified online sellers of Luobuma textile products on China’s largest online sales
platform, Tmall run by Alibaba. Selling through the Internet has become increasingly important to our sales in undeveloped
regions and developed cities.
|
The
Market
We
primarily market our health and wellbeing-focused products in China. At present, we do not sell any of our products in the United
States or Canada. On the demand side, we believe that the following four forces drive market growth in all three of our business
segments:
|
1.
|
The
rapid growth of China’s economy, which has produced one of the largest groups of middle-class families in the world,
with the largest collective purchasing power in the world. The Brookings Institution estimates that by 2030, over 70 percent
of China’s population could be middle class, consuming approximately $10 trillion in goods and services.
|
|
|
|
|
2.
|
The
increase of China’s aging population. The China Census Bureau predicts that the majority of the China “baby boom”
population (representing 40% of China’s total population) will be 65 or older by 2020, which represents over 500 million
potential consumers of our pharmaceutical and healthcare products, the majority of which are sold to older customers.
|
|
|
|
|
3.
|
Chinese
people’s increasing attention and awareness to healthy and active lifestyles, especially in urban areas.
|
|
|
|
|
4.
|
Chinese
healthcare reforms.
|
We
believe China’s healthcare sector has the capacity to grow in the coming years. From pharmaceuticals to medical products
to general consumer health, China remains among the world’s most attractive markets, and by far the fastest-growing of all
the large emerging ones. This growth is being driven by China’s aging population, increased incidence of chronic diseases,
and a material increase in investment from both domestic and foreign corporations.
China’s
healthcare market is being shaped by positive economic and demographic trends, further healthcare reform efforts, and the policies
set forth in the government’s 12th five-year plan. We believe that improvements in infrastructure, the broadening
of insurance coverage, and government encouragement and support for innovation will have positive implications for us and other
healthcare companies.
Strong
growth in the Chinese healthcare sector has been fueled by favorable demographic trends, continued urbanization throughout China,
the overall Chinese economy’s expansion, and income growth (which encourages a greater awareness of and access to healthcare
among Chinese consumers). It also reflects the Chinese government’s focus on healthcare as both a social priority (as witnessed
in its late 2000s healthcare reforms) and a strategic priority (as witnessed in the 12th five-year plan’s stated
focus on growing the Chinese biomedical industry). From pharmaceuticals to medical devices to traditional Chinese medicine, almost
every health sector has benefited.
Competition
We
compete with other top-tier pharmaceutical and healthcare companies in China. Many of them are more established than we are and
have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our competitors
have greater name recognition and a larger customer base. Those competitors may be able to respond more quickly to new or changing
opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive
terms to customers, and adopt more aggressive pricing policies. Some of our competitors have also developed similar products that
compete with ours.
Our
most prominent competitors in China’s textile products market are primarily large-scale textile companies, such as Luolai
Home Textile Co., Fuanna Bedding and Furnishing Co., Ltd., Violet Home Textile Co., and Shuixing Home Textile Co., Ltd, as well
as Bauerfeind Sports and Albert Medical, makers of protective clothing products similar to our protective clothing products. Our
most prominent competitors in our pharmaceutical sales market include Ankang City Zhenning Chinese Medicine Decoction Pieces Co.
Ltd. and Zhenping County Chinese Medicine Decoction Pieces Co. Ltd. Our most prominent competitors in China’s agricultural
market are Beijing Jinfu Yinong Agricultural Technology Group Co., Ltd. for vegetables and other produce and Shenyang Xincheng
Garden Engineering Co., Ltd. for yew trees. In the pharmaceutical sales market, we believe that our competitive position is strong
because Shaanxi Pharmacy Holding in which Ankang Longevity Group has a 49% ownership stake, is a participant in the Ankang municipal
government’s “Three Unities of Medicine” program, which is designed to facilitate the purchase, sale and delivery
of pharmaceuticals. The “Three Unities of Medicine” program refers to “unified procurement price, unified selling
price, and unified logistics”. This project is promoted by the Shaanxi Government to regulate the price of medicines in
the local market. Under the program, the Shaanxi Pharmacy Holding joint venture directly sells medicines to local institutional
purchasers, like hospitals; these institutional purchasers are only permitted to purchase pharmaceuticals from selected preferred
providers. After a bidding process, Shaanxi Pharmacy Holding, along with other two companies, were selected by the Ankang municipal
government as preferred providers under the program. However, Shaanxi Pharmacy Holding is entitled to cover all counties and districts
of Ankang City, and the other two providers only cover portions of Ankang City. This program is valid until 2020, and the participants
are subject to an ongoing review of their qualifications by the local pharmaceutical supervision authority every three years until
2020.
