Item 1. BUSINESS.
Overview
Through our PRC Operating
Entities, Joway Health Industries Group Inc. (the “Company” or “Joway Health”) is engaged in the manufacture,
distribution and sale of tourmaline-related healthcare products. We are incorporated in the state of Nevada. Our principal executive
offices are located at No. 19. Baowang Road, Baodi Economic Development Zone, Tianjin City, PRC 301800. Our website address
is www.jowayhealth.com.
Corporate History
Joway Health Industries Group, Inc.
Until October1, 2010,
we were a “shell company,” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
We were originally formed as a Texas corporation on March 21, 2003 to acquire most of the assets and certain liabilities of
and succeed to the business of G2 Companies, Inc., (formerly Hartland Investment, Inc.), as an independent recording company and
artist management company. The acquisition of G2 Companies, Inc. was consummated on April 1, 2003. On May 13, 2008, through
a registered offering, we sold 1,284,574 shares of our common stock raising an aggregate of $128,457, before costs of the Offering.
Our common stock began trading on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “GTVI”
on September 11, 2009. Prior to the Share Exchange Transaction, discussed below, we were a development stage music recording,
production and artist management company that had limited operations, primarily due to our inability to raise sufficient capital.
On September 28,
2010, Mr. Kepler, our former Chief Executive Officer and majority shareholder, sold to Crystal Globe Limited, a British Virgin
Islands company (“Crystal Globe”) 3,300,000 shares of common stock in the Company, which at that time represented 68.97%
of the issued and outstanding capital stock of the Company. In connection with the sale, Mr. Kepler resigned as our sole officer
and director and appointed Crystal Globe’s nominees, Mr. Jinghe Zhang, as our new President, Chief Executive Officer and
sole director and Mr. Yuan Huang as our new Chief Financial Officer, Secretary and Treasurer. As a result, on September 28,
2010, there was a change in control of the Company.
On October1, 2010,
as a result of a transaction with Dynamic Elite (the “Share Exchange”), Dynamic Elite became our wholly-owned subsidiary
and we ceased to be a shell company. Dynamic Elite is the holding company of all the equity of Tianjin Junhe Management Consulting
Co., Ltd. (“Junhe Consulting”).
Share Exchange Transaction
On October 1,
2010, we entered into a Share Exchange Agreement with Crystal Globe, the sole shareholder of Dynamic Elite International Limited,
pursuant to which Crystal Globe transferred all of its shares in Dynamic Elite to us in exchange for 15,215,426 shares of our common
stock. As a result, Dynamic Elite became our wholly-owned subsidiary and we ceased to be a shell company, and Crystal Globe held
a total of 18,515,426 shares (approximately 92.6%) of our issued and outstanding common stock.
The Share Exchange
was treated for accounting purposes as a reverse acquisition. Therefore, the Company’s financial statements after the Share
Exchange were those of Dynamic Elite and its subsidiaries and controlled companies on a consolidated basis, as if the Share Exchange
had been in effect retroactively for all periods presented.
Change of State of Incorporation; Name Change
In December 2010,
the Company changed its jurisdiction of incorporation from the State of Texas to the State of Nevada and changed its name to Joway
Health Industries Group, Inc. In connection with these changes, the Company adopted new Articles of Incorporation and Bylaws.
Dynamic Elite
Dynamic Elite was
founded on June 2, 2010 under the laws of the British Virgin Islands by Crystal Globe and Evan Liu, the sole shareholder of
Crystal Globe, at the request of Mr. Jinghe Zhang. Mr. Liu is a friend of Mr. Jinghe Zhang. On September 15, 2010, Dynamic
Elite established a wholly-owned subsidiary — Tianjin Junhe Management Consulting Co., Ltd. (“Junhe Consulting”),
as a wholly foreign-owned enterprise (WOFE) under the laws of the PRC for the purposes of acquiring Tianjin Joway Shengshi Group
Co., Ltd. and engaging in the manufacture, distribution and sale of tourmaline products in China. Under Article 6 of the Law of
the People’s Republic of China on Wholly Foreign-Owned Enterprises, adopted April 12, 1986 at the 4th Sess. of the 6th
National People’s Congress and as amended on October 31, 2000 (“PRC WOFE Law”) and Article 7 of the Detailed
Rules for the Implementation, any person or entity that intends to establish an enterprise in the PRC with foreign capital is required
to submit an application for examination and approval to the appropriate department under the State Council. On September 9,
2010, the local Tianjin City government issued a certificate of approval approving the foreign ownership of Junhe Consulting by
Dynamic Elite. Mr. Jinghe Zhang was appointed as the Executive Director of Junhe Consulting.
PRC Operating Entities
All of our business
operations are conducted through our PRC Operating Entities. The chart below sets forth our corporate structure.
Joway Shengshi
On May 17, 2007,
Mr. Jinghe Zhang, Mr. Lijun Si and Mr. Baogang Song founded Tianjin Joway Textile Co., Ltd. as a limited liability company under
the PRC law. On November 24, 2009, the company changed its name to Tianjin Joway Shengshi Group Co., Ltd. (“Joway Shengshi”).
The registered capital of Joway Shengshi is RMB 50,000,000 and its term of operation will expire on May 16, 2022. Mr. Jinghe
Zhang is the Executive Director and General Manager of Joway Shengshi. On July 1, 2010, Mr. Lijun Si transferred 4% of the
equity interest in Joway Shengshi to Mr. Jinghe Zhang. As a result, Mr. Zhang owns 99% of the equity interest in Joway Shengshi
andMr. Baogang Song owns the remaining 1% of the equity interest of Joway Shengshi. As of December 31, 2017 and 2016, Joway Shengshi
was the sole shareholder of Joway Technology, Joway Decoration, and Shengtang Trading.
Joway Technology
Joway Technology was
incorporated under PRC law on March 28, 2007, with a registered capital of RMB 1,100,000. Its term of operation expires on
March 27, 2017. It was formed to engage in intelligent engineering design and construction, development and sales of electronics,
water filters, and other similar products. Prior to July 25, 2010, Joway Shengshi held 90.91% of Joway Technology. On July 25,
2010 Joway Shengshi acquired the remaining 9.09% of Joway Technology from Mr. Jingyun Chen for RMB 100,000 in cash. As a result
of the acquisition, Joway Shengshi became the sole shareholder of Joway Technology.
Joway Decoration
Joway Decoration was
cofounded by Joway Shengshi and Mr. Jingyun Chen under PRC law on April 22, 2009, with a registered capital of RMB 2,000,000.
Its term of operation expires on April 21, 2019. It was formed to engage in the business of intelligent electric heating project
design and construction, development and sales of electronics technology and water filters, and the manufacture and sales of wood
products. Prior to July 9, 2010, Joway Shengshi owned 90% of Joway Decoration. On July 9, 2010, Joway Shengshi entered
into a share acquisition agreement with Mr. Jingyun Chen to acquire the remaining 10% of the shares of Joway Decoration for RMB
200,000 in cash. As a result of the acquisition, Joway Shengshi became the sole shareholder of Joway Decoration.
Shengtang Trading
Shengtang Trading
was cofoundedby Joway Shengshi and Mr. Jingyun Chen under PRC law on September 18, 2009, with a registered capital of RMB
2,000,000. Its term of operation expires on September 17, 2029. It was formed to engage in the business of importing and exporting
merchandise and technology; knitwear, biochemistry (excluding toxic chemicals and drugs), and the wholesale and retail sale of
hardware. Prior to July 28, 2010, Joway Shengshi owned 95% of Shengtang Trading. On July 28, 2010, Joway Shengshi entered
into a share acquisition agreement with Mr. Aiying Wang to acquire the remaining 5% of the shares of Shengtang Trading for RMB
100,000 in cash. As a result of the acquisition, Joway Shengshi became the sole shareholder of Shengtang Trading.
VIE Agreements
On September 16,
2010, prior to the Share Exchange, Junhe Consulting, Dynamic Elite’s wholly owned subsidiary had entered into a series of
control agreements with Joway Shengshi and all of the owners of Joway Shengshi, which agreements allow Junhe Consulting to control
Joway Shengshi. Through our ownership of Dynamic Elite, Dynamic Elite’s ownership of Junhe Consulting and Junhe Consulting’s
agreements with Joway Shengshi, we believe that Joway Health controls Joway Shengshi and therefore, we consolidate the results
of operations of Joway Shengshi and its subsidiaries with ours as variable interest entities.
In connection with
the Share Exchange and as consideration for entering into the VIE Agreements, Mr. Jinghe Zhang and Mr. Baogang Song, the shareholders
of Joway Shengshi, entered into a Call Option Agreement with the sole shareholder of Crystal Globe, pursuant to which the shareholders
of Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an aggregate price equal to $20,000 over
the next three years. The Call Option vested as to 34% of the shares of Crystal Globe on April 2, 2011, and vests as to 33%
on April 2 of 2012 and 2013. As a result, the shareholders of Joway Shengshi became the indirect beneficial owners of the
shares of the Company held by Crystal Globe.
Under PRC law the
acquisition of Joway Shengshi by Junhe Consulting must be structured as a cash transaction with the purchase price based on the
appraised value of the equity interest or assets to be sold. Neither Junhe Consulting nor Dynamic Elite had sufficient cash to
pay the appraised value of the equity interest or assets of Joway Shengshi. Alternatively, the shareholders of Joway Shengshi entered
into a series of contractual agreements (the “VIE Agreements”) which enabled Dynamic Elite to gain control of Joway
Shengshi and be entitled to receive 100% of the profits of Joway Shengshi and is obligated for 100% of the losses of Joway Shengshi.
As a result of the VIE agreements, we are able to consolidate Joway Shengshi’s financial statements, including the results
of operations, assets and liabilities of Joway Shengshi and its subsidiaries without triggering the regulatory requirements of
PRC law. Under PRC law the VIE Agreements are considered commercial transactions among legal entities and individuals, and do not
trigger the PRC requirements that apply to acquisitions, although the pledge by Joway Shengshi’s equity holders of all their
equity in Joway Shengshi to Junhe Consulting pursuant to the Equity Pledge Agreement (the “Equity Pledge”) must be
registered with the appropriate governmental agency. The Equity Pledge was registered with local administration department for
industry and commerce pursuant to the Section 1 of Article 226 of PRC Property Law passed by National People’s Congress on
March 16, 2007.
Through Junhe Consulting,
we effectively and substantially control Joway Shengshi and its three wholly owned subsidiaries Joway Technology, Shengtang Trading
and Joway Decoration.
The VIE Agreements include:
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a
Consulting Services Agreement through which Junhe Consulting has the right to advise, consult, manage and operate Joway Shengshi
and collect and own all of the net profits or losses of Joway Shengshi;
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an
Operating Agreement through which Junhe Consulting has the right to recommend director candidates and appoint the senior executives
of Joway Shengshi, approve any transactions that may materially affect the assets, liabilities, rights or operations of Joway
Shengshi, and guarantee the contractual performance by Joway Shengshi of any agreements with third parties, in exchange for a
pledge by Joway Shengshi of its accounts receivable and assets;
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a
Proxy Agreement under which the two shareholders of Joway Shengshi have vested their collective voting control over Joway Shengshi
to Junhe Consulting and may only transfer their respective equity interests in Joway Shengshi to Junhe Consulting or its designee(s);
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an
Option Agreement under which the shareholders of Joway Shengshi have granted to Junhe Consulting the irrevocable right and option
to acquire all of their equity interests in Joway Shengshi with a consideration equal to the capital paid in by the shareholders
in the amount of RMB 50 million (approximately USD $7.52 million). As executive director of Junhe Consulting, Mr. Jinghe
Zhang has the power to exercise the option in his sole discretion; and
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an
Equity Pledge Agreement under which the owners of Joway Shengshi have pledged all of their rights, titles and interests in Joway
Shengshi to Junhe Consulting to guarantee Joway Shengshi’s performance of its obligations under the Consulting Services
Agreement.
