Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C.20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of
Report (Date of earliest event reported): October 1, 2010
G2 VENTURES,
INC.
(Exact
name of registrant as specified in its charter)
Texas
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333-108715
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98-0221494
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(State
or other jurisdiction of incorporation)
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(Commission
File
Number)
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(IRS
Employer
Identification
No.)
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16th
Floor, Tianjin Global Zhiye Square, 309 Nanjing Road,
Nankai
District, Tianjin, PRC
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300100
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: 86-22-58896888
N/A
(Former
name or former address, if changed since last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see
General Instruction A.2. below):
¨ Written communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material
pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
¨ Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
TABLE
OF CONTENTS
Item No.
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Description of Item
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Page
No.
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Item
1.01
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Entry
Into a Material Definitive Agreement
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5
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Item
2.01
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Completion
of Acquisition or Disposition of Assets
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6
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Item
3.02
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Unregistered
Sales of Equity Securities
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68
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Item
4.01
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Changes
in Registrant’s Certifying Accountant
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68
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Item
5.06
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Change
in Shell Company Status
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68
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Item
9.01
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Financial
Statements and Exhibits
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69
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2
CONVENTIONS
THAT APPLY TO THIS CURRENT REPORT ON FORM 8-K
Except
where the context otherwise requires and for purposes of this Current Report on
Form 8-K only:
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·
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“we,”
“us,” “our company,” “our,” “the Company” and “G2 Ventures” refer to G2
Ventures, Inc., its consolidated subsidiaries, namely Dynamic Elite
International Limited, a British Virgin Islands limited liability company
(“Dynamic Elite”), Tianjin Junhe Enterprise Management Consulting Co.,
Ltd., a PRC incorporated company (“Junhe Consulting”), and its operating
entities, namely Tianjin JowayShengshi Group Co., Ltd. (“Joway Group”),
Liaoning Joway Technology Engineering Co., Ltd. (“Joway Technology”),
Tianjin Joway Decoration Engineering Co., Ltd. (“Joway Decoration”) and
Tianjin Oriental Shengtang Import & Export Trading Co.,
Ltd.(“Shengtang Trading”), four PRC
companies.
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·
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references to the “Bulletin
Board,” the “OTC Bulletin Board” are to the Over-the-Counter Bulletin
Board, a securities quotation service, which is accessible at the website
www.otcbb.com.
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·
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references to PRC Operating
Entities’ “registered capital” are to the equity of PRC Operating
Entities, which under PRC law is measured not in terms of shares owned but
in terms of the amount of capital that has been contributed to a company
by a particular shareholder or all shareholders. The portion of a limited
liability company’s total capital contributed by a particular shareholder
represents that shareholder’s ownership of the company, and the total
amount of capital contributed by all shareholders is the company’s total
equity. Capital contributions are made to a company by deposits into a
dedicated account in the company’s name, which the company may access in
order to meet its financial needs. When a company’s accountant certifies
to PRC authorities that a capital contribution has been made and the
company has received the necessary government permission to increase its
contributed capital, the capital contribution is registered with
regulatory authorities and becomes a part of the company’s “registered
capital.”
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·
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“China” or “PRC” refers to the
People’s Republic of China, excluding Taiwan and the Special
Administrative Regions of Hong Kong and
Macau;
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·
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all references to “Renminbi” or
“RMB” are to the legal currency of China;
and
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·
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all references to “U.S. dollars,”
“dollars,” or “$” are to the legal currency of the United
States.
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Amounts
may not always add to the totals due to rounding.
Unless
otherwise noted, all translations from Renminbi to U.S. dollars usingthe
exchange rate refers to the exchange rate quoted on http://www.xe.com on October
6, 2010, being $1.00=RMB 6.6928. We make no representation that the RMB amounts
referred to in this Current Report on Form 8-K could have been or could be
converted into U.S. dollars at any particular rate or at all.
3
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Current Report on Form 8-K or Form 8-K and other reports filed by us from time
to time with the Securities and Exchange Commission (collectively the “Filings”) contain or
may contain forward-looking statements and information that are based upon
beliefs of, and information currently available to, our management as well as
estimates and assumptions made by our management. When used in the filings the
words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”
or the negative of these terms and similar expressions as they relate to us or
our management identify forward looking statements. Such statements reflect the
current view of our management with respect to future events and are subject to
risks, uncertainties, assumptions and other factors (including the risks
contained in the section of this report entitled “Risk Factors”) as they relate
to our industry, our operations and results of operations, and any businesses
that we may acquire. Should one or more of the events described in these risk
factors materialize, or should our underlying assumptions prove incorrect,
actual results may differ significantly from those anticipated, believed,
estimated, expected, intended or planned.
Although
we believe that the expectations reflected in the forward looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Except as required by applicable law, including the U.S.
federal securities laws, we do not intend to update any of the forward-looking
statements to conform them to actual results. The following discussion should be
read in conjunction with our pro forma financial statements and the related
notes that will be filed herein.
4
Item
1.01. Entry into a Material Definitive
Agreement
On
October 1, 2010, we entered into and consummated a Share Exchange Agreement with
Crystal Globe Limited (“Crystal Globe”), the sole shareholder of Dynamic Elite
International Limited (“Dynamic Elite”) and Dynamic Elite to acquire all the
issued and outstanding capital stock of Dynamic Elite, a British Virgin Islands
company, in exchange for the issuance to Crystal Globe 15,215,426
restricted shares of our common stock (the “Reverse
Merger”).
Immediately
after the closing of the Reverse Merger, we have a total of 20,000,000 issued
and outstanding shares of common stock. As a result of the Reverse
Merger, Dynamic Elite is now our wholly-owned
subsidiary. Dynamic Elite is the holding company of all the
equity interest of Tianjin Junhe Management Consulting Co., Ltd. (“Junhe
Consulting”), a PRC incorporated company.
On
September 16, 2010, prior to the Reverse Merger, Junhe Consulting and Tianjin
JowayShengshi Group Co., Ltd. (“Joway Group”), a PRC company, entered into a
series of agreements known as variable interest agreements (the “VIE
Agreements”) pursuant to which Joway Group became Junhe Consulting’s
contractually controlled affiliate.
Through
Junhe Consulting, we effectively and substantially control Joway Group and its
three wholly owned subsidiaries, namely Liaoning Joway Technology Engineering
Co., Ltd. (“Joway Technology”), Tianjin Oriental Shengtang Import & Export
Trading Co., Ltd.(“Shengtang Trading”) and Tianjin Joway Decoration
Engineering Co., Ltd.(“Joway Decoration”)
See “Our
PRC Operating Entities” under Item 2.01 for further information on Joway Group
and its subsidiaries.
The VIE
Agreements are a common structure used to control PRC corporations in certain
circumstances, particularly when it is not feasible to use cash to acquire such
companies. The VIE Agreements include:
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·
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a
Consulting Services Agreement through which Junhe Consulting has the right
to advise, consult, manage and operate Joway Group and collect and own all
of the net profits of Joway Group;
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·
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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
Group, approve any transactions that may materially affect the assets,
liabilities, rights or operations of Joway Group, and guarantee the
contractual performance by Joway Group of any agreements with third
parties, in exchange for a pledge by Joway Group of its accounts
receivable and assets;
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·
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a
Proxy Agreement under which the two owners of Joway Group have vested
their collective voting control over Joway Group to Junhe Consulting and
will only transfer their respective equity interests in Joway Group to
Junhe Consulting or its
designee(s);
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·
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an
Option Agreement under which the owners of Joway Group have granted to
Junhe Consulting the irrevocable right and option to acquire all of their
equity interests in Joway Group;
and
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·
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an
Equity Pledge Agreement under which the owners of Joway Group have pledged
all of their rights, titles and interests in Joway Group to Junhe
Consulting to guarantee Joway Group’s performance of its obligations under
the Consulting Services Agreement.
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Because
of the common control between Dynamic Elite, Junhe Consulting, Joway Group and
its wholly owned subsidiaries, for accounting purposes, the acquisition of these
entities has been treated as a recapitalization with no adjustment to the
historical basis of their assets and liabilities. The restructuring has been
accounted for using the “as if” pooling method of accounting and the operations
were consolidated as if the restructuring had occurred as of the beginning of
the earliest period presented in our consolidated financial statements and the
current corporate structure had been in existence throughout the periods covered
by our consolidated financial statements.
5
As a result of the VIE Agreements and
the Reverse Merger, Dynamic Elite, our wholly owned subsidiary, owns 100% of the
equity of Junhe Consulting, which in turn, through the VIE Agreements,
effectively and substantially controls Joway Group and its subsidiaries. As a
result of the Reverse Merger, we are now engaged in the manufacture and sale of
tourmaline-related healthcare products through Joway Group and its subsidiaries
(collectively, the “PRC Operating Entities”).
We claim
an exemption from the registration requirements of the Securities Act of 1933,
as amended (the “Act”) for the private placement of the shares of our
common stock to Crystal Globe pursuant to Section 4(2) of the Act and/or
Regulation D promulgated thereunder since, among other things, the transaction
did not involve a public offering, the recipient is an accredited
investor and had access to information about our company and their
investment, the recipient took the securities for investment and not resale, and
our company took appropriate measures to restrict the transfer of the
securities.
Item
2.01 Completion of Acquisition or
Disposition of Assets
As
described in Item 1.01 above, on October 1, 2010, we acquired all the issued and
outstanding shares of Dynamic Elite pursuant to the Share Exchange Agreement and
Dynamic Elite became our wholly owned subsidiary. The acquisition was accounted
for as a recapitalization effected by a share exchange, wherein Dynamic Elite is
considered the acquirer for accounting and financial reporting purposes. The
assets and liabilities of Dynamic Elite have been brought forward at their book
value and no goodwill has been recognized.
FORM
10 DISCLOSURE
As
disclosed elsewhere in this report, on October 1, 2010, we acquired Dynamic
Elite in a Reverse Merger acquisition transaction. Item 2.01(f) of Form 8-K
states that if the registrant were a shell company as we were immediately before
the Reverse Merger transaction disclosed under Item 2.01, then the registrant
must disclose the information that would be required if the registrant were
filing a general form for registration of securities under the Exchange Act on
Form 10.
Accordingly,
we are providing below the information that would be included in a Form 10
registration statement. Please note that the information provided below relates
to the combined enterprises after the acquisition of Dynamic Elite, except that
information relating to periods prior to the date of the Reverse Merger only
relate to Dynamic Elite and its subsidiaries unless otherwise specifically
indicated.