Ankang
Longevity Group
Ankang
Longevity Group competes within its traditional Chinese medicinal products and Western medicine wholesale and retail business
primarily against Ankang City Zhenning Chinese Medicine Decoction Pieces Co. Ltd. and Zhenping County Chinese Medicine Decoction
Pieces Co. Ltd., which conduct their wholesale pharmaceuticals business in the Ankang area, but Ankang Longevity Group has greater
revenues than any of its competitors; its two main competitors’ output value and sales combined are just one-third of Ankang
Longevity Group’s. The Ankang Longevity Group has formed a new pharmaceutical company and chain of drug stores with two
entities wholly owned by the state-owned Shaanxi Pharmaceutical Group that has resulted in a favorable market position in the
Ankang area.
Numerous
competitors nationwide, including Ankang City Zhenning Chinese Medicine Decoction Pieces Co. Ltd. and Zhenping County Chinese
Medicine Decoction Pieces Co. Ltd., participate in the sale of Chinese medicinal herbs and Chinese medicine decoction pieces;
among them are some high-profile and large-scale companies along with some companies that have huge production and storage capacity
to influence the market price. Because we believe we are able to obtain early access to and to occupy natural resources for producing
selenium Chinese herbal medicines, the Group is especially focusing on those products in order to gain market share.
Zhisheng
Group
There
are dozens of companies planting and cultivating yew trees in China, some of which are large-scale companies. Shenyang Xincheng
Garden Engineering Co., Ltd. is a large agricultural competitor whose main product is yew. Their nurseries have the most mature
yew trees in northeast China, and the average age of their yew trees is more than eleven years old. Another competitor, Chongqing
Jiangjin District Mansheng Agricultural Development Co., Ltd., has the biggest nursery for young plants in Southwest China. And
Jingyin City Hengtu Town Green Industry Yew Base specializes in cultivating, planting, gardening, and technological development
of yew trees. They were the first company to introduce taxus media yew trees in China.
Tenet-Jove
There
are few viable competitors producing advanced technology textile products with health benefits like our Luobuma textile products.
Principally, our competitors are those that market and sell traditional textile products, such as Luolai Home Textile Co., Fuanna
Bedding and Furnishing Co., Ltd., Violet Home Textile Co., and Shuixing Home Textile Co., Ltd, as well as those companies that
market and sell protective clothing, like Bauerfeind Sports and Albert Medical. Luobuma is native to China, thus our ability to
source raw materials locally greatly enhances our competitive position in the Chinese market for high quality textile products
with perceived health benefits.
Employees
As of June 30, 2019,
we employed a total of 425 full-time and no part-time employees in the following functions.
Department
|
|
June 30,
2019
|
|
Senior Management
|
|
|
30
|
|
Human Resource & Administration
|
|
|
25
|
|
Finance
|
|
|
35
|
|
Research & Development
|
|
|
18
|
|
Production & Procurement
|
|
|
152
|
|
Sales & Marketing
|
|
|
165
|
|
Total
|
|
|
425
|
|
Our employees are
not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages.