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Terms of the VIE Agreements
Consulting Agreement
Under the Consulting
Agreement, Joway Shengshi retained Junhe Consulting to (i) provide general advice and assistance relating to the management
and operation of Joway Shengshi’s business; (ii) provide general advice and assistance with respect to employment and
staffing issues, including recruiting and training of management personnel, administrative personnel and other staff, establishing
an efficient payroll management system, and relocation assistance; (iii) provide business development advice and assistance;
and (iv) such other advice and assistance as may be agreed upon by the parties. In return, Joway Shengshi agreed to pay Junhe
Consulting quarterly a consulting fee in an amount equal to all of Joway Shengshi’s net income for that quarter within fifteen
(15) days after receipt of Joway Shengshi’s quarterly financial statements. Joway Shengshi shall cause the owners of
Joway Shengshi to pledge their equity interests in Joway Shengshi to Junhe Consulting to secure the payment of the foregoing consulting
fee.
Joway Shengshi is
subject to a number of covenants typical for this type of transaction, including the obligation to provide monthly, quarterly and
annual reports, and other information requested by Junhe Consulting. In addition, Joway Shengshi is subject to a number of negative
covenants, including the agreement that it will not (i) issue, purchase or redeem any equity or debt, or equity or debt securities;
(ii) create, incur, assume or suffer to exist any liens upon any of its property or assets (except certain enumerated liens);
(iii) wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or sale of all
or substantially all of its assets; (iv) declare or pay any dividends; (v) incur, assume or suffer to exist any indebtedness,
(other than certain enumerated exceptions); (vi) lend money or credit or make advances to any Person, or purchase or acquire
any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any other Person, except
receivables in the ordinary course of business; (vii) enter into any transaction or series of related transactions, whether
or not in the ordinary course of business, with any of its affiliates or related parties, other than on terms and conditions substantially
as favorable to Joway Shengshi as would be obtainable in a comparable arm’s-length transaction; (viii) make any expenditure
for fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which are capitalized in accordance
with generally accepted accounting principles in the PRC and capitalized lease obligations) during any quarterly period which exceeds
the aggregate the amount contained in the budget; (ix) amend or modify or change its Articles of Association or business license,
or any agreement entered into by it, with respect to its capital stock, or enter into any new agreement with respect to its capital
stock; or (x) engage (directly or indirectly) in any business other than those types of business prescribed within the business
scope of its business license.
The Consulting Agreement
may be terminated by Junhe Consulting for any reason at any time. In addition, the Consulting Agreement may be terminated by Junhe
Consulting by written notice in the event of a material breach by Joway Shengshi which, in the case of breach of a non-financial
obligation, has not been remedied within fourteen (14) days following the receipt of such written notice. Either party may
terminate the Consulting Agreement by written notice to the other party if (i) the other party becomes bankrupt or insolvent
or is the subject of proceedings or arrangements for liquidation or dissolution or ceases to carry on business or becomes unable
to pay its debts as they become due; (ii) if the operations of Junhe Consulting are terminated; or (iii) if circumstances
arise which materially and adversely affect the performance or the objectives of the Consulting Agreement.
Operating Agreement
Under the Operating
Agreement, Junhe Consulting agreed to guarantee Joway Shengshi’s performance of contracts, agreements or transactions with
third parties in consideration for the pledge by Joway Shengshi to Junhe Consulting of all of Joway Shengshi’s assets. In
addition, Joway Shengshi and its shareholders agreed that Joway Shengshi would not, without the prior written consent of Junhe
Consulting, enter into any transactions which may materially affect the assets, obligations, rights or the operations of Joway
Shengshi (excluding transactions entered into in the ordinary course of business and the lien obtained by relevant counter parties
due to such agreements), including transactions involving (i) the borrowing of money or assumption of any debt; (ii) the
sale or purchase from any third party any asset or right, including, but not limited to, any intellectual property rights; (iii) the
provision of any guarantees to any third parties using its assets or intellectual property rights; or (iv) the assignment
of any business agreements to any third party. Joway Shengshi and its shareholders also agreed to appoint to Joway Shengshi’s
board of directors, and Joway Shengshi’s General Manager, Chief Financial Officer, and other senior officers those persons
recommended or selected by Junhe Consulting.
Voting Rights Proxy Agreement
Under the Proxy Agreement,
the Shareholders irrevocably granted to Junhe Consulting, for the maximum period of time permitted by law, all of their voting
rights as shareholders of Joway Shengshi. In addition, the Shareholders agreed not to transfer their equity interest in Joway Shengshi
to any third party (other than Junhe Consulting or a designee of Junhe Consulting). The Proxy Agreement may not be terminated without
the unanimous consent of all Parties, except Junhe Consulting, which may terminate the Proxy Agreement with or without cause on
thirty (30) days prior written notice.
Option Agreement
Under the Option Agreement,
the Shareholders irrevocably granted to Junhe Consulting or its designee an exclusive option to purchase at any time, to the extent
permitted under PRC Law, all or a portion of the Shareholders’ Equity Interest in Joway Shengshi for a price equal to the
capital paid in by the Shareholders on a pro rata basis in accordance with the percentage of the Shareholders’ Equity Interest
acquired, subject to applicable PRC laws and regulations.
Equity Pledge Agreement
Under the Equity Pledge
Agreement, the Shareholders pledged all of their right, title and interest in their equity interests in Joway Shengshi to Junhe
Consulting to guarantee Joway Shengshi’s performance of its obligations under the Consulting Services Agreement. The pledge
expires two (2) years after the satisfaction by Joway Shengshi of all of its obligations under the Consulting Services Agreement.
During the term of the Equity Pledge Agreement, Junhe Consulting is entitled to vote, control, sell, or dispose of the Pledged
Collateral in the event the Company does not perform its obligations under the Consulting Services Agreement. In addition, Junhe
Consulting is entitled to collect any and all dividends declared or paid in connection with the Pledged Collateral.
Through these contractual
arrangements, we have the ability to substantially influence the daily operations and financial affairs of Joway Shengshi and to
receive, through our subsidiaries, all of its profits. As a result, we are considered the primary beneficiary of Joway Shengshi
and its operations, and Joway Shengshi and its subsidiaries are deemed to be our variable interest entities. Accordingly, we are
able to consolidate into our financial statements the results, assets and liabilities of Joway Shengshi and its subsidiaries.
Call Option Agreement
As part of the reorganization
of Joway Shengshi, Mr. Liu and the shareholders of Joway Shengshi entered into a Call Option Agreement, pursuant to which
the shareholders of Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an aggregate price equal
of $20,000 over the next three years. In addition, the Option Agreement also provides that Mr. Liu shall not dispose any of
the shares of Crystal Globe without consent of Mr. Jinghe Zhang and Mr. Baogang Song. Upon the consummation of the Share Exchange
Transaction, Crystal Globe became the principal shareholder of Joway Health (f/k/a G2 Ventures, Inc.) and Mr. Zhang and Mr. Song
became indirect beneficial owners of the shares in Joway Health held by Crystal Globe pursuant to this Call Option Agreement.
On November 13, 2016,
Mr. Jinghe Zhang exercised his Call Option as to 99% of the shares of Crystal Globe and Mr. Baogang Song exercised his Call Option
as to 1% of the shares of Crystal Globe. As a result of exercising his Call Option, Mr. Zhang became the controlling shareholder
of Crystal Globe and in turn, the controlling shareholder of the Company. On November 20, 2016, Mr. Song transferred his1% of the
shares of Crystal Globe to Mr. Zhang. Mr. Zhang now controls 17,408,000 shares, or 86.81%, of the issued and outstanding shares
of the Company’s common stock.
Business Description
We are, through our
PRC Operating Entities, engaged in the manufacture and sales of tourmaline-related healthcare products. As of December 31, 2017,
we had 89 employees. Our principal executive offices are located at No. 19 Baowang Road, Baodi Economic Development Zone,
Tianjin, PRC 301800.
Introduction to Tourmaline
Tourmaline is a crystal
silicate mineral compounded with elements such as aluminum, iron, magnesium, sodium, lithium, or potassium. Tourmaline is classified
as a semi-precious stone and the gem comes in a wide variety of colors. (Source: http://en.wikipedia.org/wiki/Tourmaline)
Tourmaline has the
ability to become its own source of electric charge, as it is both pyroelectric, as well as piezoelectric. When it is put under
pressure or when it is dramatically heated or cooled, tourmaline creates an electrical charge capable of emitting far infrared
rays (“FIR”) and negative ions. (Source: http://www.globalhealingcenter.com/tourmaline.html)
FIRs are invisible
waves of energy capable of penetrating deep into the human body. Negative ions are atoms that have a negative electric charge. FIRs
and negative ions are perceived to have certain health benefits. (Source: http://www.globalhealingcenter.com/tourmaline.html)
Because it is a permanent
source of FIRs and negative ions, tourmaline is perceived to have certain health benefits (Source: Niwa Institute for Immunology,
Japan. Int J. Biometeorol 1993 Sep; 37(3) 133-8). In view of its perceived health benefits, tourmaline has been used to manufacture
a wide range of healthcare products, including apparel, bedding, water purifiers, sauna rooms, and personal care products.
While tourmaline has
perceived health benefits, the actual benefits of tourmaline to human health are unknown. The full efficacy of tourmaline to human
health requires further significant clinical study. We are not aware of any formal clinical studies which have validated the health
benefits of tourmaline.
We purchase liquid
tourmaline from domestic Chinese companies which, in turn, import it from South Korea. Liquid tourmaline is readily available and
its price has remained relatively stable. We have not experienced any shortage in tourmaline but as a precaution, we closely monitor
its price and have several back-up suppliers.
China’s Tourmaline Health-Related Products Market
The use of tourmaline
in health-related products in China began in 2001. Although more and more companies are producing tourmaline health-related products
every year, the market for these products in China is still in its infancy and highly fragmented. (Source: 2010-2012 China’s tourmaline
market and investment prospects research report, Institute of China Uniway Economics, August, 2010).
Currently, there are
numerous kinds of tourmaline health-related products on the market, including tourmaline clothes, tourmaline mattresses, tourmaline
water machines, etc. In China, users of tourmaline health-related products are typically middle-aged and elderly people and
demand for tourmaline health-related products is still relatively low compared to the size of the Chinese population.
In 2015, New Material
is listed in the state development strategies in the State Council Report by Premier Li Keqiang. Tourmaline is defined as New Material
and Tourmaline Processing Technology is designated as New Material Application Technology.
We believe that the
main challenge for the tourmaline health-related product companies is market development rather than competition. With rising living
standards, increasing disposable income, higher health consciousness and the greater awareness of the health benefits of tourmaline,
we believe that the tourmaline health products market will grow rapidly in the next few years.
Manufacturing Process
We have two manufacturing
processes.
One manufacturing
process consists of applying or infusing raw textiles with liquid or granular tourmaline and then producing products from these
tourmaline-infused textiles. This process is used to produce Male and Female Underpants, Tourmaline Scarves and Tourmaline Pillowcases.
Our second manufacturing
process consists of applying or infusing already finished products with liquid or granular tourmaline. We purchase finished products,
such as clothing, bedding, and mattresses and then, using one or more of the techniques described below, coat and/or infuse the
products with liquid or granular tourmaline.
We coat or infuse
liquid or granular tourmaline into our products using one or more of the following methods:
The Spray Method
We use special high-pressure
nozzles to spray liquid tourmaline onto the surface of the product. Through this process, the tourmaline particles attach onto
the surface of the product. We then use a high-temperature ironing machine to embed the tourmaline particles into the fibers of
the product. This method is used in the manufacture of large pieces of textile products, such as mattresses.
The Dip Method
We completely immerse
fabrics into liquid tourmaline and then stir the fabrics in the liquid tourmaline to ensure the tourmaline particles attach to
the surface of the fabrics. Finally, we embed the tourmaline particles into the fibers by applying heat with our special high-temperature
ironing machine. This method is used in the manufacture of smaller products, such as underwear, scarves, and shirts.
The Filling Method
We fill the products
with tourmaline particles. This method is used to make activated water machines and other water treatment products.
The three methods
mentioned above are keys to our manufacturing process. We protect our manufacturing methods via confidentiality agreements entered
into between us and our employees. Pursuant to the confidentiality agreement, the employees are prohibited from unlawfully revealing
and using our confidential technology during his/her term of employment and ten years after the termination of employment.
Our Products and Services
We primarily manufacture the following
three series of tourmaline-related healthcare products:
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Healthcare Knit Goods Series
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For the fiscal years
ended December 31, 2017 and 2016, our healthcare knit goods series of products accounted for approximately 22.4% and 20.8% of our
annual sales revenue, respectively. This series of products is comprised of tourmaline treated mattresses, bed linen, underwear,
and shirts. We use either the spray or dip method to embed tourmaline particles into the fabric of this series of products.