CORPORATE
STRUCTURE AND HISTORY
Corporate
Structure
We are a
Texasholding company for our direct and indirect subsidiaries in the BVI and the
PRC. We own all of the issued and outstanding capital stock of Dynamic Elite, a
BVI corporation. Dynamic Elite is a holding company that owns 100% of the
outstanding capital stock of Junhe Consulting, a PRC company.
Because
it was not feasible for us to acquire PRC companies for cash pursuant to PRC
laws and regulations, we, through Junhe Consulting entered into VIE Agreements
on September 16, 2010 with Joway Group pursuant to which Joway Group became
Junhe Consulting’s contractually controlled affiliate.
Joway
Group has three wholly owned subsidiaries, namely Joway Technology,Shengtang
Trading and Joway Decoration, involved in the tourmaline-related healthcare
products business, We control Joway Group, Joway Technology,Shengtang
Trading and Joway Decoration (collectively referred to as the “PRC Operating
Entities”) through the VIE Agreements.These contracts are summarized below.
Please also refer to the full text of the contracts, which are filed as exhibits
to this report.
6
These VIE
Agreements include:
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·
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a
Consulting Services Agreement through which Junhe Consulting has the right
to advise, consult, manage and operate Joway Group and collect and own all
of the net profits of Joway Group;
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|
·
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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
Group, approve any transactions that may materially affect the assets,
liabilities, rights or operations of Joway Group, and guarantee the
contractual performance by Joway Group of any agreements with third
parties, in exchange for a pledge by Joway Group of its accounts
receivable and assets;
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·
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a
Proxy Agreement under which the two owners of Joway Group have vested
their collective voting control over Joway Group to Junhe Consulting and
will only transfer their respective equity interests in Joway Group to
Junhe Consulting or its
designee(s);
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·
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an
Option Agreement under which the owners of Joway Group have granted to
Junhe Consulting the irrevocable right and option to acquire all of their
equity interests in Joway Group;
and
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·
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an
Equity Pledge Agreement under which the owners of Joway Group have pledged
all of their rights, titles and interests in Joway Group to Junhe
Consulting to guarantee Joway Group’s performance of its obligations under
the Consulting Services Agreement.
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We
believe that the terms of these agreements are no less favorable than the terms
that we could obtain from disinterested third parties. According to our PRC
counsel, AllbrightLaw Offices, our conduct of business through these agreements
complies with existing PRC laws, rules and regulations.
As a
result of these contractual arrangements, Joway Group became our controlled VIE.
A variable interest represents a contractual or ownership interest in another
entity that causes the holder to absorb the changes in fair value of the other
entity’s net assets. Potential variable interests include: holding economic
interests, voting rights, or obligations to an entity; issuing guarantees on
behalf of an entity; transferring assets to an entity; managing the assets of an
entity; leasing assets from an entity; and providing financing to an entity. In
such cases consolidation of the VIE is required by the enterprise that controls
the economic risks and rewards of the entity, regardless of ownership. We have
consolidated the PRC Operating Entities’ historical financial results in our
financial statements as a variable interest entity pursuant to U.S.
GAAP.
All of
our business operations are conducted through our PRC Operating Entities. The
chart below sets forth our corporate structure.
7
Our
Corporate History and Background
We were
formed as a Texas corporation on March 21, 2003 to acquire most of the assets
and certain liabilities of and succeed the business of G2 Companies, Inc.,
(formerly Hartland Investment, Inc.), as an independent recording company and
artist management company.
On April
1, 2003, we acquired the business, most of the assets and assumed liabilities of
G2 Companies, Inc., a music recording and production company. At the time of
such acquisition, Gust Kepler, our principal shareholder, sole officer, director
and employee, also served as an officer, director and was the sole shareholder
of G2 Companies, Inc., the seller. The acquisition of assets and the assumption
of liabilities from G2 Companies, Inc. were not conducted at “arm’s length” due
to Mr. Kepler’s interest in both companies.
On May
13, 2008, through a registered offering, we offered up to 1,500,000 shares of
our common stock on a self-underwritten basis at a price of $0.10 per share with
a minimum offering of 1,200,000 shares and a maximum offering of 1,500,000
shares (the “Offering”). The shares were offered and sold by the Company
throughour previous Chief Executive Officer, Mr. Gust C. Kepler through December
3, 2008, when we terminated the Offering after subscribing 1,284,574 shares and
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 Reverse Merger, 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 21, 2010, Mr. Kepler
entered into a Stock Purchase Agreement to sell to Crystal Globe Limited, a
British Virgin Islands company (“Crystal Globe”) all his 3,300,000 shares of
common stock in the Company, representing approximately 68.97% of the issued and
outstanding capital stock of the Company. The transaction closed on September
28, 2010. 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 on that
date. As a result, on September 28, 2010, there was a change in
control of the Company.
Acquisition
of Dynamic Elite
On
October 1, 2010, we entered into and consummated a Share Exchange Agreement with
Crystal Globe, the sole shareholder of Dynamic Elite and Dynamic Elite to
acquire all the issued and outstanding capital stock of Dynamic Elite, a British
Virgin Islands company, in exchange for the issuance to Crystal Globe
of 15,215,426 restricted shares of our common stock. As of result of
this Reverse Merger, Crystal Globe owns a total of 18,515,426 shares of our
common stock or approximately 92.58% of our total and issued shares of common
stock and is our single largest shareholder.
As
described above, because of our acquisition of Dynamic Elite, we now control,
through Junhe Consulting, the PRC Operating Entities under the VIE Agreements
and are now involved in the manufacture and sale of tourmaline-related
healthcare products.
Tianjin
Junhe Enterprise Management Consulting Co., Ltd.
Junhe
Consulting was established in the PRC on September 15, 2010. Dynamic
Elite currently owns 100% of Junhe Consulting. On September 9, 2010,
the local government of the PRC issued a certificate of approval regarding the
foreign ownership of Junhe Consulting by Dynamic Elite, a British Virgin Islands
entity. Jinghe Zhang serves as the executive director of Junhe
Consulting.
8
Our
PRC Operating Entities
Joway
Group, our primary operating entity, was incorporated on May 17, 2007 in the PRC
as a limited liability company under the name of “Tianjin Joway Textile Co.,
Ltd.” It changed its name to Tianjin Joway Shengshi Group Co., Ltd. on November
24, 2009. Its original registered capital was RMB 5,000,000, which was increased
to RMB 50,000,000 on March 16, 2009.Its term of operation is from May 17, 2007
to May 16, 2022. Mr. Jinghe Zhang serves as the Executive Directors and General
Manager of Joway Group and owns 99% of the equity interest in Joway
Group. Baogang Song owns the remaining 1% of the equity interest of
Joway Group. Joway Group owns 100% equity interest in each of Joway
Technology, Joway Decoration, and Shengtang Trading.
Joway
Technology was incorporated under the PRC laws on March 28, 2007, with a
registered capital of RMB 1,100,000. Its term of operation is from March 28,
2007 to March 27, 2017. Its business scope is intelligent engineering design and
construction; development and sales of electronics, water filters, sales of
groceries and decoration project.
Joway
Decoration was incorporated under the PRC laws on April 22, 2009, with a
registered capital of RMB 2,000,000. Its term of operation is from April 22,
2009 to April 21, 2019. Its business scope is decoration projects, intelligent
electric heating project design and construction, development and sales of
electronics technology, sales of groceries, water filters, manufacture and sales
of wood products.
Shengtang
Trading was incorporated under the PRC laws on September 18, 2009, with a
registered capital of RMB 2,000,000. Its term of operation is from September 18,
2009 to September 17, 2029. Its scope of business is the import and export of
merchandise and technology; knitwear, groceries, biochemistry (excluding toxic
chemicals and drugs that are easily manufactured), and wholesale and retail of
hardware.
Overview
We are
through our PRC Operating Entities, engaged in the manufacture and sales of
tourmaline-related healthcare products.
As of
October 6, 2010, we have approximately 128 employees.
Our
principal executive offices are located at16th Floor, Tianjin Global Zhiye
Square, 309 Nanjing Road, Nankai District, Tianjin, PRC 300100.
Introduction
to Tourmaline
Tourmaline
is the most important raw material we use in the manufacture of our healthcare
products. It is a crystalsilicate 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
hasthe ability to become its own source of electric charge, as it is both
pyroelectric, as well as piezoelectric. When it is put under greater amounts of
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, where
they gently elevate the body's surface temperature and activate major bodily
functions. Negative ions are atoms that have a negative electric charge. It is
believed that FIRs and negative ions gently heal, soothe, stimulate and detox
the physical body, as well as the mind. (Source:
http://www.globalhealingcenter.com/tourmaline.html)
Because
it is a permanent source of FIRs and negative ions, tourmaline is believed to
have the advantage of improving human body circulation, relieving stress,
increasing mental alertness and strengthening the immune system function
(Source: Niwa Institute for Immunology, Japan. Int J. Biometeorol 1993 Sep;
37(3) 133-8). In view of its powerful 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.
9
We
purchase liquid tourmaline from domestic companies which, in turn, import it
from South Korea. Liquid tourmaline is readily available and its price has
remained relatively stable. We have not experienced any shortage in tourmaline
but as a precaution, we closely monitor its price and have several back-up
suppliers.
Manufacture
Process
In order
to take advantage of Tourmaline’s health benefits, we coat or infuse liquid
tourmaline or granular tourmaline into our products using the following
methods:
The
Spray Method
We use
special high-pressure nozzle to spray liquid tourmaline onto the surface of the
products. 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 fibresof the product so that the powdered
tourmaline will not fall off. This method is used in the manufacture of single
large piece of textile products, such as mattresses.
The
Dip Method
We
completely immerse fabrics into liquid tourmaline. We 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 fibres of
our products 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 tourmaline particles directly into components of our products. This method
is used to make activated water machine and other water treatment
products.
The three
methods mentioned above are key 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 employee is
prohibited from unlawfully revealing and using our confidential technology
during his term of employment and ten years after the termination of employment.
We also plan to submit patent application for the dipmethod in the
PRC.
Our
Products and Services
We
primarily manufacture the following three series of tourmaline-related
healthcare products:
1.