The Company plans
to hire additional employees as required. Its management and employees enjoy both compensation and welfare benefits pursuant to
Chinese laws. We are required under PRC law to make contributions to employee benefit plans at specified percentages of our after-tax
profit. In addition, we are required by PRC law to cover employees in China with various types of social insurance. In 2019, 2018
and2017, we contributed approximately $128,713, $146,312 and $139,736, respectively, to employee social insurance. The effect on
our liquidity by the payments for these contributions is immaterial. We believe that we are in material compliance with the relevant
PRC employment laws.
Relevant PRC Regulations
Laws and Regulations in China Regarding Agriculture and
Pharmaceutical Products and Distribution
Laws regulating pharmaceutical
and healthcare products and agriculture cover a broad array of subjects. We must comply with numerous additional provincial and
local laws relating to matters such as safe working conditions, manufacturing practices, environmental protection and fire hazard
control. We believe we are in compliance with these laws and regulations in the future in all material respects. We may be required
to incur significant costs to comply with these laws and regulations. Unanticipated changes in existing regulatory requirements
or adoption of new requirements could materially adversely affect our business, financial condition and results of operations.
Pharmaceutical Administration Law of The People’s
Republic of China and its detailed implementation provisions
According to Pharmaceutical
Administration Law of The People’s Republic of China effective on December 1, 2001, a Pharmaceutical Trade License is required
in order to sell pharmaceutical products and a Pharmaceutical Manufacturer License shall be obtained to manufacture pharmaceutical
products. Our license currently expires in April 2019. The regulations indicate the specific procedure to obtain and maintain other
licenses, packaging, price control, advertising and relevant penalty.
Notice on Supervision of Manufacture of Chinese Medicine
in Pieces
According to Notice
on Supervision of Manufacture of Chinese medicine in Pieces on February 1, 2008 and effective on June 1, 2008, companies processing
raw Chinese medicine shall be a GMP certified company. Our GMP license currently expires on April 17, 2019.
Standards of Preparation for Chinese Medicine in Pieces
Shaanxi province has
issued standards of preparation for Chinese Medicine in Pieces, which became effective on July 1, 2011. Our company is required
to follow the procedures designated in the standards during the process of preparing the pieces of herbs.
Food Safety Law of the People’s Republic of China
The Food Safety Law
of the People’s Republic of China as adopted at the 7th Session of the Standing Committee of the 11th
National People’s Congress of the People’s Republic of China and effective on June 1, 2009, governs the food safety
in food production and business operation activities. Pursuant to the Food Safety Law of the People’s Republic of China,
food producers must establish an internal inspection and record system for raw materials and pre-delivery products, and food distributors
must also establish internal systems to record and inspect food products procured from suppliers. In addition, any food additives
that are not in the approved government catalog must not be used and no food products can be sold inspection-free.
Regulations on the Implementation of the Food Safety Law
of the People’s Republic of China
The Regulations on
the Implementation of the Food Safety Law of the People’s Republic of China as adopted at the 73rd Standing Committee
Meeting of the State Council on July 8, 2009 and effective on July 20, 2009, are promulgated in accordance with the Food Safety
Law of the People’s Republic of China. The Regulations require that the local People’s Government at or above the county
level shall perform the responsibility specified in the Food Safety Law of the People’s Republic of China, improve the ability
for supervision and administration of food safety, ensure supervision and administration of food safety; establish and improve
the coordination mechanism between food safety regulatory authorities, integrate and improve the food safety information network,
and realize the sharing of food safety and food inspection information and other technical resources.
Law of the People’s Republic of China on Quality
and Safety of Agricultural Products
The Law of the People’s
Republic of China on Quality and Safety of Agricultural Products was adopted at the 21st Meeting of the Standing Committee
of the Tenth National People’s Congress on April 29, 2006. This Law was enacted in order to ensure the quality and safety
of agricultural products, maintain the health of the general public, and promote the development agriculture and rural economy.
Pursuant to this Law, agricultural products distribution enterprises shall establish a sound system of inspection and acceptance
for their purchases. In addition, agricultural products that fail to pass the inspection based on the quality and safety standards
of agricultural products cannot be marketed.