Set forth below is a list of our major
healthcare knit goods products, the trademarks or marks under which they are marketed and the manufacturing method employed:
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Daily Healthcare and Personal Care Series
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For the fiscal years
ended December 31, 2017 and 2016, our daily healthcare and personal care series of products accounted for approximately 27.8% and
28.0% of our annual sales revenue, respectively. This series is comprised of tourmaline-treated waist protectors, knee protectors,
scarves, and shampoo and soap products. We use all three production methods to embed tourmaline particles into these products.
We believe these tourmaline-treated daily healthcare products and personal care products produce FIRs and negative ions which have
perceived health benefits. This series is also comprised of four edible products without tourmaline treatment, including
Xin-Nao-Ling
Fish Oil Soft Gel
and
Zhi-Li-Bao Fish Oil Soft Gel
, which are subject to CFDA regulation.
Set forth below is a list of our major
products in the daily healthcare and personal care series, the trademarks or marks under which they are marketed and the manufacturing
method employed:
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Wellness House and Activated Water Machine
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For the years ended
December 31, 2017 and 2016, our wellness house and activated water machine series of products accounted for approximately 49.9%
and 51.3% of our annual sales revenue, respectively. This series of products is comprised mainly of tourmaline wellness houses,
foot sauna bucket, tourmaline activated water machines and drinking mugs. Our tourmaline wellness house resembles a regular sauna
room in which users experience heat sessions. However, the inner layer of our wellness house is coated with tourmaline, which emits
FIRs and negative ions when heated. Tourmaline is perceived to have certain health benefits. We supply two types of wellness houses:
one for family use, which is designed to be installed in the corner of a room and can contain two to three people; the other is
customized and constructed on site for commercial bathrooms or spas according to their specifications. Our tourmaline activated
water machines and drinking mugs are infused tourmaline particles into filters. Our Foot Sauna Bucket is filled with tourmaline
particles on the bottom.
Set forth below is a list of our major
products in the wellness house and activated water machine series, the trademarks or marks under which they are marketed and the
manufacturing method employed:
No.
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Products
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Trademark/Mark
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Manufacturing Method
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1
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Wellness House for family use
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Spray Method
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2
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Tourmaline Water Mug
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Filling Method
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3
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Tap Water Purifier
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Filling Method
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4
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Foot Sauna Bucket
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Filling Method
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Return Policy
It is the Company’s
normal commercial practice to only allow the return of goods that do not conform to the customer’s order due to some occasional
error in packaging or shipment. The return should be requested within seven days of purchase. Customers may also request a free
repair of defective products within 15 days of purchase. For products purchased more than 15 days previously, we charge a
service fee of 110% of the cost of repaired or replaced parts. During the year of 2017 and 2016, we did not have sales return occurred.
Services: Wellness House Maintenance
Our wellness house
products generally carry a one-year warranty. When the warranty expires, we provide our customers the option to engage us to service
and maintain their wellness houses for a fee equal to 200% of the cost of the repaired or replaced parts.
There has been very
little demand for our wellness house maintenance services in 2017 and 2016.
Manufacturing Facilities
Our manufacturing
facilities are located in Baodi District, Tianjin City, PRC, and occupy an area of approximately 2,500 square meters. We have nineteen
employees engaged in manufacturing as of December 31, 2017. We had our own design team comprising seven designers who are responsible
for designing new styles for our products every quarter. They are also responsible for product packaging design.
Customers and Suppliers
Customers
Below is a list of our top ten customers
for the years 2017 and 2016, respectively.
Top Ten Customers in
2017
No.
|
|
Name
|
|
Amount
(RMB)
|
|
|
Amount
(US$)
|
|
|
Products
Sold
|
|
Percentage
of Sales
|
|
1
|
|
Tianjin Baicheng Yitong
Technology Co., Ltd.
|
|
¥
|
1,836,850
|
|
|
$
|
271,811
|
|
|
Tourmaline Bed Linens, Latex Pillow,
Golden Mattress, etc.
|
|
|
6.4
|
%
|
2
|
|
Xie Weijing Store
|
|
|
1,279,606
|
|
|
|
189,352
|
|
|
Foot Sauna Bucket, Tap Water Purifier,
Golden Mattress, etc.
|
|
|
4.4
|
%
|
3
|
|
Wen Zhanhe Store
|
|
|
1,241,906
|
|
|
|
183,773
|
|
|
Tourmaline Scarf, Tourmaline Bed Linens,
Wellness House, etc.
|
|
|
4.3
|
%
|
4
|
|
Xu Xiangyun Store
|
|
|
1,228,409
|
|
|
|
181,776
|
|
|
Foot Sauna Bucket, Wellness House,
Tourmaline Scarf, etc.
|
|
|
4.2
|
%
|
5
|
|
Zhang Xiangyue Store
|
|
|
924,163
|
|
|
|
136,754
|
|
|
Wellness House, Foot Sauna Bucket,
Golden Mattress, etc.
|
|
|
3.2
|
%
|
6
|
|
Zhu Cuiliu Store
|
|
|
863,829
|
|
|
|
127,826
|
|
|
Foot Sauna Bucket, Tap Water Purifier,
Golden Mattress, etc.
|
|
|
3.0
|
%
|
7
|
|
Li Xiaojun Store
|
|
|
807,492
|
|
|
|
119,490
|
|
|
Foot Sauna Bucket, Wellness House,
Tap Water Purifier, etc.
|
|
|
2.8
|
%
|
8
|
|
Zhang Aiyun Store
|
|
|
791,742
|
|
|
|
117,159
|
|
|
Foot Sauna Bucket, Tap Water Purifier,
Golden Mattress, etc.
|
|
|
2.7
|
%
|
9
|
|
Wang Jun Store
|
|
|
692,695
|
|
|
|
102,503
|
|
|
Tourmaline Bed Linens, Foot Sauna Bucket,
Tap Water Purifier, etc.
|
|
|
2.4
|
%
|
10
|
|
Xia Caoyong Store
|
|
|
633,904
|
|
|
|
93,803
|
|
|
Foot Sauna Bucket, Tap Water Purifier,
Golden Mattress, etc.
|
|
|
2.2
|
%
|
|
|
|
|
¥
|
10,300,596
|
|
|
$
|
1,524,247
|
|
|
|
|
|
35.6
|
%
|
Top Ten Customers in
2016
No.
|
|
Name
|
|
Amount
(RMB)
|
|
|
Amount
(US$)
|
|
|
Products
Sold
|
|
Percentage
of Sales
|
|
1
|
|
Tianjin Baicheng Yitong
Technology Co., Ltd.
|
|
¥
|
1,316,170
|
|
|
$
|
198,096
|
|
|
Tourmaline Mattress, Tap Water Purifier,
Foot Sauna Bucket, etc.
|
|
|
4.6
|
%
|
2
|
|
Xu Xiangyun Store
|
|
|
1,110,061
|
|
|
|
167,075
|
|
|
Tourmaline Mattress, Foot Sauna Bucket,
Wellness House, etc.
|
|
|
3.9
|
%
|
3
|
|
Zhang Xiangyue Store
|
|
|
1,026,109
|
|
|
|
154,439
|
|
|
Foot Sauna Bucket, Tap Water Purifier,
Golden Mattress, etc.
|
|
|
3.6
|
%
|
4
|
|
Liu Jinmiao Store
|
|
|
733,400
|
|
|
|
110,384
|
|
|
Foot Sauna Bucket, Tap Water Purifier,
Latex Mattress, etc.
|
|
|
2.6
|
%
|
5
|
|
Wang Xiaojun Store
|
|
|
627,295
|
|
|
|
94,414
|
|
|
Tourmaline Latex Pillow, Tourmaline Scarves,
Tourmaline Underwear, etc.
|
|
|
2.2
|
%
|
6
|
|
Guo Laijin Store
|
|
|
559,047
|
|
|
|
84,142
|
|
|
Tap Water Purifier, Foot Sauna Bucket,
Tourmaline Bed Linens, etc.
|
|
|
2.0
|
%
|
7
|
|
Miao Li Store
|
|
|
518,811
|
|
|
|
78,086
|
|
|
Golden Mattress, Tap Water Purifier,
Tourmaline Waist Protector, etc.
|
|
|
1.8
|
%
|
8
|
|
Cao Xueqin Store
|
|
|
518,075
|
|
|
|
77,975
|
|
|
Foot Sauna Bucket, Tap Water Purifier,
Wellness House, etc.
|
|
|
1.8
|
%
|
9
|
|
Wang Jun Store
|
|
|
495,672
|
|
|
|
74,603
|
|
|
Foot Sauna Bucket, Tourmaline Bed Linens,
Tourmaline Mattress, etc.
|
|
|
1.7
|
%
|
10
|
|
Xie Weijing Store
|
|
|
489,590
|
|
|
|
73,688
|
|
|
Tourmaline Mattress, Foot Sauna Bucket,
Golden Mattress, etc.
|
|
|
1.7
|
%
|
|
|
|
|
¥
|
7,394,230
|
|
|
$
|
1,112,902
|
|
|
|
|
|
25.9
|
%
|
Our main customers are franchisees that
are authorized to sell our products exclusively. None of our customers accounted for more than 10% of our annual sales revenue
in 2017 and 2016.
Suppliers
Below is a list of our top ten suppliers
in 2017 and 2016, respectively.
Top Ten Suppliers in
2017
No.
|
|
Name
|
|
Amount
(RMB)
|
|
|
Amount
(US$)
|
|
|
Product Purchased
|
|
Percentage
of Purchase
|
|
1
|
|
Guangzhou Sanjian Wood
Products Co., Ltd.
|
|
¥
|
1,326,600
|
|
|
$
|
196,306
|
|
|
Foot Sauna Bucket
|
|
|
12.6
|
%
|
2
|
|
Healthland sauna
equipment Co., Ltd.
|
|
|
645,000
|
|
|
|
95,445
|
|
|
Wellness House for family use
|
|
|
6.1
|
%
|
3
|
|
Jiangsu Meimiao Environmental Protection
Technology Co., Ltd.
|
|
|
539,660
|
|
|
|
79,857
|
|
|
Tap Water Purifier and Materials
|
|
|
5.1
|
%
|
4
|
|
Erlian Haote Yuanheng Wood
Industry Co., Ltd.
|
|
|
464,173
|
|
|
|
68,687
|
|
|
Wellness House Materials
|
|
|
4.4
|
%
|
5
|
|
Shijiazhuang Huajie Wood
Industry Co., Ltd.
|
|
|
455,250
|
|
|
|
67,366
|
|
|
Wellness House Materials
|
|
|
4.3
|
%
|
6
|
|
Tianjin Zhengxinglong Packing
Products Co., Ltd.
|
|
|
412,654
|
|
|
|
61,063
|
|
|
Package
|
|
|
3.9
|
%
|
7
|
|
Penglai Huakang Healthcare
Product Co., Ltd.
|
|
|
335,000
|
|
|
|
49,572
|
|
|
Xin-Nao-Ling Fish Oil Soft Gel and Zhi-Li-Bao Fish Oil Soft Gel
|
|
|
3.2
|
%
|
8
|
|
Haimen Baibaoli Bedding
textile factory
|
|
|
316,424
|
|
|
|
46,823
|
|
|
Tourmaline Bed Linens
|
|
|
3.0
|
%
|
9
|
|
Hangzhou Siluhua Home
textile Co., Ltd.
|
|
|
265,855
|
|
|
|
39,340
|
|
|
Mattress Products and Other Bedding Articles
|
|
|
2.5
|
%
|
10
|
|
Lianyungang Dongguang
Floor Heating Co., Ltd.
|
|
|
265,590
|
|
|
|
39,301
|
|
|
Wellness House Materials
|
|
|
2.5
|
%
|
|
|
|
|
¥
|
5,026,206
|
|
|
$
|
743,760
|
|
|
|
|
|
47.6
|
%
|
Top Ten Suppliers in
2016
No.
|
|
Name
|
|
Amount
(RMB)
|
|
|
Amount
(US$)
|
|
|
Product
Purchased
|
|
Percentage
of Purchase
|
|
1
|
|
Jiangsu Meimiao Environmental Protection Technology Co., Ltd.
|
|
¥
|
802,876
|
|
|
$
|
120,840
|
|
|
Tap Water Purifier and Materials
|
|
|
8.8
|
%
|
2
|
|
Tianjin Zhengxinglong Packing
Products Co., Ltd.