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Healthcare
Knit Goods Series
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For the
fiscal years ended December 31, 2008 and 2009, our healthcare knit goods series
products accounted for approximately 3.5% and 55.4% of our annual sales revenue,
respectively. This series comprises tourmaline treated mattress, bed linen,
underwear, and shirt products. We use either the spray or dip method to embed
tourmaline particles into the fabric of this series of products. The
tourmaline-treated apparel and bedding provide an electrical stimulus to the
wearer's or user’s body and improve their health.
Set forth
below is a list of products in the Healthcare Knit Goods Series, the trademarks
or marks under which they are marketed and the manufacturing method
employed:
10
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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Golden
Mattress
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Spray
Method
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2
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Tourmaline
Mattress
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Spray
Method
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3
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Tourmaline
Undergarment
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Dip
Method
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||||
4
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Tourmaline
Bed Linens
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Spray
Method
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5
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Tourmaline
Male Shirts
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Dip
Method
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2.
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Daily
Healthcare and Personal Care Series
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For the
fiscal years ended December 31, 2008 and 2009, our daily healthcare and personal
care series products accounted for approximately 0% and 16% of our annual sales
revenue, respectively. This series comprises tourmaline-treated wrist
protectors,knee protector, scarves, shampoo and soap products. We use
the spray or dip or filling methods to embed the tourmaline particles into the
products in this series. We believe these tourmaline-treated daily
healthcare products and personal care products produce FIRs and negative ions
which stimulate blood circulation in capillary vessels and deliver incredible
benefits to users both physically and mentally.
Set forth
below is a list of our products in the Daily Healthcare and Personal Care
Series, the trademarks or marks under which they are marketed and the
manufacturing method employed:
No.
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Products
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Trademark/Mark
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Manufacture
Method
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|||
1
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Tourmaline
Wrist Protector
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Spray
Method
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||||
2
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Tourmaline
Knee Protector
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Spray
Method
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||||
3
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Tourmaline
Scarves
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Dip
Method
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||||
4
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Tourmaline
Shampoo
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Filling
Method
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||||
5
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Tourmaline
Soap
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Filling
Method
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||||
6
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Tourmaline
Socks
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Dip
Method
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3.
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Wellness
House and Activated Water Machine
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For the
years ended December 31, 2008 and 2009, our wellness house and activated water
machine series products accounted for approximately 96.5% and 28.5% of our
annual sales revenue, respectively. This series mainly includes tourmaline
wellness houses, tourmaline wellness house materials, 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
icons when heated. Tourmaline wellness housesare currently employed for the
purpose of stimulating perspiration of users to improve their health.It is
believed that the user will feel more rejuvenated after using our tourmaline
wellness house.We mainly manufacture two types of wellness houses: one for
family use, which is designed to be installed in the corner of a room and can
seat one to eight people depending on its size; the other is customized and
constructed on site for commercial bathrooms or spas in according to their
specifications.
11
Below is
a list of different models of our Wellness House for family use:
Model
|
Trademark/Mark
|
Material
|
Dimension
|
Capacity
|
Manufacturing
Method
|
|||||
Classic
Mini Wellness House
|
Hemlock
|
1.0mX1.0mX1.9m
|
1-2
persons
|
Spray
Method
|
||||||
Classic
Twin Wellness House I
|
Hemlock
|
1.2mX1.05MX1.9m
|
2-3
persons
|
Spray
Method
|
||||||
Classic
Twin Wellness House II
|
Snow
Pine
|
1.2mX1.05mX1.9m
|
2-3
persons
|
Spray
Method
|
||||||
Elegant
Multi-Person Wellness House
|
Hemlock
|
1.5mX0.53mX1.37mX1.9m
|
4-5
persons
|
Spray
Method
|
||||||
Classic
Multi-Person Wellness House
|
Hemlock
|
1.75mX1.6mX1.9m
|
6-7
persons
|
Spray
Method
|
Our
tourmaline water machines or water mugs purify, mineralize and activate the
water in them because we infuse tourmaline particles into the filter of the
water machine or water mug. It is believed that the purified, mineralized and
activated water will promote the drinker’s metabolism and prevent
oxidation.
Below is a list of our water
treatment products:
No.
|
Products
|
Trademark/Mark
|
Manufacturing
Method
|
|||
1
|
Tourmaline
Water Machine
|
Filling
Method
|
||||
2
|
Tourmaline
Water Mug
|
Filling
Method
|
Return
policy
We accept
returns of defective products (excluding wellness houses) within seven days of
purchase and exchanges of defective products within 15 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 ago, we will
charge a service fee of 110% of the cost of repaired or replaced
parts.
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.
Except
for the fiscal year 2007 where the maintenance contributed to 62.8% of our then
annual revenue, there has been very little demand of our wellness house
maintenance services.
12
Manufacturing
Facilities
Our manufacturing facilities are
located in Baodi District, Tianjin, PRC, with an area of approximately 2,500
square meters. The major equipment we use in the manufacture our products
include three ironing machines, three driers, three washing machines, three
cutting machines, 43 sewing machines, six chainsaws, six impact drills and six
air nailers. We have 33 employees engaged in the manufacture as of October 6,
2010. We have our own design team comprising four designers who are responsible
for designing new styles for our products every quarter. They are also
responsible for the product packaging design.
Customers
and Suppliers
Customers
Below is
a list of our top ten customers for the years 2007, 2008 and 2009,
respectively.
Top Ten Customers in 2007
|
|||||||||||||||
No.
|
Name
|
Amount
(RMB)
|
Amount
(US$)
|
Products Sold
|
Percentage
of Sales
|
||||||||||
1
|
Shenyang
Xike Quartz Co., Ltd.
|
26,047 | 3,836 |
Wellness
House maintenance
|
62.8 | % | |||||||||
2
|
Fengrong
Bo
|
7,115 | 1,048 |
Wellness
House materials
|
17.2 | % | |||||||||
3
|
Xinhua
Insurance Company
|
4,089 | 602 |
Wellness
House materials
|
9.9 | % | |||||||||
4
|
Anshan
City Tiedong District Aiming Law Firm
|
3,438 | 506 |
Wellness
House materials
|
8.3 | % | |||||||||
5
|
Beijing
Luhang Machinery Factory
|
763 | 112 |
Wellness
House materials
|
1.8 | % | |||||||||
Total
|
41,453 | 6,104 | 100.0 | % |
Top Ten Customers in 2008
|
|||||||||||||||
No.
|
Name
|
Amount
(RMB)
|
Amount
(US$)
|
Products Sold
|
Percentage of
Sales
|
||||||||||
1
|
ShenyangNew
CityRiversideHealthCenter
|
270,419 | 39,826 |
Wellness
House
|
6.80 | % | |||||||||
2
|
Chenghong
Wei
|
168,600 | 24,831 |
Wellness
House
|
6.48 | % | |||||||||
3
|
Xiaoyun
Zhu
|
165,000 | 24,300 |
Wellness
House
|
6.40 | % | |||||||||
4
|
Yanmei
Feng
|
165,000 | 24,300 |
Wellness
House
|
6.19 | % | |||||||||
5
|
Youfeng
Lu
|
162,620 | 23,950 |
Wellness
House
|
5.30 | % | |||||||||
6
|
Shenyang
Shifa Special Rubber Co., Ltd.
|
157,000 | 23,122 |
Wellness
House
|
5.06 | % | |||||||||
7
|
Weichun
Zhou
|
156,000 | 22,975 |
Wellness
House
|
4.83 | % | |||||||||
8
|
Lijuan
Gu
|
140,000 | 20,619 |
Wellness
House
|
2.12 | % | |||||||||
9
|
Xudong
Wang
|
137,500 | 20,250 |
Wellness
House
|
1.20 | % | |||||||||
10
|
Runmei
Zhang
|
133,430 | 19,651 |
Wellness
House
|
1.09 | % | |||||||||
Total
|
1,656,139 | 243,824 | 45.47 | % |
13
Top Ten Customers in 2009
|
|||||||||||||||
No.
|
Name
|
Amount
(RMB)
|
Amount
(US$)
|
Products Sold
|
Percentage
of Sales
|
||||||||||
1
|
Shandong
Jingbo Holdings Development Co., Ltd.
|
523,223 | 77,058 |
Wellness
House materials
|
2.5 | % | |||||||||
2
|
Beijing
No. 9 Urban Construction Engineering Company Limited
|
397,087 | 58,481 |
Wellness
House materials
|
1.9 | % | |||||||||
3
|
Baocong
Yang Joining Franchise Store
|
380,788 | 56,080 |
Tourmaline
mattress and underwear
|
1.8 | % | |||||||||
4
|
Jinbao
Liu Joining Franchise Store
|
369,461 | 54,412 |
Tourmaline
mattress, pillowcases and soap
|
1.7 | % | |||||||||
5
|
Xiuchun
Jia Joining Franchise Store
|
357,615 | 52,668 |
Tourmaline
mattress, mugs and scarves
|
1.7 | % | |||||||||
6
|
Fengqi
Wu
|
349,628 | 51,492 |
Tourmaline
Wellness House
|
1.6 | % | |||||||||
7
|
Zhuoguan
Joining Franchise Store
|
330,795 | 48,718 |
Tourmaline
mattress, pillowcases and soap
|
1.6 | % | |||||||||
8
|
Zhengyi
Qiao Joining Franchise Store
|
290,334 | 42,759 |
Tourmaline
mattress, pillowcases and soap
|
1.4 | % | |||||||||
9
|
Ning
Fang Joining Franchise Store
|
289,004 | 42,563 |
Tourmaline
mattress, pillowcases and soap
|
1.4 | % | |||||||||
10
|
Liang
Ping Joining Franchise Store
|
288,362 | 42,469 |
Tourmaline
mattress, pillowcases and soap
|
1.4 | % | |||||||||
Total
|
3,576,308 | 526,700 | 16.8 | % |
Our main
customers are franchise stores that are authorized to sell our products
exclusively. Two customers made up more than 10% of our sales in 2007. However,
none of our customers have accounted for more than 10% of our annual sales
revenue for the fiscal years 2008 and 2009.