Regulation on Product Advertisements and Promotion
Article 5 of the Provisions
for Health Food Management provides that foods claimed to have health function shall be approved by the Chinese Ministry of
Health. The developer or manufacturer shall submit an application to the provincial level health administrative departments where
such developer or manufacturer is located. After preliminary examination and approval by Ministry of Health, the Ministry of Health
may issue a health food license to the qualified health food. Under Article 21, the label and package insert of health foods shall
conform to national standards and requirements and indicate, among other things, its function and suitable users; dosage and administration;
storage methods; and active ingredients.
When promoting health
foods, the advertisement of health food shall conform to the other regulations. Article 19 of The Advertisement Law of People’s
Republic of China provides that “an advertisement for foods, alcoholic drinks or cosmetics must meet requirements for
public health, and shall not employ medical jargon or terms liable to confuse them with pharmaceuticals.” In Interim Provisions
on Health Food Advertisements Review, Article 4 provides that prior to advertising health foods, developers or manufacturers
should first submit an application to the food and drug administration departments on the provincial, autonomous, municipal level
under the Central Government. Article 8 provides that publicizing of health functions, active ingredients, content, suitable users,
dosage in health food advertisements shall be subject to prior review of the package insert ratified by the food and drug administration
departments in the State Council and cannot be changed without permission. Certain content may not appear in health food advertisements,
including: a guarantee of its functions; exaggerated claims; jargon, mysterious terms and technical content; promises such as “safe”
or “no side effects”; or comprehensive assessment information such as efficiency, cure rate, ranking and awards.
Laws and Regulations Regarding Promotion and Advertisement
of Health Textiles
In The Model Code
of Health Textiles, “health textiles” refer to textiles without toxic side effects that have far infrared functions,
magnetic functions and/or antibacterial effects, and which aim at regulating the body, but not healing illnesses. The Code requires
that the effect of health textiles cannot be exaggerated in any form of advertising.
In addition, the promotion
of health textiles should comply with The Advertisement Law of People’s Republic of China. Where there are statements
in an advertisement on the performance, place of origin, usage, quality, price, producer or manufacturer, or on the items, forms,
quality, price and promise of service, such statements shall be clear and explicit.
Regulation on Product Liability
Manufacturers and
vendors of defective products in the PRC may incur liability for losses and injuries caused by such products. Under the General
Principles of the Civil Laws of the PRC, which became effective on January 1, 1987 and were amended on August 27, 2009, manufacturers
or retailers of defective products that cause property damage or physical injury to any person will be subject to civil liability.
In 1993, the General
Principles of the PRC Civil Law were supplemented by the Product Quality Law of the PRC (as amended in 2000 and 2009) and the Law
of the PRC on the Protection of the Rights and Interests of Consumers (as amended in 2009), which were enacted to protect the legitimate
rights and interests of end-users and consumers and to strengthen the supervision and control of the quality of products. If our
products are defective and cause any personal injuries or damage to assets, our customers have the right to claim compensation
from us.
The PRC Tort Law was
promulgated on December 26, 2009 and became effective from July 1, 2010. Under this law, a patient who suffers injury from a defective
product can claim damages from either the hospital or medical institution or the manufacturer of the defective product. If our
pharmaceutical products injure a patient, for example, and if the patient claims damages from the medical institution, the medical
institution is entitled to claim repayment from us. Pursuant to the PRC Tort Law, where a personal injury is caused by a tort,
the tortfeasor shall compensate the victim for the reasonable costs and expenses for treatment and rehabilitation, as well as death
compensation and funeral costs and expenses if it causes the death of the victim. There is no cap on monetary damages the plaintiffs
may seek under the PRC Tort Law.