|
|
|
766,780
|
|
|
|
115,408
|
|
|
Package
|
|
|
8.4
|
%
|
3
|
|
Beijing Quanfu Wood
Products Co., Ltd.
|
|
|
753,600
|
|
|
|
113,424
|
|
|
Wellness House Materials
|
|
|
8.2
|
%
|
4
|
|
Shenzhen Josen Industry Co., Ltd
|
|
|
709,676
|
|
|
|
106,813
|
|
|
Wellness House for family use
|
|
|
7.8
|
%
|
5
|
|
Shenzhen Ainuowei
Electronics Co., Ltd.
|
|
|
626,564
|
|
|
|
94,304
|
|
|
Foot Sauna Bucket
|
|
|
6.8
|
%
|
6
|
|
Lianyungang Dongguang
Floor Heating Co., Ltd.
|
|
|
571,428
|
|
|
|
86,005
|
|
|
Wellness House Materials
|
|
|
6.2
|
%
|
7
|
|
Hangzhou Siluhua Home
textile Co., Ltd.
|
|
|
467,199
|
|
|
|
70,318
|
|
|
Mattress Products and Other Bedding Articles
|
|
|
5.1
|
%
|
8
|
|
Tianjin 51 Health Network
Technology Co., Ltd.
|
|
|
419,400
|
|
|
|
63,124
|
|
|
Body Composition Analyzer
|
|
|
4.6
|
%
|
9
|
|
Penglai Huakang Healthcare
Product Co., Ltd.
|
|
|
380,573
|
|
|
|
57,280
|
|
|
Xin-Nao-Ling Fish Oil Soft Gel and Zhi-Li-Bao Fish Oil Soft Gel
|
|
|
4.2
|
%
|
10
|
|
Suzhou Jinmao Daily
Chemicals Co., Ltd.
|
|
|
330,840
|
|
|
|
49,795
|
|
|
Toothpaste
|
|
|
3.6
|
%
|
|
|
|
|
¥
|
5,828,936
|
|
|
$
|
877,311
|
|
|
|
|
|
63.7
|
%
|
In 2017, we had one supplier accounted for
12.6% of our annual raw materials purchases and in 2016 we do not have any supplier accounted for more than 10% of our annual raw
materials purchases. We do not have long term contracts with any of our suppliers since the raw materials we use are readily available
on the market at generally stable prices.
Franchise Stores
Approximately 72% of our annual sales in
both 2017 and 2016, were made to our franchisees.
As of December 31, 2017, there were approximately
140 franchise stores across the PRC that were authorized to sell our products exclusively. Set forth below is a geographical breakdown
of the franchise stores:
Region
|
|
Number of
Franchise Stores
|
|
Northeastern China (Liaoning, Jilin, Heilongjiang)
|
|
|
12
|
|
Northern China (Beijing, Tianjin, Hebei, Shanxi, Inner Mongolia)
|
|
|
70
|
|
Eastern China (Shanghai, Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi)
|
|
|
8
|
|
Southern China (Guangdong, Hainan, Guangxi)
|
|
|
12
|
|
Central China (Henan, Hubei, Hunan, Jiangxi)
|
|
|
28
|
|
Southwestern China (Chongqing, Sichuan, Guizhou, Yunnan, Tibet)
|
|
|
10
|
|
|
|
|
|
|
Total
|
|
|
140
|
|
We use multiple criteria
to select our franchisees, including financial condition, sales network, sales personnel, and facilities. Generally we approve
applicants that meet a minimum working capital requirement of RMB 40,000 and have the requisite business facilities and resources.
We typically enter
into a standard franchising agreement with the applicant. Pursuant to the agreement, the franchisee is authorized to sell our products
exclusively at a predetermined retail price. In exchange, we provide them with products at a discounted price, geographical exclusivity,
and marketing, training and technological support. The franchisee is also required to adhere to certain standards of product merchandising,
promotion and presentment. No initial franchise fees are required from the franchisee, nor is the franchisee required to pay any
continuing royalties. The agreement is generally for a term of three years and is renewable on the mutual agreement of both parties.
Marketing and Sales
Our primary marketing
strategies are directed towards both our franchisees and end users, and the marketing efforts of our franchisees are directed towards
end users. The Company assists franchisees on monthly product introduction seminars, which are open to both our franchisees and
to the general public. We also host an annual conference and three quarterly conferences, which are open to both our franchisees
and to the general public as well. In 2017 and 2016, we held our annual and quarterly conferences in Tianjin City and did not charge
entrance fees.
The franchise stores
are responsible for the cost of organizing the monthly product introduction seminars and meetings and we are responsible for the
travel expenses of our employees who attend these meetings and seminars to explain and promote our various product lines. There
are on average 20 such seminars and meetings each month nationwide. Generally, we choose the venue for the product seminars and
meetings based on market prospects, sales volume and the extent of meeting preparation. During the year ended December 31, 2017,
we held product seminars and meetings in approximately 54 cities in the PRC.
Generally, we are
responsible for the cost of annual and quarterly conferences. In 2017 and 2016, we incurred costs related to annual and quarterly
conferences of $72,478 (RMB 489,797) and $176,995 (RMB 1,175,972), respectively.
Below is a breakdown of our marketing expenses
in the fiscal years 2017 and 2016.
|
|
2017
|
|
|
2016
|
|
Expenses
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
Promotion
|
|
¥
|
582,620
|
|
|
$
|
87,690
|
|
|
¥
|
1,655,284
|
|
|
$
|
249,136
|
|
Printing
|
|
|
118,826
|
|
|
|
17,884
|
|
|
|
247,409
|
|
|
|
37,237
|
|
Travelling
|
|
|
2,794,704
|
|
|
|
420,629
|
|
|
|
1,632,349
|
|
|
|
245,684
|
|
Training
|
|
|
19,200
|
|
|
|
2,890
|
|
|
|
61,887
|
|
|
|
9,315
|
|
Salaries
|
|
|
2,006,652
|
|
|
|
302,020
|
|
|
|
1,691,878
|
|
|
|
254,644
|
|
Total
|
|
¥
|
5,522,002
|
|
|
$
|
831,113
|
|
|
¥
|
5,288,807
|
|
|
$
|
796,016
|
|
For the fiscal year
2018, we have a marketing and sales budget of $768,357 (RMB 5,000,000), of which, $153,671 (RMB1,00,000) is budgeted for our 2018
annual and quarterly conference, $307,343 (RMB 2,000,000) for sales personnel, and the remainder for travel, training and other
expenses of our sales and marketing department.
Seasonality
Because our products
are for daily use, seasonal variations do not have meaningful impact on the market demand for our products.
Competition
Competitive Environment
China’s tourmaline
health products market is highly segmented and is in the stage with great demand.
However, given the
highly segmented nature of the market, we are unable to locate any information on the size of the tourmaline healthcare-related
market in China. Currently, Japanese and Korean companies are leaders in tourmaline technology. However, they have not yet developed
a sizeable market share for their products in the PRC (Source: 2010-2012 China’s tourmaline market and investment prospects research
report, Institute of China Uniway Economics, August 2010). Therefore, we believe that there is a great opportunity for us to create
demand and market share and establish ourselves as a leader in the tourmaline-related healthcare products field.
Our Competitors
Our major competitors
in the PRC are as follows:
|
●
|
Hanya
Nano Technology Co., Ltd. operates in Changsha, Hunan province, PRC. They mainly focus on manufacturing tourmaline sauna rooms
and tourmaline health products.
|
|
●
|
Harbin
Handu Tourmaline Nano Technology Development Co., Ltd. operates in PRC. They mainly focus on manufacturing tourmaline sauna rooms
and tourmaline health products.
|
Our Competitive Advantages
We believe that by leveraging the following
strengths, we can effectively compete and enhance our market position:
|
●
|
Brand
Advantage: We are one of the first companies to manufacture, distribute and sell tourmaline health-related products in the PRC
and we believe that our trademark, “Joway”, is the most established and well-known brand in the market.
|
|
●
|
Technology
Advantage: We possess several patents for tourmaline health-related products. We also invest a significant amount of time and
expense in new product research and development. In 2016, we applied for a new patent on tourmaline after researching with Tianjin
University of Technology. In addition, we have 3 types of products put on record of the Class 1 Medical devices in Tianjin Market
and Quality Supervision and Administration Commission which lay a foundation of making health care products listed in Tianjin
catalogue of medical system.
|
|
●
|
Product
Diversification Advantage: Most of our competitors concentrate on the one of the tourmaline segments. On the contrary,
our products cover diversified tourmaline related catalogue such as tourmaline daily health-related products, water treatment
products and tourmaline home accessories, etc.
|
|
●
|
Sales
Channels Advantage: As of December 31, 2017, we had approximately 140 franchise stores in most of the big cities in the PRC and
we continue to expand our franchise network. We believe our extensive franchisee network will assure that our sales continue to
grow.
|
|
●
|
Talent
Advantage: We have recruited additional employees in the fields of marketing, franchise and training, who have several years of
relevant experience in their previous careers. We plan to focus the efforts of these individuals to enhance our marketing and
sales.
|
|
●
|
Public
Relation Advantage: We enjoy the benefits of a membership at China Health Care Association and China Home Textile Association. For
example, as a member, we are entitled to obtain the fist-hand technology related to tourmaline and apply such technology to our
business when necessary.
|
Business Strategy
We believe the market for tourmaline health-related
products in the PRC will grow rapidly. In order to benefit from the market opportunities, we plan to implement the following strategies:
|
●
|
We
will focus on expanding our sales and franchise network in the PRC. Over the past few years, most of our franchises are located
in north of China, our target is to cover the most provinces in China especially the southern part in which economy remains high
development.
|
|
●
|
We
will continue to expand our product offerings and seek to optimize our product portfolio to include more products with higher
profit margins. For example, we believe that tourmaline daily health-related products, water treatment products and tourmaline
home accessories have more profit potential and we plant on investing more research and development dollars into developing these
products.
|
|
●
|
We
intend to improve our operations, exploit our competitive strengths, and look for ways to expand our business, including through
the acquisition of other existing businesses.
|
|
●
|
We
have participated in the Tourmaline Application Committee in 2016. Our goal is to improve the purity of tourmaline and diversify
tourmaline products related to our daily lives.
|
Research and Development
As of December 31,
2017, we had seven employees engaged in research and development activities. Our research and development focus on developing
new products in the daily health-related, tourmaline products, including tourmaline undergarment, tourmaline scarf and shawl, wellness
room for family use.
During 2017 and 2016,
we spent $108,466 (RMB 732,998) and $103,391 (RMB 686,942), respectively, on research and development activities. The following
is a breakdown of our research and development expenses for 2017 and 2016 as well as our budget for 2018.
|
|
2017
|
|
|
2016
|
|
|
2018 (Budget)
|
|
Item
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
Equipment
|
|
|
3,504
|
|
|
|
519
|
|
|
|
92,285
|
|
|
|
13,890
|
|
|
|
20,000
|
|
|
|
3,073
|
|
Samples
|
|
|
51,869
|
|
|
|
7,675
|
|
|
|
3,635
|
|
|
|
547
|
|
|
|
50,000
|
|
|
|
7,684
|
|
Travel Expense
|
|
|
15,659
|
|
|
|
2,317
|
|
|
|
10,976
|
|
|
|
1,652
|
|
|
|
10,000
|
|
|
|
1,537
|
|
Salary
|
|
|
568,360
|
|
|
|
84,104
|
|
|
|
520,455
|
|
|
|
78,333
|
|
|
|
500,000
|
|
|
|
76,836
|
|
Inspection Fee
|
|
|
93,606
|
|
|
|
13,851
|
|
|
|
59,591
|
|
|
|
8,969
|
|
|
|
50,000
|
|
|
|
7,684
|
|
Total
|
|
|
732,998
|
|
|
|
108,466
|
|
|
|
686,942
|
|
|
|
103,391
|
|
|
|
630,000
|
|
|
|
96,814
|
|
Intellectual Property
We regard our trademarks,
trade secrets, patents and similar intellectual property as critical factors to our success. We rely on patent, trademark and trade
secret law, as well as confidentiality and license agreements with certain of our employees, customers and others to protect our
proprietary rights.