In the
past three fiscal years, our products have been primarily sold to the
northeasternpart of China, which includes Liaoning province, Jilin province and
Heilongjiang province. Set forth below is a geographical breakdown of our sales
for the fiscal years 2008 and 2009 and six months ended June 30,
2010:
14
Region
|
Percentage of Sale
|
|
Northeast
China (Liaoning, Jilin, Heilongjiang)
|
40%
|
|
North
China(Beijing, Tianjin, Hebei, Shanxi, Inner Mongolia)
|
23%
|
|
East
China (Shanghai, Jiangsu, Zhejiang, Anhui, Fujian,
Jiangxi)
|
20%
|
|
Central
China (Henan, Hubei, Hunan)
|
6%
|
|
Southwest
China (Chongqing, Sichuan, Guizhou, Yunnan, Tibet)
|
6%
|
|
South
China (Guangdong, Hainan, Guangxi)
|
5%
|
Suppliers
Below is
a list of our top ten suppliers for the years 2008 and 2009,
respectively.
Top Ten Suppliers in 2008
|
|||||||||||||||
No.
|
Name
|
Amount (RMB)
|
Amount (US$)
|
Product Purchased
|
Percentage of
Purchase
|
||||||||||
1
|
Shenyang
Joway Industrial Development Co., Ltd.
|
784,990 | 115,609 |
Water
machine, bedding, underwear, waist protector and kneepad
|
31.3 | % | |||||||||
2
|
Liaoning
Jiadebao Home Building Materials Supermarket Co., Ltd.
|
445,568 | 65,621 |
Wellness
House materials
|
17.8 | % | |||||||||
3
|
Tianjin
Daxing Import & Export Trading Co., Ltd.
|
245,020 | 36,086 |
Silk
cloth and mugs
|
9.8 | % | |||||||||
4
|
Guangdong
Hongjie Underwear Industrial Co., Ltd.
|
235,842 | 34,734 |
Underwear
|
9.4 | % | |||||||||
5
|
Daekjeng
Medicare
|
100,000 | 14,727 |
Tourmaline
|
3.84 | % | |||||||||
6
|
Shenyang
Hongguangyuan Wood Co., Ltd.
|
52,171 | 7,684 |
Wellness
House materials
|
2.1 | % | |||||||||
7
|
Shenyang
Yuzhi Foam Factory
|
43,040 | 6,339 |
Wellness
House materials
|
1.7 | % | |||||||||
8
|
Shenyang
Heyi Polyurethane Co., Ltd.
|
39,600 | 5,832 |
Wellness
House materials
|
1.6 | % | |||||||||
9
|
Shenyang
Hongyu Villa
|
33,623 | 4,952 |
Wellness
House materials
|
1.3 | % | |||||||||
10
|
Shenyang
Xinxin Taiyang Electronic Technology Co., Ltd.
|
30,248 | 4,455 |
Wellness
House materials
|
1.2 | % | |||||||||
Total
|
1,940,071 | 285,726 | 80.04 | % |
Top Ten Suppliers in 2009
|
|||||||||||||||
No.
|
Name
|
Amount (RMB)
|
Amount (US$)
|
Product Purchased
|
Percentage of
Purchase
|
||||||||||
1
|
Tianjin
Daxing Import & Export Trade Co., Ltd.
|
2,278,539 | 335,573 |
Cloth,
cotton, fabrics and underwear
|
18.2 | % | |||||||||
2
|
Shenyang
Joway Industrial Development Co., Ltd.
|
2,227,718 | 328,088 |
Cloth,
cotton, underpants and hats
|
17.8 | % | |||||||||
3
|
Haining
Futianrun Silk Co., Ltd.
|
604,125 | 88,973 |
Cloth
and Cotton,
|
4.8 | % | |||||||||
4
|
Hangzhou
Chufan Textile Co., Ltd.
|
603,752 | 88,918 |
Cloth,
cotton and mattress
|
4.8 | % | |||||||||
5
|
Beijing
Quanfu Wood Products Co., Ltd.
|
598,560 | 88,153 |
Wellness
House materials
|
4.8 | % | |||||||||
6
|
Shenyang
Hongguangyuan Wood Co., Ltd.
|
413,318 | 60,871 |
Wellness
House materials
|
3.3 | % | |||||||||
7
|
Shenzhen
Maskcare Biological Technology Co., Ltd.
|
354,265 | 52,174 |
Soap,
shampoo and shower gel
|
2.8 | % | |||||||||
8
|
Tianjin
Tielingjiacai Wood Co., Ltd.
|
347,849 | 51,230 |
Wellness
House
|
2.8 | % | |||||||||
9
|
Beijing
Chenjiehao Paint Debug Ltd.
|
331,250 | 48,785 |
Wellness
House materials
|
2.6 | % | |||||||||
10
|
Tianjin
Sunflower Packaging and Printing Co., Ltd.
|
238,035 | 35,057 |
Packaging
materials and product manuals
|
1.9 | % | |||||||||
Total
|
7,997,411 | 1,088,849 | 63.8 | % |
15
We had
two major suppliers that accounted for 18.2% and 17.8% of our annual purchase of
raw materials in 2009 and two major suppliers that accounted for 31.3% and 17.8%
of our annual purchase of raw materials in 2008.We do not have long term
contracts with any of our suppliers since the materials we use in our
manufacture are readily available on the market and their prices are generally
stable.
Franchise
Stores
Approximately
72% of our annual sales were made through the operation of franchise stores in
2009. For the six months ended June 30, 2010, approximately 86.78% of our sales
were made through franchise stores.
As of the
date of this Report, there are approximately 219 franchise stores across the PRC
that are 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)
|
52
|
|
Northern
China (Beijing, Tianjin, Hebei, Shanxi, Inner Mongolia)
|
48
|
|
Eastern
China (Shanghai, Jiangsu, Zhejiang, Anhui, Fujian,
Jiangxi)
|
31
|
|
Southern
China (Guangdong, Hainan, Guangxi)
|
27
|
|
Central
China (Henan, Hubei, Hunan)
|
30
|
|
Southwestern
China (Chongqing, Sichuan, Guizhou, Yunnan, Tibet)
|
31
|
|
Total
|
219
|
We use
multiple criteria to select our franchise stores, including reviewing each
potential franchisee’s financial conditions, sales network, sales personnel, and
faculties. Generally the potential franchise store submits an application to
become our franchise store; we will review the overall conditions of the
applicant and authorize the applicant to sell our products if the applicant
meets the minimum working capital requirement of RMB 40,000 and has the
requisite business facilities.
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
productsat 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 does the franchisee need to
pay any continuing royalties. The agreement is generally for a term of three
years and is renewable at the mutual agreement of both parties.
16
Compared
with the large volume of sales from franchise stores, sales to individual
consumers are relatively small. Sales to individual consumers accounted for
approximately 28% of our annual sales in 2009. For the six months
ended June 30, 2010, sales to individual consumers only accounted for 13.22%.
The individual consumers typically make orders at product meetings or via
telephone and we deliver the products upon receipt of the payment. We ship for
free if the purchase per order exceeds RMB 80,000 (approximately $11,
764.71).
Marketing
and Sales
The
success of our business largely depends on our marketing and sales
efforts.
We market
and advertise our products primarily in two ways. First, we organize, along with
the franchise stores, product seminars and meetings where our franchise stores
familiarize themselves with our products. The franchise stores are responsible
for the cost of organizing the seminars and meetings and we are responsible for
the travelling expenses of our employees who will travel to these meetings and
seminars to explain and promote our various product lines. There are on average
15 such seminars and meetings each month nationwide and we have budgeted
travelling expenses of approximately RMB30,000 (approximately $4,400) each
month. Generally, we choose the venue for the product seminars and meetings
based on market prospects, sales volume and the extent of meeting preparation.
As of October 6, 2010, we have held product seminars and meetings in
approximately 105 cities in the PRC.
We also organize an annual conference
to promote our products and brand names. While the product meeting is often
regional and held very frequently throughout the year, the annual conference is
nationwide, has more participants and it also serves as a celebration and reward
ceremony. The primary participants for the annual conference are our franchise
stores. Generally we are responsible for the cost of annual conferencesand the
cost of the annual conference for 2008 and 2009 was approximately RMB1,000,000
(approximately $147,000) and RMB 7,096,147 (approximately $ 1,043,551.03),
respectively.
Below is
a breakdown of our marketing expenses in the fiscal years 2008 and
2009.
2008
|
2009
|
|||||||||||||||
Expenses
|
RMB
|
US$
(approx.)
|
RMB
|
US$
(approx.)
|
||||||||||||
Promotion
|
325,588.00 | 46,764.77 | 7,065,743.60 | 1,032,870.57 | ||||||||||||
Printing
|
0.00 | 0.00 | 268,808.51 | 39,294.43 | ||||||||||||
Travelling
|
9,788.60 | 1,405.95 | 353,189.20 | 51,629.21 | ||||||||||||
Training
|
31,416.48 | 4,512.40 | 137,145.80 | 20,047.98 | ||||||||||||
Salaries
|
8,820.00 | 1,266.83 | 272,740.00 | 39,869.14 | ||||||||||||
Total
|
375,613.08 | 53,949.96 | 8,097,627.11 | 1,183,711.32 |
In 2009,
we spent RMB 7.1 million on the annual conference and had revenue of
approximately RMB 6.0 million from ticket sales. The net expense was contained
in selling expenses in consolidated operation statements.
For the
fiscal year 2010, we have a marketing and sales budget of RMB 4,500,000
(approximately, $662,000), among which, approximately RMB2,600,000
(approximately $382, 352.94) will be spent on our annual conference, RMB
1,000,000 (approximately $147,058.82) on salaries of sales personnel, RMB
400,000 (approximately $58,823.53) on training, RMB 200,000 (approximately
$29,411.76) on travelling and RMB 300,000 (approximately $ 44,117.65) on daily
operation of the marketing and sales department.
17
Seasonality
Because
our products are for daily use, our business is not subject to seasonal
variations in demand.
Industry
We are
operating in the large and rapidly growing healthcare industry in the PRC. The
healthcare industry in the PRC is supported by a combination of socio-economic
factors, such as the growth of the PRC’s economy, size of its overall population
and the proportion of its population over the age of 60, living standards,
health consciousness, lifestyle related disorders and active PRC government
support.
China
Healthcare Industry—Generally
According
to the PRC Statistical Yearbook 2009 (the “Yearbook”), from 2005 to 2009, the
average per capita annual disposable income of the PRC‘s urban residents
increased from approximately RMB 3,225 (approximately $474) to RMB5, 153
(approximately $1,356). According to the Yearbook, the PRC’s Gross Domestic
Product (“GDP”) grew at a compound annual growth rate (“CAGR”) of 16.4% from
2005 to 2009, and its per capita GDP grew from RMB18, 494 (approximately $2,719)
in 2005 to approximately RMB33, 535 (approximately $4,931) in 2009. During this
period, national income and disposable income levels increased
significantly.