Regulation of Work Safety
On June 29, 2002,
the Work Safety Law of the PRC was adopted by the Standing Committee of the 9th National People’s Congress and
came into effect on November 1, 2002, as amended on August 27, 2009. The Work Safety Law provides general work safety requirements
for entities engaging in manufacturing and business activities within the PRC. Additionally, Regulation on Work Safety Licenses,
as adopted by the State Council on January 7, 2004 and effective on January 13, 2004, requires enterprises engaging in the manufacture
of dangerous chemicals to obtain a work safety license with a term of three years. If a work safety license needs to be extended,
the enterprise must go through extension procedures with authorities three months prior to its expiration. In addition, on May
17, 2004, the Measures for Implementation of Work Safety Licenses of Dangerous Chemicals Production was promulgated as implementing
measures to the Regulation on Work Safety Licenses which provides that entities producing dangerous chemicals are required to obtain
work safety licenses pursuant to specific requirements. Without work safety licenses, no entity may engage in the formal manufacture
of dangerous chemicals.
The Regulations on
the Safety Administration of Dangerous Chemicals was promulgated by the State Council on January 26, 2002, and effective as of
March 15, 2002. It sets forth general requirements for manufacturing and the storage of dangerous chemicals in China. The Regulations
on the Safety Administration of Dangerous Chemicals requires that companies manufacturing dangerous chemicals establish and strengthen
their internal regulations and rules on safety control and fulfill the national standards and other relevant provisions of the
State. In addition, according to the Regulations on the Safety Administration of Dangerous Chemicals, companies that manufacture,
store, transport or use dangerous chemicals shall be required to obtain corresponding approvals or licenses with the State Administration
of Work Safety and its local branches and other proper authorities. Companies that manufacture or store dangerous chemicals without
approval or registration with the proper authorities can be shut down, ordered to stop manufacturing or ordered to destroy the
dangerous chemicals. Such companies can also be subject to fines. If criminal law is violated, the persons chiefly liable, along
with other personnel directly responsible for such impropriety, shall be subject to relevant criminal liability.
Regulation of Foreign Currency Exchange
Foreign currency exchange
in the PRC is governed by a series of regulations, including the Foreign Currency Administrative Rules (1996), as amended, and
the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange (1996), as amended. Under these regulations,
the Renminbi is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment,
loans or investments in securities outside the PRC without the prior approval of China’s State Administration of Foreign
Exchange. Pursuant to the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange (1996), Foreign
Investment Entities may purchase foreign exchange without the approval of the State Administration of Foreign Exchange for trade
and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also
retain foreign exchange, subject to a cap approved by the State Administration of Foreign Exchange, to satisfy foreign exchange
liabilities or to pay dividends. However, the relevant Chinese government authorities may limit or eliminate the ability of foreign
investment entities to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct
investment, loan and investment in securities outside the PRC are still subject to limitations and require approvals from the State
Administration of Foreign Exchange.
China has allowed
for a more market-based exchange rate to influence the valuation of the Renmenbi versus global currencies, and supported devaluation
consistently over the seven months prior to the date of this prospectus. To the extent any of our future revenues are denominated
in Renmenbi or other currencies other than the United States dollar, we would be subject to increased risks relating to foreign
currency exchange rate fluctuations which could have a material adverse effect on our financial condition and operating results
since operating results are reported in United States dollars and significant changes in the exchange rate could materially impact
our reported earnings.
Regulation of Foreign Exchange in Certain Onshore and
Offshore Transactions
In October 2005, the
State Administration of Foreign Exchange issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising
and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or the State Administration
of Foreign Exchange Notice 75, which became effective as of November 1, 2005, and was further supplemented by three implementation
notices issued by the State Administration of Foreign Exchange on November 24, 2005, May 29, 2007 and May 20, 2011, respectively.