The trademarks we
currently use include the “Joway” trademark, which is owned by our President, Chief Executive Officer and director,
Mr. Jinghe Zhang. We are permitted to use the “Joway” trademark pursuant to a license agreement with Mr. Jinghe Zhang
dated December 1, 2009 for a term of ten years. The agreement is renewable at the end of its respective term. There is no
license fees to Mr. Jinghe Zhang for the use of the trademark.
Set forth below is a detailed description
of the trademarks we use.
Mark
|
|
Registration/
Application No.
|
|
Class
|
|
Effective Date
|
|
Expiration Date
|
|
Owner/Applicant
|
|
|
4794111
|
|
Class 24:
Fabrics.
Textiles and textile goods, not included in other classes;
bed and table covers.
|
|
February 21, 2009
|
|
February 20, 2019
|
|
Jinghe Zhang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6104256
|
|
Class 3:
Cosmetics and Cleaning Preparations.
Bleaching preparations and other substances for laundry
use; cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.
|
|
March 21, 2010
|
|
March 20, 2020
|
|
Tianjin Joway Shengshi Group Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6104253
|
|
Class 11:
Environmental control apparatus.
Apparatus for lighting, heating, steam generating,
cooking, refrigerating, drying, ventilating, water supply and sanitary purposes.
|
|
February 14, 2010
|
|
February 13, 2020
|
|
Tianjin Joway Shengshi Group Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8467175
|
|
Class 30:
Staple foods.
Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial
coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking-powder;
salt, mustard; vinegar, sauces (condiments); spices; ice.
|
|
July 21, 2011
|
|
July 20, 2021
|
|
Tianjin Joway Shengshi Group Co., Ltd.
|
Mark
|
|
Registration/
Application No.
|
|
Class
|
|
Effective Date
|
|
Expiration Date
|
|
Owner/Applicant
|
|
|
8236524
|
|
Class 24:
Fabrics.
Textiles and textile goods, not included in other classes; bed
and table covers.
|
|
April 28, 2011
|
|
April 27, 2021
|
|
Tianjin Joway Shengshi Group Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8029052
|
|
Class 5:
Pharmaceuticals.
Pharmaceutical, veterinary and sanitary preparations; dietetic
substances adapted for medical use, food for babies; plasters, materials for dressings; material for stopping teeth, dental wax;
disinfectants; preparations for destroying vermin; fungicides, herbicides.
|
|
April 14, 2011
|
|
April 13, 2021
|
|
Tianjin Joway Shengshi Group Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8029009
|
|
CLASS 2:
Paints
Paints, varnishes, lacquers; preservatives against rust and
against deterioration of wood; colorants; mordants; raw natural resins; metals in foil and powder form for painters, decorators,
printers and artists.
|
|
April 14, 2011
|
|
April 13, 2021
|
|
Tianjin Joway Shengshi Group Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8236733
|
|
Class 30:
Staple foods.
Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee;
flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard;
vinegar, sauces (condiments); spices; ice.
|
|
December 14, 2011
|
|
December 13, 2021
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8236538
|
|
Class 24:
Fabrics.
Textiles and textile goods, not included in other classes; bed
and table covers.
|
|
June 7, 2011
|
|
June 6, 2021
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8236684
|
|
Class 11:
Environmental control apparatus.
Apparatus for lighting, heating, steam generating, cooking,
refrigerating, drying, ventilating, water supply and sanitary purposes
|
|
June 21, 2011
|
|
June 20, 2021
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8236641
|
|
Class 3:
Cosmetics and Cleaning Preparations.
Bleaching preparations and other substances for laundry use;
cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.
|
|
May 28, 2011
|
|
May 27, 2021
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11275200
|
|
Class 30:
Staple foods.
Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee;
flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard;
vinegar, sauces (condiments); spices; ice.
|
|
December 28, 2013
|
|
December 27, 2023
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
Mark
|
|
Registration/
Application No.
|
|
Class
|
|
Effective Date
|
|
Expiration Date
|
|
Owner/Applicant
|
|
|
11232054
|
|
Class 33:
Alcoholic beverages.
Fruit extracts [alcoholic], aperitifs, distilled beverages,
cider, digesters [liqueurs and spirits], wine, clear wine, alcoholic beverages [except beer] and sake.
|
|
December 14, 2013
|
|
December 13, 2023
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11203446
|
|
Class 5:
Pharmaceuticals.
Glue ball, Reducing tea, air purifying preparations, mosquito-repellent
incense , sanitary pads, sanitary towels, antisepsis paper and babies’ diapers.
|
|
December 7, 2013
|
|
December 6, 2023
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16579737
|
|
Class 3:
Cosmetics and Cleaning Preparations.
Bleaching preparations and other substances for laundry use;
cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.
|
|
June 7, 2016
|
|
June 6, 2026
|
|
TianjinJoway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16579738
|
|
Class 3:
Cosmetics and Cleaning Preparations.
Cleansing lotion, cleanser, facial mask, cosmetics, complexion
cream, wrinkle cream.
|
|
June 7, 2016
|
|
June 6, 2026
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16966456
|
|
Class 3:
Cosmetics and Cleaning Preparations.
Cleansing lotion, cleanser, facial mask, cosmetics, complexion
cream, wrinkle cream.
|
|
July 21, 2016
|
|
July 20, 2026
|
|
Tianjin Joway Shengshi Group Co., Ltd
|
Currently, the patents the Company is using
are owned by our Chief Executive Officer, Mr. Jinghe Zhang. Pursuant to a license agreement with our President, Chief Executive
Officer and director, Mr. Jinghe Zhang, we are permitted to use the following five patents for free from December 1, 2009
to the expiration date of each patent.
No.
|
|
Product
|
|
Type
|
|
Patent No.
|
|
Application Date
|
|
Effective Date
|
|
Term
|
|
Owner &
Inventor
|
1
|
|
Water Purifier
|
|
Utility Model
|
|
ZL200720014571.6
|
|
September 17, 2007
|
|
October 29, 2008
|
|
Ten years
|
|
Jinghe Zhang
|
2
|
|
Tourmaline Undergarment
|
|
Utility Model
|
|
ZL200720015434.4
|
|
October 22, 2007
|
|
July 16, 2008
|
|
Ten years
|
|
Jinghe Zhang
|
3
|
|
Tourmaline Mattress
|
|
Utility Model
|
|
ZL200720015435.9
|
|
October 22, 2007
|
|
December 24, 2008
|
|
Ten years
|
|
Jinghe Zhang
|
4
|
|
Tourmaline Wellness House
|
|
Utility Model
|
|
ZL200720014570.1
|
|
September 17, 2007
|
|
July 16, 2008
|
|
Ten years
|
|
Jinghe Zhang
|
5
|
|
Drinking Water Purifier
|
|
Design
|
|
ZL200730011189.5
|
|
September 17, 2007
|
|
April 1, 2009
|
|
Ten years
|
|
Jinghe Zhang
|
6
|
|
Water Purifier
|
|
Utility Model
|
|
ZL201620164704.7
|
|
March 3, 2016
|
|
July 6, 2016
|
|
Ten years
|
|
Jinghe Zhang
|
7
|
|
Tourmaline Wellness House
|
|
Utility Model
|
|
ZL201620839876.X
|
|
August 3, 2016
|
|
April 26, 2017
|
|
Ten years
|
|
Jinghe Zhang
|
Insurance
We maintain product
liability insurance policies for claims resulting from personal injury or damage to property caused by our water machine. We also
maintain limited insurance coverage for our vehicles. The total product liability insurance coverage for our water machines is
RMB 1,000,000 ($147,976).We do not carry property insurance on our buildings, facilities, and major operating assets, but on our
vehicles, and we do not have any business interruption insurance due to the limited availability of this type of coverage in the
PRC. During 2017 and 2016, we had no product liability claims.
Employees
As of December 31, 2017, the Company, including
its subsidiaries, had a total of 89 full time employees.
Joway Shengshi
As of December 31,
2017 Joway Shengshi had 47 full-time employees based in Tianjin City, PRC. There are no collective bargaining contracts covering
any of our employees. We believe our relationship with our employees is satisfactory.
Below is a breakdown of Joway Shengshi’s
employees:
Departments
|
|
Number of
Employees
|
Management
|
|
21
|
Sales
|
|
4
|
Distribution
|
|
2
|
Production
|
|
9
|
Research and development
|
|
2
|
Franchising
|
|
5
|
Finance
|
|
4
|
Joway Decoration
As of December 31,
2017, Joway Decoration had 40 full-time employees based in Tianjin City, PRC. There were no collective bargaining contracts covering
any of our employees. We believe our relationship with our employees is satisfactory.
Below is a breakdown of Joway Decoration’s
employees:
Departments
|
|
Number of
Employees
|
Management
|
|
14
|
Sales
|
|
3
|
Distribution
|
|
4
|
Production
|
|
10
|
Research and development
|
|
5
|
Franchising
|
|
3
|
Finance
|
|
1
|
Shengtang Trading
As of December 31,
2017, Shengtang Trading had 2 full-time employees based in Tianjin, PRC. There were no collective bargaining contracts covering
any of our employees. We believe our relationship with our employees is satisfactory.
We are required to
contribute a portion of our employees’ total salaries to the PRC government’s social insurance funds, including pension
insurance, medical insurance, unemployment insurance, work-related injury insurance, and maternity insurance, in accordance with
relevant regulations. We have purchased work injury insurance and medical insurance for all our employees.
Effective January 1,
2008, the PRC introduced a new labor contract law that enhances rights for the nation’s workers, including open-ended work contracts
and severance pay. The legislation requires employers to provide written contracts to their workers, restricts the use of temporary
laborers and makes it harder to lay off employees. It also requires that employees with fixed-term contracts be entitled to an
indefinite-term contract after a fixed-term contract is renewed twice. Although the new labor contract law will increase our labor
costs, we do not anticipate there will be any significantly effects on our overall profitability in the near future since such
amount was historically not material to our operating cost
.
Management anticipates this may be a step toward improving candidate
retention for skilled workers.
Government Regulations and Compliance with Applicable Laws
Below is a list of agencies which may
have jurisdiction over our business:
Agency
|
|
Functions
|
State Food and Drug Administration (“CFDA”)(1)
|
|
Supervise the entire process from research and development, manufacturing, and distribution to utilization of drugs; supervise and coordinate the safety management of food, health food and cosmetics and organize investigations of serious accidents.
|
|
|
National Development and Reform Commission (“NDRC”)
|
|
Make strategic and mid- to long-term plans for the PRC healthcare industry; regulate drug prices; manage disaster relief funds and carry out healthcare development projects sponsored by the government.
|
|
|
Ministry of Commerce (“MOFCOM”)
|
|
Formulate regulations and policies on foreign trade, foreign direct investments, consumer protection, and market competition; negotiate bilateral and multilateral trade agreements.
|
|
|
Ministry of Science and Technology (“MST”)
|
|
Lay out science and technology development plans and policies; draft relevant regulations and rules and guarantee implementation of regulations and rules
|
|
|
|
General Administration of Quality Supervision, Inspection and Quarantine (“AQSIQ”)
|
|
Manage national quality, metrology, entry-exit commodity inspection, entry-exit health quarantine, entry-exit animal and plant quarantine, import-export food safety, certification, accreditation, and standardization, as well as enforce administrative laws
|
|
|
|
State Administration of Taxation (“SAT”)
|
|
Draft tax regulations and implementation rules and propose tax policies.
|
|
|
State Administration of Foreign Exchange (“SAFE”)
|
|
Make regulations and policies governing foreign exchange market activities and manage state foreign exchange reserves.
|
|
(1)
|
The
PRC State Food and Drug Administration is responsible for (i) regulating the research and development, manufacturing, distribution
and utilization of drugs; (ii) supervising and coordinating the safety management of food, health food and cosmetics; and
(iii) investigating serious accidents with respect to the foregoing. The products we manufacture are not regulated by the
CFDA as they are not drugs, diet supplements or food consumed by humans. There are no existing laws or regulations in China governing
the manufacture and sale of tourmaline health care products such as those sold by the Company nor are there any inspection requirements
applicable to our products.
|
We act as a distributor
for four edible products including
Xin-Nao-Ling Fish Oil Soft Gel
and
Zhi-Li-Bao Fish Oil Soft Gel
, which are subject
to CFDA regulation. These products are manufactured by Penglai Huakang Healthcare Industries, Ltd., Tianjin Hezhi Pharmaceutical
Co., Ltd.., and Jilin Luwang Sanbao Biological Technology Co., Ltd., which all have obtained the necessary manufacturing licenses
and certifications from the CFDA.