With
rising living standards and increasing disposable income, people in the PRC have
naturally become more health conscious. These developments have resulted in both
urban and rural residents spending more on healthcare. According to the PRC
National Bureau of Statistics, consumer expenditure on healthcare in the PRC’s
urban and rural areas increased from approximately RMB476 (approximately $70)
and RMB118 (approximately $17) per person in 2003, respectively, to
approximately RMB786 (approximately $115) and RMB246 (approximately $36) per
person in 2007, respectively.
As part
of its Eleventh Five-Year Plan (2006-2010), the PRC Government has actively
supported the PRC healthcare industry by creating a number of incentives and
enacting programs, including increased funding for building additional
hospitals, research centers and other healthcare facilities, enacting healthcare
reforms and standards and subsidizing healthcare services for its citizens. The
PRC Government has announced it will spend an additional RMB850 billion on
healthcare programs from 2009 to 2011, which will significantly bolster the PRC
healthcare market.
China’s
Tourmaline Health Products Market
The main
industrial applicationof tourmaline has been in the healthcare industry. In
1970s and 1980s, more developed nations such as Japan and the United Stateshave
used the tourmaline as an important industrial mineral. (Source: 2010-2012
China's tourmaline market and investment prospects research report, Institute of
China Uniway Economics, Aug, 2010).
By
contrast, the Chinese had been using tourmaline as gemstones in jewelry until
around 2001, with the steady improvement of living standards and higher health
consciousness, the Chinese began to realize the health benefits of
tourmaline.
More
companies began producing tourmaline related health products. China’s tourmaline
health products industry 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, Aug, 2010). We are not aware of any
research reports on the size and scope of the tourmaline healthcare industry in
the PRC although we believe that we are one of the first few Chinese tourmaline
health products companies who possess leading tourmaline particle attachment
technology.
18
Users of
tourmaline health product are typically middle-aged and elderly people.
Currently, there are numerous kinds of tourmaline health products in the market
such as tourmaline clothes, tourmaline mattresses, tourmaline water machines,
etc. Demand for these products is still relatively low compared to
the size of the Chinese population.
We
believe that the main challenge for the tourmaline health product companies is
market development rather than competition.With rising living standards,
increasing disposable income, higher health consciousness and the greater
awareness of health benefit produced by tourmaline health products, we believe
that the tourmaline health products market will grow rapidly in the next few
years.
Competition
Competitive
Environment
China’s
tourmaline health products market is highly segmented and is still at its
infancy. No market leader has emerged in China just yet. 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, Aug, 2010).Therefore, we believe that there
is a great opportunity for us to create demand and market share and establish
ourselves as leaders in the tourmaline-related healthcare products
field.
Our
Competitors
We believe our major competitors in the
PRC are:
|
·
|
Heilongjiang
Xingfuren Technology Development Co., Ltd.operates in PRC. They mainly
focus on producing far-infrared health products and tourmaline health
products.
|
|
·
|
Harbin
Jiuguang Daily Health Products Co., Ltd.operates in PRC.They mainly focus
on tourmaline sauna room and tourmaline health products
manufacture.
|
|
·
|
Ihanya
Nano Technology Co., Ltd.operates inChangsha, Hunan province, PRC. They
mainly focus on tourmaline sauna room and tourmaline health products
manufacture.
|
|
·
|
Harbin
Handu Tourmaline Nano Technology Development Co., Ltd. operates in PRC.
They mainly focus on tourmaline sauna room and tourmaline health products
manufacture.
|
|
·
|
Harbin
Wanshou Nano Science and Technology Co., Ltd.operates in PRC.They mainly
focus on new Nano technology research and development, tourmaline health
products and tourmaline sauna room
manufacture.
|
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 tourmaline health products
manufacturers in the PRC. We believe we have established a well-known
brand (“Joway”) in the PRC tourmaline health products
market.
|
|
·
|
Technology
Advantage: We possess several tourmaline healthcare products patents. We
also have six technicians engaged in research and development activities
to develop new tourmaline products.. We believe that we have the most
matured tourmaline particle attachment technology in the
PRC.
|
|
·
|
Sales
Channels Advantage: We have approximately 219 franchise stores covering
most of the big cities in the PRC. We are still expanding our sales
networks. We believe our extensive sales networks will assure our products
sales growing continuously.
|
19
Business
Strategy
We
believe the market for tourmaline healthcare 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 the sales network for our tourmaline health
products in the PRC. Meanwhile we also plan to develop our sales network
in India, Indonesia, Russia, Ukraine, Eastern Europe, Africa, South
America and other foreign markets.
|
|
·
|
We
will seek to optimize our product portfolio to include more products with
higher profit margins and expand our product offerings.We believe that
tourmaline daily healthcare products,
water treatment products, tourmaline home accessories and
tourmaline environmentally friendly paint have more profit potential. We
will spend more money on Research and Development (“R&D”) of these
products.
|
|
·
|
We
intend to improve our operations, exploit our competitive strengths, and
expand our operations by acquiring other existing businesses.
|
Research
and Development
As
of October 6, 2010, we have six technicians engaged in research and
developmentactivities. Our research and development focus ison
developing new tourmaline productssuch as, tourmaline wool blankets, tourmaline
laundry balls, tourmaline washing powder and tourmaline foot spa
basins.
During
the fiscal years ended December 31, 2008 and 2009, we spent RMB 7,800
(approximately $1,120.33) and RMB 59,010.15(approximately $8,626.09),
respectively, on R&D. Set forth below are a breakdown of our R&D expense
for the fiscal years 2008 and 2009, respectively and a breakdown of
R&D budget for the fiscal years 2010 and 2011, respectively:
2008
|
2009
|
2010 (Budget)
|
2011 (Budget)
|
|||||||||||||||||||||||||||||
Item
|
RMB
|
US$ (approx.)
|
RMB
|
US$ (approx.)
|
RMB
|
US$ (approx.)
|
RMB
|
US$ (approx.)
|
||||||||||||||||||||||||
R
& D Equipment
|
1,300 | 186.72 | 11,865.05 | 1,734.43 | 30,000 | 4,389 | 100,000 | 14,631 | ||||||||||||||||||||||||
R
& D Sample
|
0 | 0 | 12,110.10 | 1,770.25 | 15,000 | 2,195 | 80,000 | 11,705 | ||||||||||||||||||||||||
TravelExpense
|
0 | 0 | 4,235 | 619.07 | 8,000 | 1,170 | 50,000 | 7,316 | ||||||||||||||||||||||||
Salary
|
6,500 | 933.61 | 30,800 | 4,502.34 | 155,000 | 22,678 | 180,000 | 26,336 | ||||||||||||||||||||||||
Inspection
Fee
|
0 | 0 | 0 | 0 | 18,000 | 2,634 | 60,000 | 8,779 | ||||||||||||||||||||||||
Total
|
7,800 | 1,120.33 | 59,010.15 | 8,626.09 | 226,000 | 33,066 | 470,000 | 68,767 |
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 “Xi” trademarks and the “Joway”
trademark which are owned by Shenyang Joway Industrial Development Co., Ltd.
(“Shenyang Joway”) and our President, Chief Executive Officer and director,
Jinghe Zhang, respectively. We are licensed to use the “Xi” trademarks pursuant
to a license agreement with Shenyang Joway dated December 1, 2009 for a term of
nine years. We are also permitted to use the “Joway” trademark
pursuant to a license agreement with Jinghe Zhang dated December 1, 2009 for a
term of ten years. The agreements are renewable at the end of their respective
terms. We do not have to pay any license fee to Shenyang Joway and Jinghe Zhang
for the use of the trademarks.
20
We have
also submitted applications for twelve trademarks which are under review by the
Trademark Office of State Administration of Industry and Commerce of the
PRC.
Set forth
below is a detailed description of the trademarks we use and the trademarks
under application.
Mark
|
Registration
/Application
No.
|
Class
|
Effective
Date
|
Expiration
Date
|
Owner/
Applicant
|
|||||
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
|
Shenyang
Joway Industrial Development 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
|
Shenyang
Joway Industrial Development Co., Ltd.
|
||||||
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
|
||||||
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.
|
Registration
Application
Accepted
on
July 9, 2010
|
Tianjin
Joway Group Co., Ltd.
|
|||||||
8236587
|
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.
|
Registration
Application
Accepted
on
April 23, 2010
|
||||||||
|
8236524
|
Class
24: Fabrics.
Textiles
and textile goods, not included in other classes; bed and table
covers.
|
Registration
Application
Accepted
on
April 23, 2010
|
21
|
8029074
|
Class
11:Environmental control
apparatus.
|
|
|||||
Apparatus
for lighting, heating, steam generating, cooking, refrigerating, drying,
ventilating, water supply and sanitary purposes.
|
||||||||
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.
|
Registration
Application
Accepted
on
January 27, 2010
|
||||||
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.
|
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.
|
Registration
Application
Accepted
on
April 23, 2010
|
||||||
8236706
|
Class
25:Clothing.
Clothing,
footwear, headgear.
|
|||||||
8236538
|
Class
24:
Fabrics.
Textiles
and textile goods, not included in other classes; bed and
tablecovers.
|
|||||||
8236684
|
Class
11:Environmental control
apparatus.
Apparatus
for lighting, heating, steam generating, cooking, refrigerating, drying,
ventilating, water supply and sanitary purposes.
|
|||||||
8236608
|
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.
|
|||||||
|
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.
|
|
|
22
Currently
we do not own any patent we use. Pursuant to a license agreement with our
President, Chief Executive Officer and director, 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 Room
|
Utility
Model
|
ZL200720014570.1
|
September
17, 2007
|
July
16, 2008
|
Ten
years
|
Jinghe
Zhang
|
|||||||
5
|
|
Drinking
Water Purifier
|
|
Design
|
|
ZL200730011189.5
|
|
September
17, 2007
|
|
April
1, 2009
|
|
Ten
years
|
|
Jinghe
Zhang
|
Insurance
We
maintain product liability insurance policies covering our water machine 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
insurance coverage for our water machine is RMB 1,000,000 (approximately
$14,7275) from November 11, 2009 to November 10, 2010 and we have paid RMB7,375
(approximately $1,086) in insurance premiums for the coverage. In addition, we
do not carry property insurance, and we do not have any business interruption
insurance due to the limited coverage of any business interruption insurance in
the PRC.