On July 4th, 2014, SAFE amended it as Circular 37 (i.e., SAFE Circular on Issues Relating to the Administration of Foreign
Exchange in Offshore Investment and Financing and Round-trip Investment Activities of Domestic Residents Conducted via Offshore
Special Purpose Companies issued by SAFE on July 4, 2014). The State Administration of Foreign Exchange Circular states that PRC
residents, whether natural or legal persons, must register with the relevant local State Administration of Foreign Exchange branch
prior to establishing or taking control of an offshore entity established for the purpose of overseas equity financing involving
onshore assets or equity interests held by them. The term “PRC legal person residents” as used in the State Administration
of Foreign Exchange Circular 37 refers to those entities with legal person status or other economic organizations established within
the territory of the PRC. The term “PRC natural person residents” as used in the State Administration of Foreign Exchange
Circular 37 includes all PRC citizens and all other natural persons, including foreigners, who habitually reside in the PRC for
economic benefit.
PRC residents are
required to complete amended registrations with the local State Administration of Foreign Exchange branch upon: (i) injection of
equity interests or assets of an onshore enterprise to the offshore entity, or (ii) subsequent overseas equity financing by such
offshore entity. PRC residents are also required to complete amended registrations or filing with the local State Administration
of Foreign Exchange branch within 30 days of any material change in the his shareholding or capital of the offshore entity, such
as changes in share capital, share transfers and long-term equity or debt investments and merger and split activities.
Regulation on Dividend Distributions
Our PRC subsidiaries
are wholly foreign-owned and joint venture enterprises under the PRC law. The principal regulations governing the distribution
of dividends paid by wholly foreign-owned enterprises include:
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Corporate Law (1993), as amended in 2005 and 2013;
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The Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000;
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The Wholly Foreign-Owned Enterprise Law Implementation Regulations (1990), as amended in 2001; and
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The Enterprise Income Tax Law (2007) and its Implementation Regulations (2007).
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Under these regulations,
wholly foreign-owned and joint venture enterprises in China may pay dividends only out of their accumulated profits, if any, as
determined in accordance with PRC accounting standards and regulations. In addition, an enterprise in China is required to set
aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative
total reserve funds reaches 50% of its registered capital. The board of directors of a wholly foreign-owned enterprise has the
discretion to allocate a portion of its after-tax profits to its employee welfare and bonus funds. These reserve funds, however,
may not be distributed as cash dividends.
On March 16, 2007,
the National People’s Congress enacted the Enterprise Income Tax Law, and on December 6, 2007, the State Council issued the
Implementation Regulations on the Enterprise Income Tax Law, both of which became effective on January 1, 2008. Under this law
and its implementation regulations, dividends payable by a foreign-invested enterprise in the PRC to its foreign investor who is
a non-resident enterprise will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation
has a tax treaty with the PRC that provides for a lower withholding tax rate.
M&A Rules and Regulation on Overseas Listings
On August 8, 2006,
six PRC regulatory agencies, the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration
for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission (“CSRC”)
and the SAFE, jointly adopted the Regulation on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A
Rules, which became effective on September 8, 2006. The M&A Rules purport, among other things, to require that offshore SPVs
that are controlled by PRC companies or individuals and that have been formed for overseas listing purposes through acquisitions
of PRC domestic interests held by such PRC companies or individuals, obtain the approval of the CSRC prior to publicly listing
their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying
documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings.
While the application
of the M&A Rules remains unclear, our PRC counsel have advised us that, based on their understanding of the current PRC laws
and regulations as well as the notice announced on September 21, 2006:
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the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings such as our initial public offering are subject to the CSRC approval procedures under the M&A Rules;
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despite the lack of any definitive rule or interpretation from CSRC, the main purpose of the M&A rule is for national security and national industrial policy and so far none of the Chinese companies that have completed their public listing in the U.S. have obtained such approval; and
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our Delaware company is not controlled by a Chinese citizen. Accordingly, although the purpose of Delaware incorporation is for overseas listing, the M&A rule should not apply to us.
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Our PRC counsel also
advises us, however, that there is still uncertainty as to how the M&A Rules will be interpreted and implemented. If the CSRC
or other PRC regulatory agencies, subsequently determine that CSRC approval was required for our initial public offering, we may
need to apply for remedial approval from the CSRC and we may be subject to penalties and administrative sanctions administered
by these regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our
operating privileges in the PRC, delay or restrict the repatriation of the proceeds from our initial public offering into the PRC,
or take other actions that could materially adversely affect our business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our common stock.