Environmental Regulations
The major environmental
regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution
and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC
Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution. To
date, the Company’s costs to comply with applicable environmental laws have been minimal.
According to Article
32 of the PRC Environmental Protection Law, a project that may cause pollution to the environment cannot be undertaken until an
environmental impact statement has been approved by the applicable department of environmental protection administration.
In March 2008, Joway
Shengshi submitted an environmental impact statement with respect to the manufacturing of 300,000 sets of knitwear annually to
the Tianjin Baodi Environmental Protection Bureau. The environmental impact statement assesses the pollution that the manufacturing
is likely to produce and its impact on the environment. In addition, the report stipulates the preventive and curative measures
the company will undertake. Tianjin Baodi Environmental Protection Bureau approved the environmental impact statement on March 12,
2008 and on April 22, 2009, the Tianjin Baodi Environmental Protection Bureau approved the manufacture of 300,000 sets of
knitwear annually.
The Company’s
production process does not produce industrial waste water or waste gas emissions of a type that is regulated by current PRC laws
and regulations. The Company’s other emissions, including noise, waste water, solid waste and atmospheric pollutants meet
regulatory standards. According to the Letter regarding Environment Protection of Tianjin Joway Shengshi Group Co, Ltd. issued
by Tianjin Baodi Environmental Protection Bureau dated August 6, 2014, Joway Shengshi complies with applicable environmental
protection laws and regulations and its discharge of pollutants meets with the standards of the state and Tianjin City.
In addition, Joway
Shengshi obtained ISO 140001 International Environmental Management System Certification on January 15, 2009. ISO 140001 was
first published as a standard in 1996 and specifies the requirements for an organization’s environmental management system.
It applies to those environmental aspects over which an organization has control and where it can be expected to have an influence.
Joway Shengshi passed each annual inspection of the ISO 140001. Such Certification covers the production and service of tourmaline
health-related products such as underwear, bras, scarves, hats, knee-protectors, waist-protectors, socks, bedding and daily commodities.
We have not been named
as a defendant in any legal proceedings alleging violation of environmental laws and have no reasonable basis to believe that there
is any threatened claim, action or legal proceedings against us that would have a material adverse effect on our business, financial
condition or results of operations due to any non-compliance with environmental laws.
To date, the Company
has not incurred any significant costs in connection with complying with PRC national or local environmental laws.
Item 1A. RISK FACTORS.
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks described below and the other information contained in this report
before deciding to invest in our common stock.
Risks Related To Our Business
The purchase of many of our products
is discretionary, and may be particularly affected by adverse trends in the general economy; therefore challenging economic conditions
may make it more difficult for us to generate revenue.
Our business is affected
by global, national and local economic conditions since many of the products we sell are discretionary and we depend, to a significant
extent, upon a number of factors relating to discretionary consumer spending in the PRC. These factors include economic conditions
and perceptions of such conditions by consumers, employment rates, the level of consumers’ disposable income, business conditions,
interest rates, consumer debt levels, availability of credit and levels of taxation in regional and local markets in the PRC where
we sell such products. There can be no assurance that consumer spending on the products we sell, will not be adversely affected
by changes in general economic conditions in the PRC and globally.
The success of our business depends
on our ability to market and advertise the products we sell effectively.
Our ability to establish
effective marketing and advertising campaigns is the key to our success. Our advertisements promote our corporate image, our
merchandise and the pricing of such products. If we are unable to increase awareness of our brands and our products, we may
not be able to attract new customers. Our marketing activities may not be successful in promoting the products we sell
or pricing strategies or in retaining and increasing our customer base. We cannot assure you that our marketing programs will
be adequate to support our future growth, which may result in a material adverse effect on our results of operations.
If we fail to maintain optimal inventory
levels, our inventory holding costs could increase or cause us to lose sales, either of which could have a material adverse effect
on our business, financial condition and results of operations.
While we must maintain
sufficient inventory levels to operate our business successfully and meet our customers’ demands, we must be careful to avoid amassing
excess inventory. Changing consumer demands, manufacturer backorders and uncertainty surrounding new product launches expose
us to increased inventory risks. Demand for products can change rapidly and unexpectedly, including the time between when
the product is ordered from the supplier to the time it is offered for sale. We carry a wide variety of products and must
maintain sufficient inventory levels of the products we sell. We may be unable to sell certain products in the event that
consumer demand changes. Our inventory holding costs will increase if we carry excess inventory. However, if we do not
have a sufficient inventory of a product to fulfill customer orders, we may lose orders or customers, which may adversely affect
our business, financial condition and results of operations. We cannot assure you that we can accurately predict consumer
demand and events and avoid over-stocking or under-stocking products.
We may not be able to optimize the
management of our distribution network or be successful in expanding our distribution network.
We sell our products
to our customers mainly through our franchise stores across the PRC. Any disruption in the operation of our franchise stores
distribution network could result in higher costs or longer lead times associated with distributing our products. In addition,
as it is difficult to predict accurate sales volumes in our industry, we may be unable to optimize our distribution activities,
which may result in excess or insufficient inventory, warehousing, fulfillment of logistics or value-added services, or distribution
capacity. In addition, failure to effectively control product damage or spoilage during the distribution process could decrease
our operating margins and reduce our profitability.
Our operations would be adversely
affected if third-party carriers were unable to transport our products on a timely basis.
Some of our products
are shipped through third party carriers. If a strike or other event prevented or disrupted these carriers from transporting
our products, other carriers may be unavailable or may not have the capacity to deliver our products to our customers. If
adequate third party sources to ship our products were unavailable at any time, our business would be adversely affected.
There may be shortages of, or price
fluctuations with respect to, raw materials or components, which would cause us to curtail our manufacturing or incur higher than
expected costs.
We purchase the raw
materials and certain components we use in producing our products, and we may be required to bear the risk of price fluctuations
of raw materials or components. Shortages of raw materials and price fluctuations may occur in the future and we may not be able
to pass through a substantial portion of such raw material cost increases to our customers if we experience significant supply
disruptions or excess levels of industry capacity or due to other factors outside of our control, in which case our profitability
could suffer. Our ability to pass through raw material price increases may be limited by the level of industry excess capacity,
competitive practices and other regional-specific factors which are out of our control. In addition, if we experience a shortage
of materials or components, we may not be able to produce products for our customers in a timely fashion.
In addition, the Dodd-Frank
Act of 2010 requires the Securities and Exchange Commission (the “SEC”) to establish new annual disclosure and reporting
requirements for public companies to report their use of “conflict minerals” originating from the Democratic Republic
of Congo and its nine immediate neighbors. The current list of “conflict minerals” under the Dodd-Frank Act includes
gold, tantalum, tin and tungsten (although additional minerals may be added in the future). If tourmaline is classified as a “conflict
mineral” in the future, there may only be a limited pool of suppliers who provide conflict-free tourmaline, and we cannot
assure you that we will be able to obtain products in sufficient quantities or at competitive prices.
If we are unable to renew the leases of any of our property,
our operations may be adversely affected.
We do not directly
own any land use rights over the properties we lease. We may lose our leases or may not be able to renew them when they are
due on terms that are reasonable or favorable to us. This may have adverse impact on our operations, including disrupting
our operations or increasing our cost of operations.
Counterfeit products sold in the
PRC could negatively impact our revenues, brand reputation, business and results of operations.
The products we sell
are also subject to competition from counterfeit products, which are healthcare products manufactured without proper licenses or
approvals and are fraudulently mislabeled with respect to their content and/or manufacturer. Counterfeit products are generally
sold at lower prices than authentic products due to their low production costs, and in some cases are very similar in appearance
to authentic products. Although the PRC government has recently been increasingly active in policing counterfeit products, including
counterfeit healthcare products, there is a lack of effective counterfeit product regulation control and enforcement systems in
the PRC. The proliferation of counterfeit products has grown in recent years and may continue to grow in the future. Despite
our implementation of quality controls, we cannot assure you that we would not be distributing or selling counterfeit products
inadvertently. Any accidental sale or distribution of counterfeit products can subject our company to fines, administrative penalties,
litigation and negative publicity, which could negatively impact our revenues, brand reputation, business and results of operations. Moreover,
the continued proliferation of counterfeit products and other products in recent years may reinforce the negative image of retailers
among consumers in the PRC. The continued proliferation of counterfeit products in the PRC could have a material adverse effect
on our business, financial condition, and results of operation.
The required certificates, permits,
and licenses related to our operations are subject to governmental control and renewal and failure to obtain renewal will cause
all or part of our operations to be terminated.
We are subject to
various PRC laws and regulations pertaining to our manufacture and sales of healthcare products. We have attained certificates,
permits, and licenses required for the operation of a healthcare products manufacturer and distributor. We cannot assure you
that we will have all necessary permits, certificates and authorizations for the operation of our business at all times. Additionally,
our certifications, permits and authorizations are subject to periodic renewal by the relevant government authorities. We
intend to apply for renewal of these certificates, permits and authorizations prior to their expiration. During the renewal
process, we will be re-evaluated by the appropriate governmental authorities and must comply with the then prevailing standards
and regulations which may change from time to time. In the event that we are not able to renew the certificates, permits and
licenses, all or part of our operations may be terminated. Furthermore, if escalating compliance costs associated with governmental
standards and regulations restrict or prohibit any part of our operations, it may adversely affect our operations and profitability.
If we become subject to product liability
claims, personal injury claims or defective products our business may be harmed.
We will be exposed
to risks inherent in the manufacture and sales of healthcare products, such as the unintentional distribution of counterfeit healthcare
products. Furthermore, we may sell products which inadvertently have an adverse effect on the health of individuals. Product
liability claims may be asserted against us. Any product liability claim, product recall, adverse side effects caused by improper
use of the products we sell or manufacturing defects may result in adverse publicity regarding us and the products we sell, which
would harm our reputation. If we are found liable for product liability claims, we could be required to pay substantial monetary
damages in excess of insurance coverage amounts. Furthermore, even if we successfully defend ourselves against this type of claim,
we could be required to spend significant management, financial and other resources, which could disrupt our business, and our
reputation and our brand name may also suffer. In addition, we do not have any business interruption insurance due to the limited
coverage of any business interruption insurance in the PRC, and as a result, any business disruption or natural disaster could
severely disrupt our business and operations and significantly decrease our revenue and profitability.
The failure to manage growth effectively could have an
adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.
Any significant growth
in the market for our products or our entry into new markets may require an expansion of our employee base for managerial, operational,
financial, and other purposes. As of December 31, 2017, we had approximately 89 full time employees. During any growth,
we may face problems related to our operational and financial systems and controls, including quality control and delivery and
service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth
will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate
new employees.
Aside from increased
difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity
to finance the purchase of raw materials and supplies, development of new products, and the hiring of additional employees. For
effective growth management, we will be required to continue improving our operations, management, and financial systems and controls. Our
failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our
profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the
quality standards required by our existing and potential customers.
If we need additional capital to
fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
If adequate additional
financing is not available on reasonable terms, we may not be able to undertake our expansion plans or purchase additional equipment
for our operations and we would have to modify our business plans accordingly. There is no assurance that additional financing
will be available to us.
In connection with
our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital to fund our
future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our
profitability; (ii) the release of competitive products by our competitors; (iii) the level of our investment in research and development;
and (iv) the amount of our capital expenditures, including acquisitions. We cannot assure you that we will be able to obtain capital
in the future to meet our needs.
If we cannot obtain
additional funding, we may be required to: (i) limit our investments in research and development; (ii) limit our marketing
efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect our business
and our ability to compete.
Even if we do find
a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that
are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or
rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could
have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing
will be available to us, or if available, will be on terms favorable to us.
We are dependent on certain key personnel
and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our success is, to
a certain extent, attributable to the management, sales and marketing, and operational and technical expertise of certain key personnel. In
addition, we will require an increasing number of experienced and competent executives and other members of senior management to
implement our growth plans. We do not maintain key-man insurance for members of our management team because it is not a customary
practice in the PRC. If we lose the services of any member of our senior management, we may not be able to locate suitable
or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our
business and prospects.