Employees
Joway
Group
As of the
date of this report Joway Group has 101 employees, all of whom are
full-time workers and are 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 Group’s employees:
Departments
|
Number
of Employees
|
|
Management
|
8
|
|
Sales
|
13
|
|
Distribution
|
13
|
|
Design
|
4
|
|
Production
|
33
|
|
Research
and development
|
6
|
|
Franchising
|
15
|
|
Finance
|
7
|
|
Project
|
2
|
23
Joway
Technology
As of the
date of this Report, Joway Technology has 15 employees, all of whom are full
time workers and are based in Tianjin, PRC. There are no collective bargaining
contracts covering any of our employees. We believe our relationship with our
employees is satisfactory.
Joway
Decoration
As of the
date of this Report, Joway Decoration has eight employees, all of whom are full
time workers and are based in Tianjin, PRC. There are no collective bargaining
contracts covering any of our employees. We believe our relationship with our
employees is satisfactory.
Shengtang
Trading
As of the
date of this Report, Shengtang Trading has four employees, all of whom are full
time workers and are based in Tianjin, PRC. There are 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
Below
is a list of agencies which may have a jurisdiction over our
business:
Agency
|
Functions
|
|
State
Food and Drug Administration (“SFDA”)
|
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.
|
24
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.
|
The PRC
government imposes extensive regulations over the healthcare industries. This
section summarizes the principal PRC laws and regulations that are relevant to
our business.
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.
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.
Intellectual
Property
Trademark
In the
PRC, the Trademark Office administers the system of trademark law (Trademark
Review and Adjudication Board and the courts administer the appeal function).
The two principal pieces of legislation forming the trademark system are the
Trademark Law and the Unfair Competition Law. The Trademark Law of the PRC
stipulates that goods mark, service mark, collective mark and certification mark
can be registered in the PRC and the holder of the marks can obtain exclusive
trademark rights. Trademarks should be visible marks, including words, device,
letters, digits, 3-D marks and combinations of colors, and combinations of any
of the aforementioned. Sound or smell is not registrable yet in the
PRC.
A
trademark applicant must file an application with the PRC Trademark Office.
Normally, the Trademark Office renders a decision within 18 months after it
receives all supporting documents. If the Trademark Office approves the
application, the mark will be published in the PRC Trademark Gazette. After the
mark is published, there will be a three-month opposition period. If nobody
files opposition within that period, the application will mature into
registration. The Trademark Office will then issue the certificate and the
Trademark Gazette will publish the mark again as a registered
mark.
25
The term
of trademark protection is ten years from the date the registration is granted.
The registrant may renew the trademark for an additional ten year term within
six months before the expiration date of the mark's present term. Where no such
application could be filed within the stated period, a grace period of six
months may be allowed. If the registrant does not file for renewal within the
grace period, the registered trademark will be canceled. Currently, the
applicant does not need to prove the use of the trademark prior to
renewal.
However,
registration of a mark may be blocked by an unregistered famous mark in the PRC
in accordance with the PRC’s Trademark Law and obligations under the Paris
Convention and the 1995 United States-China Intellectual Property Protection
Agreement ("IP Action Plan"), provided that the owner of the famous mark can
prove that the mark was well-known in the PRC before the filing date of the
similar mark. Owners of unregistered famous mark may also bring oppositions or
cancellations for previously registered marks, based on Articles 13, 30 and 41
of the Trademark Law.
Without
authorization from the trademark owner, no one may use a mark identical or
similar to the registered mark on identical or similar goods as the registered
mark. Infringers will be subject to administrative, civil or criminal
punishment. The damages awarded to the trademark owner will be calculated upon
the illegal profits of the infringer and actual losses to the rights owner. In
the event that the damages from infringement are difficult to calculate, the
statutory maximum compensation will be RMB 500,000 (about US $61,000), which may
be a real deterrent in some cases. In addition, the trademark owner may apply to
a competent court for preliminary injunction against ongoing or threatened
trademark infringement before a lawsuit is initiated.
Patent
Patents
in the PRC are governed by the China Patent Law and its Implementing Regulations
(the “Patent Law”), each of which went into effect in 1985, amended versions of
the Patent Law went into effect in 1992, 1993, 2001 and 2003,
respectively. The latest amended version of the Patent Law was made on
December 7, 2008 and will become effective on October 1, 2009.
The PRC
patent system adopts the principle of first to file. This means that, where more
than one person files a patent application for the same invention, a patent can
only be granted to the person who first filed the application. Consistent with
international practice, the PRC only allows the patenting of inventions or
utility models that possess the characteristics of novelty, inventiveness and
practical applicability. For a design to be patentable, it should not be
identical with or similar to any design which, before the date of filing, has
been publicly disclosed in publications in the country or abroad or has been
publicly used in the country, and should not be in conflict with any prior right
of another.
The PRC
law defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. A patent holder who believes his patent is
being infringed may file a civil suit or file a complaint with a PRC local
Intellectual Property Administrative Authority, which may order the infringer to
stop the infringing acts. Preliminary injunction may be issued by the PRC court
upon the patentee’s or the interested parties’ request before instituting any
legal proceedings or during the proceedings. Damages in the case of patent
infringement is calculated as either the loss suffered by the patent holder
arising from the infringement or the benefit gained by the infringer from the
infringement. If it is difficult to ascertain damages in this manner, damages
may be reasonably determined in an amount ranging from one to three times of the
license fee under a contractual license. In the case of false patents, if
there is no license fee for reference, the damages may be reasonably determined
in an amount ranging from RMB 10,000 to RMB 1,000,000.
26
Compliance
with Circular 106 and the Revised M&A regulations
On May
29, 2007, SAFE issued an official notice known as “Circular 106”, which requires
the owners of any PRC companies to obtain approval from Ministry of Finance
(“MOFCOM”) before establishing any offshore holding company structure in
so-called “round-trip” investment transactions (a round-trip investment refers
to an investment made by a PRC resident in a PRC enterprise through an offshore
special purpose vehicle) for foreign financing as well as subsequent acquisition
matters in the PRC. Likewise, on August 8, 2006, MOFCOM joined by State-owned
Assets Supervision and Administration Commission, State Administration of
Taxation, SAIC, CSRC and 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 imposed approval requirements from
MOFCOM for “round-trip” investment transactions, including acquisitions in which
equity was used as consideration.
Foreign
Currency Exchange
Under the
PRC foreign currency exchange regulations applicable to us, the RMB is
convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange transactions.
Conversion of RMB for capital account items, such as direct investment, loan,
security investment and repatriation of investment, however, is still subject to
the approval of the PRC State Administration of Foreign Exchange, or SAFE.
Foreign-invested enterprises may only buy, sell and/or remit foreign currencies
at those banks authorized to conduct foreign exchange business after providing
valid commercial documents and, in the case of capital account item
transactions, obtaining approval from the SAFE. Capital investments by
foreign-invested enterprises outside of the PRC are also subject to limitations,
which include approvals by the Ministry of Commerce, the SAFE and the State
Reform and Development Commission.
Dividend
Distributions
Under
applicable PRC regulations, foreign-invested enterprises in the PRC may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in the PRC are required to set aside at least 10% of
their after-tax profit based on PRC accounting standards each year to its
general reserves until the accumulative amount of such reserves reach 50% of its
registered capital. These reserves are not distributable as cash
dividends.
Approvals,
Licenses and Certificates
We
require a number of approvals, licenses and certificates in order to operate our
business. Our principal approvals, licenses and certificates are set forth
below.
Joway
Group
|
·
|
Business
License (No.120224000028519) issued by Tianjin City Administration of
Industry and Commerce, valid from May 17, 2007 to May 16,
2022.
|
|
·
|
Social
Insurance Register (No. 66033653) issued by Baodi Branch of Tianjin City
Social Security Fund Management Centre, valid from September 2008 to
August 2016.
|
|
·
|
Tax
Registration Certificate (No. 120224660336538) issued by State
Administration of Taxation and local administration of taxation in
2010.
|
|
·
|
Organization
Code Certificate (Code: 66033653-8) issued byTianjin Bureau of Quality and
Technical Supervision,valid from November 30, 2009 to November 29,
2013.
|
Joway
Technology
|
·
|
Business
License (No.210100000007455 (1-1)) issued by Shenyang City
Administration of Industry and Commerce, valid from March 28, 2007 to
March 27, 2017.
|
|
·
|
Tax
Registration Certificate (No. 210114798469376) issued by State
Administration of Taxation and local administration of taxation in
2008.
|
|
·
|
Organization
Code Certificate (Code: 79846937-6) issued by Shenyang Bureau of Quality
and Technical Supervision, valid from August 21, 2007 to August 21,
2011.
|
|
·
|
Social
Insurance Register (No. 210114955931) issued by Ministry of Human
Resources and Social Security of Liaoning
Province.
|
27
Joway
Decoration
|
·
|
Business
License (No.120224000040629) issued by Baodi Branch City Administration of
Industry and Commerce, valid from April 22, 2009 to April 21,
2019.
|
|
·
|
Tax
Registration Certificate (No. 120224687710841) issued by State
Administration of Taxation and local administration of taxation in
2010.
|
|
·
|
Organization
Code Certificate (Code: 68771084-1) issued by Tianjin Bureau of Quality
and Technical Supervision, valid from April 22, 2009 to April 21,
2013.
|
|
·
|
Social
Insurance Register (No. 68771084) issued by Baodi Branch of Tianjin City
Social Security Fund Management Centre, valid from August 2010 to July
2018.
|
Shengtang
Trading
|
·
|
Business
License (No.120104000125590) issued by Nankai Branch of Tianjin City
Administration of Industry and Commerce, valid from September 18, 2009 to
September 17, 2029.
|
|
·
|
Tax
Registration Certificate (No. 120104694072753) issued by State
Administration of Taxation and local administration of taxation in
2009.
|
|
·
|
Organization
Code Certificate (Code: 69407275-3) issued by Tianjin Bureau of Quality
and Technical Supervision, valid from September 22, 2009 to September 21,
2013.
|
|
·
|
Social
Insurance Register (No. 69407275) issued by Nankai Branch of Tianjin City
Social Security Fund Management Centre, valid from February 2010 to
January 2018.
|
28
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.