In addition, if the
CSRC later requires that we obtain its approval for our initial public offering, we may be unable to obtain a waiver of the CSRC
approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity
regarding the CSRC approval requirements could have a material adverse effect on the trading price of our common stock.
Restriction on Foreign Ownership
The Foreign Investment
Industrial Catalogue jointly issued by the Ministry of Commerce for the People’s Republic of China and the National Development
and Reform Commission in 2011 classified various industries/business into three different categories: (i) encouraged for foreign
investment; (ii) restricted to foreign investment; and (iii) prohibited from foreign investment. For any industry/business not
covered by any of these three categories, they will be deemed industries/business permitted to have foreign investment. Except
for those expressly provided restrictions, encouraged and permitted industries/business are usually 100% open to foreign investment
and ownership. With regard to those industries/business restricted to or prohibited from foreign investment, there is always a
limitation on foreign investment and ownership. The decoction business conducted by Ankang Longevity Group falls under the industry
categories that are prohibited from foreign investment and thus is subject to limitation on foreign investment and ownership. None
of the other business activities conducted by us fall under industry categories that are restricted to, or prohibited from foreign
investment.
Regulations on Offshore Parent Holding Companies’
Direct Investment in and Loans to Their PRC Subsidiaries
An offshore company
may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after investment. Such
equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China,
which include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual
Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing rules; the Tentative Provisions
on the Foreign Exchange Registration Administration of Foreign-Invested Enterprise; and the Notice on Certain Matters Relating
to the Change of Registered Capital of Foreign-Invested Enterprises.
Under the aforesaid
laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval
by the original approval authority of its establishment. In addition, the increase of registered capital and total investment amount
shall both be registered with the State Administration for Industry and Commerce (“SAIC”) and SAFE.
Shareholder loans
made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory purposes,
which debts are subject to a number of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations,
the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts
and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.
Under these regulations,
the shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore,
the total amount of foreign debts that can be incurred by such PRC subsidiaries, including any shareholder loans, shall not exceed
the difference between the total investment amount and the registered capital amount of the PRC subsidiaries, both of which are
subject to governmental approval.
Regulations on Trademarks
Trademarks are protected
by the PRC Trademark Law adopted in 1982, as subsequently amended, as well as the Implementation Regulations of the PRC Trademark
Law adopted by the State Council in 2002 and 2013. The Trademark Office under the SAIC handles trademark registrations. Trademarks
can be registered for a term of ten years and can be extended for another ten years if requested upon expiration of the first or
any renewed ten-year term. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark
registration. Where a trademark for which a registration application has been made is identical or similar to another trademark
which has already been registered or been subject to a preliminary examination and approval for use on the same type of or similar
commodities or services, the application for such trademark registration may be rejected. Any person applying for the registration
of a trademark may not prejudice the existing right first obtained by others, nor may any person register in advance a trademark
that has already been used by another party and has already gained a “sufficient degree of reputation” through such
other party’s use. Trademark license agreements must be filed with the Trademark Office or its regional offices.
Regulations on Patents
The PRC Patent Law
provides for patentable inventions, utility models and designs, which must meet three conditions: novelty, inventiveness and practical
applicability. The State Intellectual Property Office is responsible for examining and approving patent applications. A patent
is valid for a term of twenty years in the case of an invention and a term of ten years in the case of utility models and designs.
Presently the Company holds a patent in the People’s Republic of China for Luobuma fiber yarn preparation and an application
method (patent number: 201110429362.9), which patent is a critical patent used for our high-pressure steam degumming process project.
PRC Enterprise Income Tax Law and Individual Income Tax
Law
Under the Enterprise
Income Tax Law or EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. PRC resident enterprises
typically pay an enterprise income tax at the rate of 25%. An enterprise established outside of the PRC with its “de facto
management bodies” located within the PRC is considered a “resident enterprise,” meaning that it can be treated
in a manner similar to a PRC domestic enterprise for enterprise income tax purposes. The implementation rules of the EIT Law define
“de facto management body” as a managing body that in practice exercises “substantial and overall management
and control over the production and operations, personnel, accounting, and properties” of the enterprise.