We are dependent on a trained workforce
and any inability to retain or effectively recruit such employees, particularly distribution personnel and regional retail managers
for our business, could have a material adverse effect on our business, financial condition and results of operations.
We must attract, recruit
and retain a sizeable workforce of qualified and trained staff to operate our business. Our ability to implement effectively
our business strategy and expand our operations will depend upon, among other factors, the successful recruitment and retention
of highly skilled and experienced distribution personnel, regional retail managers and other technical and marketing personnel. There
is significant competition for qualified personnel in our business and we may not be successful in recruiting or retaining sufficient
qualified personnel consistent with our current and future operational needs.
We rely on the high quality of customer
service and any poor service may lead to adverse impact on our business.
Our goal is to provide
customer with first class service. It will be attained by the one-stop consultancy, analysis on feedback of customer to provide
information on customer’s potential demand, customer file system to introduce new product and promotion policy. If we fail
to supply high quality of customer service, we may incur considerable complaints from our customers and lose loyalty of our customers,
as a result, more and more customers may pursue competitors’ products and our competitive ability may drop correspondingly.
Our Chinese operating companies maintain
their books and records in accordance with PRC GAAP and, as a result, it involves a risk of accuracy when our personnel convert
the financial statements to U.S. GAAP.
Under PRC law, our
operating companies in China are required to maintain their books and records in accordance with PRC GAAP. We do not retain an
outside accounting firm or consultant to prepare our financial statements or to evaluate our internal controls over financial reporting.
Our Financial Manager prepares the U.S. GAAP financial statements and converts the financial statements prepared under PRC GAAP
into U.S. GAAP. Our CFO is responsible for supervising the preparation of our financial statements under PRC GAAP and for reviewing
such financial statements to ensure their accuracy and completeness. In addition, he is responsible for reviewing the adjustments
made to the financial statements to convert them into U.S. GAAP for SEC reporting requirements. Our CFO and CEO are responsible
for evaluating the effectiveness of our internal controls over financial reporting.
Our company is at
the early stage of adopting necessary financial reporting concepts and practices, including strong corporate governance, internal
controls and, computer, financial and other control systems. Most of our accounting and finance staff are not educated and trained
in U.S. GAAP and SEC reporting requirements, and we may have difficulty hiring new employees in the PRC with such training. As
a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial
data and preparing financial statements, books of account and corporate records and instituting business practices that meet SEC
reporting requirements. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls
as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses
in our internal controls, which could impact the reliability of our financial statements and prevent us from complying with SEC
rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance
could have a materially adverse effect on our business.
Our financial results may fluctuate
because of many factors and, as a result, investors should not simply rely on our historical financial data as indicative of future
results.
Fluctuations in operating
results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact
the market price of our securities. Operating results may fluctuate in the future due to a variety of factors that could affect
revenues or expenses in any particular quarter. Fluctuations in operating results could cause the value of our securities
to decline. Investors should not rely on comparisons of results of operations as an indication of future performance. As
result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of
public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect
our quarterly results include:
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vulnerability
of our business to a general economic downturn in the PRC;
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fluctuation
and unpredictability of the prices of the products we sell;
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changes
in the laws of the PRC that affect our operations;
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competition
from other healthcare products manufacturers and distributors; and
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our
ability to obtain necessary government certifications and/or licenses to conduct our business.
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We are dependent on certain suppliers
and a failure to continue to obtain our supplies from such suppliers may adversely affect our business.
We do not have any
long-term supply contracts with our raw materials suppliers. Any significant fluctuation in price of our raw materials could have
a material adverse effect on the manufacturing cost of our products. We are subject to market conditions and although raw materials
are generally available and we have not experienced any raw materials shortage in the past, we cannot assure you that the necessary
materials will continue to be available to us at prices currently in effect or acceptable to us.
We may have limited
options in the short-term for alternative supplies if our suppliers fail for any reason, including their business failure or financial
difficulties, to continue the supply of raw materials. Moreover, identifying and accessing alternative sources may increase our
costs.
Risks Related to Conducting Business in the PRC
Our operations are subject to PRC
laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations
thereof, may have a material and adverse effect on our business.
The PRC’s legal
system is a civil law system based on written statutes. Unlike the common law system prevalent in the United States, decided legal
cases have little value as precedent in the PRC. There are substantial uncertainties regarding the interpretation and application
of PRC laws and regulations, including but not limited to, the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy or criminal
proceedings. The PRC government has been developing a comprehensive system of commercial laws, and considerable progress has been
made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance,
commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited
volume of published cases and judicial interpretation and their lack of authority as precedents, interpretation and enforcement
of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively.
Our principal operating
subsidiaries are regarded as foreign invested enterprises (“FIE”s) under PRC laws, and as a result are required to
comply with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct of FIEs. We
cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the
relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation,
including, without limitation:
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revoking
our business license, other licenses or authorities;
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requiring
that we restructure our ownership or operations; and
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requiring
that we discontinue any portion or all of our business.
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PRC Labor Laws may adversely affect our results of operations.
On January 1,
2008, the PRC government promulgated the Labor Contract Law of the PRC, or the New Labor Contract Law. The New Labor Contract
Law imposes greater liabilities on employers and significantly impacts the cost of an employer’s decision to reduce its workforce. Further,
it may require certain terminations to be based upon seniority and not merit. In the event we decide to significantly change
or decrease our workforce, the New Labor Contract Law could adversely affect our ability to enact such changes in a manner that
is most advantageous to our business or in a timely and cost effective manner, thus materially and adversely affecting our financial
condition and results of operations.
We may not be able to comply with
applicable Good Manufacture Practice (“GMP”) requirements and other regulatory requirements, which could have a material
adverse effect on our business, financial condition and results of operations.
We are required to
comply with applicable GMP regulations, which include requirements relating to quality control and quality assurance as well as
corresponding maintenance, record-keeping and documentation standards. Manufacturing facilities must be approved by governmental
authorities before we use them to commercially manufacture our products and are subject to inspection by regulatory agencies. If
we fail to comply with applicable regulatory requirements, including following any product approval, we may be subject to sanctions,
including:
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product
recalls or seizure;
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refusal
of regulatory agencies to review pending market approval applications or supplements to approval applications;
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total
or partial suspension of production;
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withdrawals
of previously approved marketing applications; or
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If we fail to protect our intellectual
property rights, it could harm our business and competitive position.
Our business relies
in part on intellectual properties to stay competitive in the market place. We rely on a combination of trademark laws, patent
law, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property rights and the obligations
we have to third parties from whom we license intellectual property rights. Nevertheless, these afford only limited protection
and policing unauthorized use of proprietary technology can be difficult and expensive. In addition, intellectual property rights
historically have not been enforced in the PRC to the same extent as in the United States, and intellectual property theft presents
a serious risk in doing business in the PRC. We may not be able to detect unauthorized use of, or take appropriate steps to enforce
our intellectual property rights and this could have a material adverse effect on our business, operating results and financial
condition.
Under the new EIT Law, we may be
classified a “resident enterprise” for PRC tax purposes, which may subject us to PRC enterprise income tax for any
dividends we receive from our PRC Operating Entities and to PRC income tax withholding for any dividends we pay to our non-PRC
shareholders.
On March 16,
2007, the National People’s Congress (“NPC”) promulgated the Law of the People’s Republic of China on Enterprise
Income Tax, and the new EIT Law as amended became effective on January 1, 2008. In accordance with the new EIT Law, the corporate
income tax rate is set at 25% for all enterprises. However, certain industries and projects, such as FIEs, may enjoy favorable
tax treatment pursuant to the new EIT Law and its implementing rules.
Under the new EIT
Law, an enterprise established outside of the PRC whose “de facto management bodies” are located in the PRC is considered
a “resident enterprise” and is subject to the 25% enterprise income tax rate on its worldwide income. The new EIT Law
and its implementing rules are relatively new, and currently, no official interpretation or application of this new “resident
enterprise” classification is available. Therefore, it is unclear how tax authorities will determine the tax residency of
enterprises established outside of the PRC.
Most of our management
is currently based in the PRC. If the PRC tax authorities determine that our U.S. holding company is a “resident enterprise”
for PRC enterprise income tax purposes, we may be subject to an enterprise income tax rate of 25% on our worldwide taxable income.
The “resident enterprise” classification also could subject us to a 10% withholding tax on any dividends we pay to
our non-PRC shareholders if the relevant PRC authorities determine that such income is PRC-sourced income. In addition to the uncertainties
regarding the interpretation and application of the new “resident enterprise” classification, the new EIT Law may change
in the future, possibly with retroactive effect. If we are classified as a “resident enterprise” and we incur these
tax liabilities, our net income will decrease accordingly.
Our ability to pay dividends is restricted by PRC laws.
Our ability to pay
dividends is primarily dependent on receiving distributions of funds from our PRC Operating Entities. Relevant PRC statutory laws
and regulations permit payments of dividends by our PRC Operating Entities only out of their retained earnings, if any, as determined
in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared
in accordance with United States Generally Accepted Accounting Principles (“GAAP”) differ from those reflected in the
statutory financial statements of our PRC Operating Entities.
The principal laws,
rules and regulations governing dividends paid by our PRC Operating Entities include the Company Law of the PRC, Wholly Foreign
Owned Enterprise Law and its Implementation Rules. Under these laws and regulations, our PRC Operating Entities are required to
set aside at least 10% of their after-tax profit based on PRC accounting standards each year to its statutory surplus reserve fund
until the accumulative amount of such reserve reaches 50% of their respective registered capital. These reserve funds are recorded
as part of shareholders’ equity but are not available for distribution to shareholders other than in the case of liquidation. As
a result of this requirement, the amount of net income available for distribution to shareholders will be limited.
Our business is subject to a variety
of environmental laws and regulations. Our failure to comply with environmental laws and regulations may have a material adverse
effect on our business and results of operations.
Since the beginning
of the 1980s, the PRC has formulated and implemented a series of environmental protection laws and regulations. Our operations
are subject to these environmental protection laws and regulations in the PRC. These laws and regulations impose fees for the discharge
of waste substances, permit the levy of fines and claims for damages for serious environmental offences and allow the PRC government,
at its discretion, to close any facility that fails to comply with orders requiring it to correct or stop operations causing environmental
damage. Our operations are in compliance with PRC environmental regulations in all material aspects. The PRC government has taken
steps and may take additional steps towards more rigorous enforcement of applicable environmental laws, and towards the adoption
of more stringent environmental standards. If the PRC national or local authorities enact additional regulations or enforce current
or new regulations in a more rigorous manner, we may be required to make additional expenditures on environmental matters, which
could have an adverse impact on our financial condition and results of operations. In addition, environmental liability insurance
is not common in the PRC. Therefore, any significant environmental liability claims successfully brought against us would adversely
affect our business, financial condition and results of operations.
PRC regulations relating to acquisitions
of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate.
On August 8, 2006,
the PRC Ministry of Commerce (“MOFCOM”), joined by the State-owned Assets Supervision and Administration Commission
of the State Council, the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities
Regulatory Commission (“CSRC”) and the State Administration of Foreign Exchange (“SAFE”), released a substantially
amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises (the “Revised M&A
Regulations”), which took effect on September 8, 2006. These new rules significantly revised the PRC’s regulatory
framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. These new rules signify
greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a
key regulator for issues related to mergers and acquisitions in the PRC and requiring MOFCOM approval of a broad range of merger,
acquisition and investment transactions. Further, the new rules establish reporting requirements for acquisition of control
by foreigners of companies in key industries, and reinforce the ability of the PRC government to monitor and prohibit foreign control
transactions in key industries.
These rules may significantly
affect the means by which offshore-onshore restructurings are undertaken in the PRC in connection with offshore private equity
and venture capital financings, mergers and acquisitions. It is expected that such transactional activity in the PRC in the
near future will require significant case-by-case guidance from MOFCOM and other government authorities as appropriate. It
is anticipated that application of the new rules will be subject to significant administrative interpretation, and we will need
to closely monitor how MOFCOM and other ministries apply the rules to ensure its domestic and offshore activities continue to comply
with PRC laws. Given the uncertainties regarding interpretation and application of the new rules, we may need to expend significant
time and resources to maintain compliance. It is uncertain how our business operations or future strategy will be affected
by the interpretations and implementation of the SAFE notices and new rules. Our business operations or future strategy could be
adversely affected by the SAFE notices and the new rules. For example, we may be subject to more stringent review and
approval processes with respect to our foreign exchange activities.