29
If all or a significant portion of
our customers with accounts receivables fail to pay all or part of the trade
receivables or delay the repayment, our net income will decrease and our
profitability will be adversely affected.
We had
accounts receivablesof approximately $57,532 as of December 31, 2009. There
is no assurance that our accounts receivables will be fully repaid on a timely
basis. If all or a significant portion of our customers with accounts
receivables fail to pay all or part of the accounts receivables or delay the
payment due to us for whatever reason, our net profit will decrease and our
profitability will be adversely affected.
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.
Certain
disruptions in supply of and changes in the competitive environment for our
products may adversely affect our profitability.
A
significant disruption in the supply of the raw material could decrease
inventory levels and sales, and materially adversely affect our business and
financial results. Shortages of products or interruptions in
transportation systems, labor strikes, work stoppages, war, acts of terrorism or
other interruptions or difficulties in the employment of labor or transportation
in the markets in which we purchase raw materials may adversely affect our
ability to maintain sufficient inventories of our products to meet consumer
demand. If we were to experience a significant or prolonged shortage
of products from any of our suppliers and could not procure the products from
other sources, we would be unable to meet customer demand, which, in turn, would
adversely affect our sales, margins and customer relations.
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.
30
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. 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 the date of this Report, we had
approximately 128 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 plan, 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.
31
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.
Our
financial results may fluctuate because of many factors and, as a result,
investors should not 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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·
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vulnerability of our business to
a general economic downturn in the
PRC;
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·
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fluctuation and unpredictability
of the prices of the products we
sell;
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·
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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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32
We
are dependent of 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.
We
do not own any trademarks we currently use in our business. Any
failure to continue using these trademarks may affect our business in that any
goodwill and brand recognition may be lost.
We do not
own any trademarks we use. The trademarks we use currently are “Joway” and “Xi”
trademarks which are owned by our President, Chief Executive Officer and
director, Jinghe Zhang and Shenyang Joway, respectively.Pursuant to a license
agreement between our Company and Jinghe Zhang dated December 1, 2009, the term
of using the “Joway” trademark is from December 1, 2009 to November 30, 2019.
Pursuant to a license agreement between our company and Shenyang Joway dated
December 1, 2009, the term of using the “Xi” trademark is from December 1, 2009
to November 30, 2018. We do not have to pay any license fee to Jinghe Zhang and
Shenyang Joway for the use of the trademarks. There is no assurance that we may
continue using these trademarks on the expiration of the license agreement or
that we will be allowed to use in on terms favorable to use. Any
failure to continue using this trademark may affect our business in that any
brand recognition may be lost.
Risks
Related to Conducting Business in the PRC
Our
operations are subject to PRC laws and regulations that are sometimes vague and
uncertain. Any changes in such PRC laws and regulations, or the
interpretations thereof, may have a material and adverse effect on our
business.
The PRC's
legal system is a civil law system based on written statutes. Unlike the common
law system prevalent in the United States, decided legal cases have little value
as precedent in the PRC. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to, the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the
imposition of statutory liens, death, bankruptcy or criminal proceedings. The
PRC government has been developing a comprehensive system of commercial laws,
and considerable progress has been made in introducing laws and regulations
dealing with economic matters such as foreign investment, corporate organization
and governance, commerce, taxation and trade. However, because these
laws and regulations are relatively new, and because of the limited volume
of published cases and judicial interpretation and their lack of authority as
precedents, interpretation and enforcement of these laws and regulations involve
significant uncertainties. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively.
Our
principal operating subsidiaries are regarded as foreign invested enterprises
(“FIE”s) under PRC laws, and as a result are required to comply with PRC laws
and regulations, including laws and regulations specifically governing the
activities and conduct of FIEs. We cannot predict what effect the
interpretation of existing or new PRC laws or regulations may have on our
businesses. If the relevant authorities find us in violation of PRC
laws or regulations, they would have broad discretion in dealing with such a
violation, including, without limitation:
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levying
fines;
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revoking our business license,
other licenses or
authorities;
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requiring that we restructure our
ownership or operations; and
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requiring that we discontinue any
portion or all of our
business.
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33
New
labor law in the PRC may adversely affect our results of
operations.
On
January 1, 2008, the PRC government promulgated the Labor Contract Law of
the PRC, or the New Labor Contract Law. The New Labor Contract Law
imposes greater liabilities on employers and significantly impacts the cost of
an employer’s decision to reduce its workforce. Further, it may
require certain terminations to be based upon seniority and not
merit. In the event we decide to significantly change or decrease our
workforce, the New Labor Contract Law could adversely affect our ability to
enact such changes in a manner that is most advantageous to our business or in a
timely and cost effective manner, thus materially and adversely affecting our
financial condition and results of operations.
We
may not be able to comply with applicable Good Manufacture Practice (“GMP”)
requirements and other regulatory requirements, which could have a material
adverse effect on our business, financial condition and results of
operations.
We are
required to comply with applicable GMP regulations, which include requirements
relating to quality control and quality assurance as well as corresponding
maintenance, record-keeping and documentation standards. Manufacturing
facilities must be approved by governmental authorities before we use them to
commercially manufacture our products and are subject to inspection by
regulatory agencies. If we fail to comply with applicable regulatory
requirements, including following any product approval, we may be subject to
sanctions, including:
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fines;
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product recalls or
seizure;
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injunctions;
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refusal of regulatory agencies to
review pending market approval applications or supplements to approval
applications;
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total or partial suspension of
production;
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civil
penalties;
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withdrawals of previously
approved marketing applications;
or
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criminal
prosecution.
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If
we fail to protect our intellectual property rights, it could harm our business
and competitive position.
Our
business relies in part on intellectual properties to stay competitive in the
market place. We rely on a combination of trademark laws, patent law, trade
secrets, confidentiality procedures and contractual provisions to protect our
intellectual property rights and the obligations we have to third parties from
whom we license intellectual property rights. Nevertheless, these afford only
limited protection and policing unauthorized use of proprietary technology can
be difficult and expensive. In addition, intellectual property rights
historically have not been enforced in the PRC to the same extent as in the
United States, and intellectual property theft presents a serious risk in doing
business in the PRC. We may not be able to detect unauthorized use of, or take
appropriate steps to enforce our intellectual property rights and this could
have a material adverse effect on our business, operating results and financial
condition.
Under
the new EIT Law, we may be classified a “resident enterprise” for PRC tax
purposes, which may subject us to PRC enterprise income tax for any dividends we
receive from our PRC Operating Entities and to PRC income tax withholding for
any dividends we pay to our non-PRC shareholders.
On March
16, 2007, the National People’s Congress (“NPC”) promulgated the Law of the
People’s Republic of China on Enterprise Income Tax, or the new EIT Law,
which 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.
34
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,
including our ability to pay dividends.
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.
35
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.
36
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.
37
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:
|
·
|
quarantines or closure of our
distribution center, which would severely disrupt our
operations,
|
|
·
|
the sickness or death of our key
officers and employees, and
|
|
·
|
a general slowdown in the PRC
economy.
|
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:
|
·
|
the extent of government
involvement;
|
|
·
|
the level of
development;
|
|
·
|
the growth
rate;
|
|
·
|
the control of foreign
exchange;
|
|
·
|
the allocation of
resources;
|
|
·
|
an evolving regulatory system;
and
|
·
|
lack of sufficient transparency
in the regulatory process.
|
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.
38
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,
all of our directors and 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 us or 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
a Texas 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:
|
·
|
levying
fines;
|
39
|
·
|
confiscating our
income;
|
|
·
|
revoking business and other
licenses;
|
|
·
|
requiring us to discontinue any
portion or all of our
business;
|
|
·
|
requiring us to restructure our
ownership structure or operations;
and
|
|
·
|
requiring actions necessary for
compliance.
|
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.
We will
become a public company upon completion of the private placement and our
internal control will be essential to the integrity of our business and
financial results. Our public reporting obligations are expected to place a
strain on our management, operational and financial resources and systems in the
foreseeable future. In preparation for this offering, we have implemented
measures to enhance our internal controls, and plan to take steps to further
improve our internal controls. If we encounter difficulties in improving our
internal controls and management information systems, we may incur additional
costs and management time in meeting our improvement goals. 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.
40
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.
41
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The
following discussion should be read in conjunction with our consolidated
financial statements and notes to those consolidated financial statements,
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results and the
timing of selected events could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including those
set forth under “Risk factors” and elsewhere in this prospectus.
FORWARD-LOOKING
STATEMENTS:
Certain
statements made in this report may constitute “forward-looking statements on our
current expectations and projections about futureevents.” These forward-looking
statements involve known or unknown risks, uncertainties and other factors that
may cause our actual results, performance, or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. In some cases you can identify
forward-looking statements by some words such as “may,” “should,” “potential,”
“continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,”
“estimates,” and similar expressions. These statements are based on our current
beliefs, expectations, and assumptions and are subject to a number of risks and
uncertainties. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. These forward-looking
statements are made as of the date of this report, and we assume no obligation
to update these forward-looking statements whether as a result of new
information, future events, or otherwise, other than as required by law. In
light of these assumptions, risks, and uncertainties, the forward-looking events
discussed in this report might not occur and actual results and events may vary
significantly from those discussed in the forward-looking
statements.
Overview
We
research, develop, manufacture and market tourmaline products, including
healthcare knitgoods, daily healthcare and personal care products, and activated
water machine and wellness house products. We conduct operations in Tianjin,
China and distribute most of our products to more than 200 franchisees. Our
franchisees, in turn, sell the products to their customers.
Results
of Operations
The
following table sets forth certain information regarding our results of
operations.
For the six months ended June 30,
|
For the year ended December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Audited)
|
(Audited)
|
|||||||||||||
REVENUES
|
$ | 2,323,841 | $ | 984,456 | $ | 3,109,059 | $ | 422,612 | ||||||||
COGS
|
639,488 | 448,437 | 1,164,683 | 303,854 | ||||||||||||
GROSS
PROFIT
|
1,684,353 | 536,019 | 1,944,376 | 118,758 | ||||||||||||
OPERATING
EXPENSES
|
761,495 | 401,561 | 1,133,249 | 259,532 | ||||||||||||
INCOME
(LOSS) FROM OPERATIONS
|
922,858 | 134,458 | 811,127 | (140,774 | ) | |||||||||||
OTHER
(EXPENSE) INCOME, NET
|
(23,840 | ) | 3,326 | (19,344 | ) | (1,131 | ) | |||||||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
899,018 | 137,784 | 791,783 | (141,905 | ) | |||||||||||
INCOME
TAXES
|
211,233 | 34,592 | 141,248 | 5,083 | ||||||||||||
NET
INCOME (LOSS)
|
$ | 687,785 | $ | 103,192 | $ | 650,535 | $ | (146,988 | ) |
42
The
following tables provide information on revenues, cost of sales and gross profit
for each of our reporting segments.