The SAT Circular 82
issued by the SAT in April 2009 provides certain specific criteria for determining whether the “de facto management body”
of a PRC-controlled offshore incorporated enterprise is located in China. Pursuant to the SAT Circular 82, a PRC-controlled offshore
incorporated enterprise has its “de facto management body” in China only if all of the following conditions are met:
(a) the senior management and core management departments in charge of its daily operations function have their presence mainly
in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the
PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings
are located or kept in the PRC; and (d) more than half of the enterprise’s directors or senior management with voting rights
habitually reside in the PRC. The SAT Bulletin 45, in effect from September 2011, provides more guidance on the implementation
of the SAT Circular 82 and provides for procedures and administration details on determining resident status and administration
on post-determination matters. Although the SAT Circular 82 and the SAT Bulletin 45 only apply to offshore enterprises controlled
by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria
set forth there may reflect the SAT’s general position on how the “de facto management body” test should be applied
in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or
PRC enterprise groups or by PRC or foreign individuals.
Due to the lack of
applicable legal precedents, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a
foreign company controlled by individuals in the PRC. We may be classified as a PRC “resident enterprise” for PRC enterprise
income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders,
and would have a material adverse effect on our results of operations and the value of your investment.
PRC Value Added Tax
Pursuant to the Provisional
Regulation of China on Value Added Tax, all entities and individuals that are engaged in the businesses of sales of goods, provision
of repair and placement services and importation of goods into China are generally subject to a VAT at a rate of 17% (with the
exception of certain goods which are subject to a rate of 13%) of the gross sales proceeds received, less any VAT already paid
or borne by the taxpayer on the goods or services purchased by it and utilized in the production of goods or provisions of services
that have generated the gross sales proceeds.
PRC Business Tax
Companies in China
were generally subject to business tax and related surcharges by various local tax authorities at rates ranging from 3% to 20%
on revenue generated from providing services and revenue generated from the transfer of intangibles. Beginning on May 1, 2016,
value added tax replaced the existing business tax in China, and there is no longer business tax imposed in China.
Employment Laws
In accordance with
the PRC National Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees
in order to establish an employment relationship. All employers must compensate their employees equal to at least the local minimum
wage standards. All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules
and standards and provide employees with appropriate workplace safety training. In addition, employers in China are obliged to
pay contributions to the social insurance plan and the housing fund plan for employees.
We have not entered
into employment agreements with any of our executive officers. We have contributed to the basic and minimum social insurance plan.
While we believe we have made adequate provision of such outstanding amounts of contributions to such plans in our audited financial
statements, any failure to make sufficient payments to such plans would be in violation of applicable PRC laws and regulations
and, if we are found to be in violation of such laws and regulations, we could be required to make up the contributions for such
plans as well as to pay late fees and fines.
Regulations on Environmental Protection
According to the Prevention
and Control of Water Pollution Law, China adopted a licensing system for pollutant discharge. Companies directly or indirectly
responsible for discharge of industrial waste water or medical sewage to waters shall be required to obtain a pollutant discharge
license. All companies are prohibited from discharging wastewater and sewage to waters without or in violation of the terms of
the pollutant discharge license.
The Regulations on
the Administration of Construction Projects Environmental Protection governs construction projects and the impact such projects
will have on the environment. Pursuant to the Regulations on the Administration of Construction Projects Environmental Protection,
the governing body is responsible for supervising the implementation of a three tiered system that includes (i) reviewing and approving
a construction project, (ii) overseeing the construction project and (iii) to inspect the finished construction project and ensure
that all harmful pollutants are disposed of correctly. Manufacturing companies are required to apply for inspection with environment
protection authorities upon completion of a construction project.