The foreign currency exchange rate
between U.S. dollars and Renminbi (“RMB”) could adversely affect our reported financial results and condition.
To the extent that
we need to convert U.S. dollars into RMB for our operational needs, our financial position and the price of our common stock may
be adversely affected should RMB appreciate against U.S. dollar at that time. Conversely, if we decide to convert our RMB
into U.S. dollars for the operational needs or paying dividends on our common stock, the dollar equivalent of our earnings from
our subsidiaries in the PRC would be reduced should U.S. dollar appreciate against RMB.
Until 1994, RMB experienced
a gradual but significant devaluation against most major currencies, including dollars, and there was a significant devaluation
of RMB on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of RMB relative to U.S. dollar has remained stable and has appreciated
slightly against U.S. dollar. Countries, including the United States, have argued that RMB is artificially undervalued due to the
PRC’s current monetary policies and have pressured the PRC to allow RMB to float freely in world markets. In July 2005, the
PRC government changed its policy of pegging the value of RMB to the U.S. dollar. Under the new policy, RMB is permitted to
fluctuate within a narrow and managed band against a basket of designated foreign currencies. While the international reaction
to RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt
an even more flexible currency policy, which could result in further and more significant appreciation of RMB against the dollar.
Restrictions on currency exchange
may limit our ability to utilize our revenues effectively and the ability of our PRC Operating Entities to obtain financing.
Substantially all
of our revenues and operating expenses are denominated in RMB. Restrictions on currency exchange imposed by the PRC government
may limit our ability to utilize revenues generated in RMB to fund our business activities outside the PRC, if any, or expenditures
denominated in foreign currencies. Under current PRC regulations, RMB may be freely converted into foreign currency for payments
relating to “current account transactions,” which include among other things dividend payments and payments for the
import of goods and services, by complying with certain procedural requirements. Our PRC Operating Entities may also retain foreign
exchange in their respective current account bank accounts, subject to a cap set by SAFE or its local counterpart, for use in payment
of international current account transactions.
However, conversion
of RMB into foreign currencies and of foreign currencies into RMB, for payments relating to “capital account transactions,”
which principally includes investments and loans, generally requires the approval of SAFE and other relevant PRC governmental authorities.
Restrictions on the convertibility of the RMB for capital account transactions could affect the ability of our PRC Subsidiary to
make investments overseas or to obtain foreign exchange through debt or equity financing, including by means of loans or capital
contributions from us.
In August 2008, SAFE
promulgated Circular 142, a notice regulating the conversion by FIEs of foreign currencies into RMB by restricting how the converted
RMB may be used. Circular 142 requires that RMB converted from the foreign currency-denominated capital of a FIE may only be used
for purposes within the business scope approved by the applicable government authority and may not be used for equity investments
within the PRC unless specifically provided for otherwise. In addition, SAFE strengthened its oversight over the flow and use of
RMB funds converted from the foreign currency-denominated capital of a FIE. The use of such RMB may not be changed without approval
from SAFE, and may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Violations of Circular
142 may result in severe penalties, including substantial fines as set forth in the SAFE rules.
Any existing and future
restrictions on currency exchange may affect the ability of our PRC Subsidiary or affiliated entity to obtain foreign currencies,
limit our ability to utilize revenues generated in RMB to fund our business activities outside the PRC that are denominated in
foreign currencies, or otherwise materially and adversely affect our business.
We may be exposed to liabilities
under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could
have a material adverse effect on our business.
We are subject to
the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments
and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or
retaining business. We have operations, agreements with third parties and we make all of our sales in China. The PRC also strictly
prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments
by the employees, consultants, sales agents or distributors of our company and its affiliate, even though they may not always be
subject to our control. It is our policy to implement safeguards to discourage these practices by our employees, and we have implemented
a policy to comply specifically with the FCPA. In spite of these efforts, our existing safeguards and any future improvements may
prove to be less than effective, and the employees, consultants, sales agents or distributors of our company and its affiliate
may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result
in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business,
operating results and financial condition. In addition, the U.S. government may seek to hold our company liable for successor liability
FCPA violations committed by companies in which we invest or that we acquire.
If we make equity compensation grants
to persons who are PRC citizens, they may be required to register with SAFE. We may also face regulatory uncertainties that
could restrict our ability to adopt an equity compensation plan for our directors and employees and other parties under PRC law.
On April 6, 2007,
SAFE issued the Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan
or Stock Option Plan of An Overseas Listed Company, also known as Circular 78. It is not clear whether Circular 78 covers all forms
of equity compensation plans or only those which provide for the granting of stock options. For any plans which are so
covered and are adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC
citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78
also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas
listed company’s covered equity compensation plan prior to April 6, 2007. We intend to adopt an equity compensation plan
in the future and make option grants to our officers and directors, most of whom are PRC citizens. Circular 78 may require our
officers and directors who receive option grants and are PRC citizens to register with SAFE. We believe that the registration and
approval requirements contemplated in Circular 78 will be burdensome and time consuming. If it is determined that any of our
equity compensation plans is subject to Circular 78, failure to comply with such provisions may subject us and participants of
our equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation
to our PRC employees. In that case, our ability to compensate our employees and directors through equity compensation would
be hindered and our business operations may be adversely affected.
Any recurrence of severe acute respiratory
syndrome (“SARS”), Avian Flu, or another widespread public health problem in the PRC could adversely affect our operations.
A renewed outbreak
of SARS, Avian Flu or another widespread public health problem in the PRC, where all of our businesses are located and where all
of our sales occur, could have a negative effect on our operations. Our businesses are dependent upon our ability to continue
to efficiently distribute and sell our products. Such an outbreak could have an impact on our operations as a result of:
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quarantines
or closure of our distribution center, which would severely disrupt our operations,
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the
sickness or death of our key officers and employees, and
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a
general slowdown in the PRC economy.
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Any of the foregoing
events or other unforeseen consequences of public health problems could adversely affect our operations.
Adverse changes in political, economic
and other policies of the PRC government could have a material adverse effect on the overall economic growth of the PRC, which
could reduce the demand for our products and materially and adversely affect our competitive position.
All of our business
operations are conducted in the PRC, and all of our sales are currently made in the PRC. Accordingly, our business, financial condition,
results of operations and prospects are affected significantly by economic, political and legal developments in the PRC. The PRC
economy differs from the economies of most developed countries in many respects, including:
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the
extent of government involvement;
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the
level of development;
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the
control of foreign exchange;
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the
allocation of resources;
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an
evolving regulatory system; and
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a
lack of sufficient transparency in the regulatory process.
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While the PRC economy
has experienced significant growth in the past 20 years, growth has been uneven, both geographically and among various sectors
of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources.
Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition
and results of operations may be adversely affected by government control over capital investments or changes in tax regulations
that are applicable to us.
The PRC economy has
been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented
measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets
and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in
the PRC are still owned by the PRC government. The continued control of these assets and other aspects of the national economy
by the PRC government could materially and adversely affect our business. The PRC government also exercises significant control
over PRC economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the PRC government
to slow the pace of growth of the PRC economy could result in decreased expenditures by the users of our products, which in turn
could reduce demand for our products.
Moreover, the political
relationship between the United States, Europe, or other Asian nations and the PRC is subject to sudden fluctuation and periodic
tension. Changes in political conditions in the PRC and changes in the state of foreign relations are difficult to predict and
could adversely affect our operations or cause our products to become less attractive. This could lead to a decline in our profitability.
Any adverse change
in the economic conditions or government policies in the PRC could have a material adverse effect on overall economic growth and
the level of healthcare investments and expenditures in the PRC, which in turn could lead to a reduction in demand for our products
and consequently have a material adverse effect on our businesses.
Because our business is located in
the PRC, we may have difficulty establishing adequate management, legal and financial controls, which are required in order to
comply with United States securities laws.
PRC companies have
historically not adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control systems. In addition, we may have difficulty in hiring
and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience
difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements,
books of account and corporate records and instituting business practices that meet Western standards. Therefore, we may,
in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404
of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls
which could impact the reliability of its financial statements and prevent us from complying with the rules and regulations promulgated
by the Securities Exchange Commission (the “SEC”) and the requirements of the Sarbanes-Oxley Act of 2002 (“SOX”). Any
such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business.
Investors may experience difficulties
in effecting service of legal process, enforcing foreign judgments or bringing original actions in the PRC based upon
United States laws, including the federal securities laws or other foreign laws against us or our management.
All of our current
business operations are conducted in the PRC. Moreover, our president and all of our officers are nationals and residents
of the PRC. All the assets of these persons are located outside the United States and in the PRC. As a result, it may not be possible
to effect service of process within the United States or elsewhere outside the PRC upon these persons. In addition, uncertainty
exists as to whether the PRC courts would recognize or enforce judgments of United States courts obtained against such officers
and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof,
or be competent to hear original actions brought in the PRC against us or such persons predicated upon the securities laws of the
United States or any state thereof.
If we are found to be in violation
of current or future PRC laws, rules or regulations regarding the legality of foreign investment in the PRC with respect to our
ownership structure, we could be subject to severe penalties.
We currently conduct
business operations solely in the PRC through our subsidiaries, in which we hold 100% equity ownership interest. We are now
a Nevada corporation. As a result, our subsidiaries in the PRC are regarded as FIEs under PRC law and we are subject to PRC law
limitations on foreign ownership of PRC companies. There are substantial uncertainties regarding the interpretation and application
of PRC laws and regulations, including, but not limited to, the laws and regulations governing our healthcare products distribution
and production businesses.
Accordingly, it is
possible that the relevant PRC authorities could, at any time, assert that any portion of our existing or future ownership structure
and businesses violate existing or future PRC laws, regulations or policies. It is also possible that the new laws or regulations
governing our business operations in the PRC that have been adopted or may be adopted in the future will prohibit or restrict foreign
investment in, or other aspects of, any of our PRC Operating Entities’ and our current or proposed businesses and operations. The
effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New
laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
The PRC government has broad discretion
in dealing with violations of laws and regulations, including:
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confiscating
our income;
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revoking
business and other licenses;
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requiring
us to discontinue any portion or all of our business;
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requiring
us to restructure our ownership structure or operations; and
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requiring
actions necessary for compliance.
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In particular, licenses
and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We
cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure
you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As
a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide
certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from
conducting a substantial portion of our business operations, which, in turn, could materially and adversely affect our business,
financial condition and results of operations.
Risks Relating to Investment in Our Securities
An active public market for our common
stock may not develop or be sustained, which would adversely affect the ability of our investors to sell their securities in the
public market.
We cannot predict
the extent to which an active public market for our common stock will develop or be sustained.
Shares eligible for future sale may
adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public
marketplace could reduce the price of our common stock.
Holders of a significant
number of our shares and/or their designees may be eligible to sell our shares of common stock by means of ordinary brokerage transactions
in the open market pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”), subject to certain limitations. In
general, pursuant to Rule 144, a non-affiliate stockholder (or stockholders whose shares are aggregated) who has satisfied a six-month
holding period, and provided that there is current public information available, may sell all of its securities. Rule 144
also permits the sale of securities, without any limitations, by a non-affiliate that has satisfied a one-year holding period.
Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price
of our common stock by creating an excessive supply.
If we fail to maintain effective
internal controls, we may not be able to accurately report our financial results or prevent fraud, and our business, financial
condition, results of operations and reputation could be materially and adversely affected.
The effectiveness
of our internal controls is essential to the integrity of our business and financial results. Our public reporting obligations
currently place and are expected to continue to place a strain on our management, operational and financial resources and systems.
We have implemented measures to enhance our internal controls, and plan to take steps to further improve our internal controls.
We cannot assure you that the measures taken to improve our internal controls will be effective. If we fail to maintain effective
internal controls in the future, our business, financial condition, results of operations and reputation may be materially and
adversely affected.
Compliance with changing regulation
of corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations
and standards relating to corporate governance and public disclosure, including SOX and related SEC regulations, have created uncertainty
for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our
management team will need to invest significant management time and financial resources to comply with both existing and evolving
standards for public companies, which will lead to increased general and administrative expenses and a diversion of management
time and attention from revenue generating activities to compliance activities.
We do not foresee paying cash dividends
in the near future.
We do not plan to
declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future
earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the
investment to produce dividend income.