For the
six months ended June 30, 2010 (Unaudited)
Healthcare
Knitgoods
Series
|
% of
Total
|
Daily
Healthcare
and
Personal
Care Series
|
% of
Total
|
Wellness House
and Activated
Water Machine
Series
|
% of
Total
|
Total
|
||||||||||||||||||||||
REVENUES
|
$ | 1,440,617 | 62.0 | % | $ | 478,320 | 20.6 | % | $ | 404,904 | 17.4 | % | $ | 2,323,841 | ||||||||||||||
COGS
|
305,383 | 47.8 | % | 140,370 | 22.0 | % | 193,735 | 30.3 | % | 639,488 | ||||||||||||||||||
GROSS
PROFIT
|
1,135,234 | 67.4 | % | 337,950 | 20.1 | % | 211,169 | 12.5 | % | 1,684,353 | ||||||||||||||||||
GROSS
MARGIN
|
78.8 | % | 70.7 | % | 52.2 | % | 72.5 | % | ||||||||||||||||||||
OPERATING
EXPENSES
|
486,739 | 63.9 | % | 161,609 | 21.2 | % | 113,147 | 14.9 | % | 761,495 | ||||||||||||||||||
INCOME
FROM OPERATIONS
|
$ | 648,495 | 70.3 | % | $ | 176,341 | 19.1 | % | $ | 98,022 | 10.6 | % | $ | 922,858 |
For the
six months ended June 30, 2009 (Unaudited)
Healthcare
Knitgoods
Series
|
% of
Total
|
Daily
Healthcare
and
Personal
Care Series
|
% of
Total
|
Wellness House
and Activated
Water Machine
Series
|
% of
Total
|
Total
|
||||||||||||||||||||||
REVENUES
|
$ | 446,112 | 45.3 | % | $ | 250,409 | 25.4 | % | $ | 287,935 | 29.2 | % | $ | 984,456 | ||||||||||||||
COGS
|
123,487 | 27.5 | % | 82,463 | 18.4 | % | 242,487 | 54.1 | % | 448,437 | ||||||||||||||||||
GROSS
PROFIT
|
322,625 | 60.2 | % | 167,946 | 31.3 | % | 45,448 | 8.5 | % | 536,019 | ||||||||||||||||||
GROSS
MARGIN
|
72.3 | % | 67.1 | % | 15.8 | % | 54.4 | % | ||||||||||||||||||||
OPERATING
EXPENSES
|
226,600 | 56.4 | % | 127,193 | 31.7 | % | 47,768 | 11.9 | % | 401,561 | ||||||||||||||||||
INCOME
(LOSS) FROM OPERATIONS
|
$ | 96,025 | 71.4 | % | $ | 40,753 | 30.3 | % | $ | (2,320 | ) | -1.7 | % | $ | 134,458 |
For the
year ended December 31, 2009
Healthcare
Knitgoods
Series
|
% of
Total
|
Daily
Healthcare
and
Personal
Care Series
|
% of
Total
|
Wellness House
and Activated
Water Machine
Series
|
% of
Total
|
Total
|
||||||||||||||||||||||
REVENUES
|
$ | 1,723,846 | 55.4 | % | $ | 498,341 | 16.0 | % | $ | 886,872 | 28.5 | % | $ | 3,109,059 | ||||||||||||||
COGS
|
428,004 | 36.7 | % | 122,891 | 10.6 | % | 613,788 | 52.7 | % | 1,164,683 | ||||||||||||||||||
GROSS
PROFIT
|
1,295,842 | 66.6 | % | 375,450 | 19.3 | % | 273,084 | 14.0 | % | 1,944,376 | ||||||||||||||||||
GROSS
MARGIN
|
75.2 | % | 75.3 | % | 30.8 | % | 62.5 | % | ||||||||||||||||||||
OPERATING
EXPENSES
|
709,485 | 62.6 | % | 205,102 | 18.1 | % | 218,662 | 19.3 | % | 1,133,249 | ||||||||||||||||||
INCOME
FROM OPERATIONS
|
$ | 586,357 | 72.3 | % | $ | 170,348 | 21.0 | % | $ | 54,422 | 6.7 | % | $ | 811,127 |
43
For the
year ended December 31, 2008
Healthcare
Knitgoods
Series
|
% of
Total
|
Daily
Healthcare
and
Personal
Care Series
|
% of
Total
|
Wellness House
and Activated
Water Machine
Series
|
% of
Total
|
Total
|
||||||||||||||||||||||
REVENUES
|
$ | 14,761 | 3.5 | % | $ | 144 | 0.0 | % | $ | 407,707 | 96.5 | % | $ | 422,612 | ||||||||||||||
COGS
|
1,793 | 0.6 | % | 17 | 0.0 | % | 302,044 | 99.4 | % | 303,854 | ||||||||||||||||||
GROSS
PROFIT
|
12,968 | 10.9 | % | 127 | 0.1 | % | 105,663 | 89.0 | % | 118,758 | ||||||||||||||||||
GROSS
MARGIN
|
87.9 | % | 88.2 | % | 25.9 | % | 28.1 | % | ||||||||||||||||||||
OPERATING
EXPENSES
|
137,167 | 52.9 | % | 1,338 | 0.5 | % | 121,027 | 46.6 | % | 259,532 | ||||||||||||||||||
LOSS
FROM OPERATIONS
|
$ | (124,199 | ) | 88.2 | % | $ | (1,211 | ) | 0.9 | % | $ | (15,364 | ) | 10.9 | % | $ | (140,774 | ) |
For
The Six Months Ended June 30, 2010 Compared to June 30,
2009 (Unaudited)
Revenue. For the six months
ended June 30, 2010, revenue was $2.3 million compared to $1.0 million for the
six months ended June 30, 2009, an increase of $1.3 million, or
136.1%. This increase was mainly due to the expansion of our market
areas and the increase the number of our franchisees selling our products
exclusively. For the first half of the fiscal year 2009, we had 69 franchisees
and this number of franchisees increased to175 by the end of the first half of
the fiscal year 2010, which resulted in the increase of our sales. More
specifically, revenue from our healthcare knitgoods series increased by $1.0
million, or 222.9% to $1.4 million for the six months ended June 30, 2010 from
$0.4 million for the six months ended June 30, 2009. Our healthcare
knitgoods contributed the most to our revenue increase with the expansion of our
market share.
Cost of Goods
Sold. For the six months ended June 30, 2010, cost of goods
sold was $0.6 million compared to $0.4 million for the six months ended June 30,
2009, an increase of $0.2 million, or 42.6%. This increase was mainly
due to the increase of sales. Cost of goods sold for healthcare
knitgoods series increased by $0.2 million or 147.3% to $0.3 million for the six
months ended June 30, 2010 from $0.1 million for the six months ended June 30,
2009.
Gross profit. Our gross profit
increased by $1.2million or 214.2% to $1.7 million for the six months ended June
30, 2010, compared to $0.5million for the six months ended June 30, 2009. This
increase was due to the increase in sales. Our gross margin increased from 54.4%
for the six months ended June 30, 2009 to 72.5% for the six months ended June
30, 2010. This increase was primarily due to the expansion of production. Since
the fixed manufacture expenses were born by more products, the expenses born by
each product decreased, hence the gross profit of each product
increased.
Operatingexpenses. Our
total operating expenses consist of sales and marketing expenses and general and
administrative expenses. Our total operating expenses increased by $0.4 million,
or 89.6%, from $0.4 million for the six months ended June 30, 2009 to $0.8
million for the six months ended June 30, 2010. This increase was mainly due to
the increase of our market operation and the expansion of our administrative
organization. As an important segment, operating expenses for healthcare
knitgoods series increased by $0.3 million or 114.8% to $0.5 million for the six
months ended June 30, 2010 from $0.2 million for the six months ended June 30,
2009.
Income from
operations. As a result of the foregoing, our income from
operations increased to $0.9 million for the six months ended June 30, 2010 from
$0.1 million for the six months ended June 30, 2009, an increase of 586.4% due
to the increase of revenue. Our income from operations for health care knitgoods
series increased to $0.6 million for the six months ended June 30, 2010 from
$0.1 million for the six months ended June 30, 2009, an increase of
575.3%.
Income taxes. Our
income tax expenses increased by $0. 2 million, or 510.6%, from $0.03 million
for the six months ended June 30, 2009 to $0.2 million for the six months ended
June 30, 2010. The increase was primarily due to the increase of
income.
44
Net income. Our net
income increased by $0.6 million, or 566.5% to $0.7 million for the six months
ended June 30, 2010 from $0.1 million for the six months ended June 30, 2009.
Our profit margin increased from 10.5% for the six months ended June 30, 2009 to
29.6% for the six months ended June 30, 2010.
For
The Year Ended December 31, 2009 Compared to December 31, 2008
Revenue.For the year ended
December 31, 2009, revenue was $3.1 million compared to $0.4 million for the
year ended December 31, 2008, an increase of $2.7 million, or 635.7%. This
increase was mainly due to the expansion of our operation. Beginning December
2008, Joway Group became operational as our primary operating company. Revenue
from healthcare knitgoods series increased to $1.7 million for the year ended
December 31, 2009 from $0.01 million for the year ended December 31, 2008. Since
Joway Group became operational from December 2008, healthcare knit goods
produced by Joway Group were sold only in one month of the year of 2008, hence
the significant increase in revenue.
Cost of Goods
Sold. For the year ended December 31, 2009, cost of goods sold
was $1.2 million compared to $0.3 million for the year ended December 31, 2008,
an increase of $0.9 million, or 283.3%. This increase was mainly due
to the increase of sales. Cost of goods sold for healthcare knitgoods
series increased to $0.4 million for the year ended December 31, 2009 from $0.02
million for the year ended December 31, 2008. This increase was also
due to only one month of sales of healthcare knitgoods in 2008.
Gross profit. Our gross profit
increased by $1.8 million or 1537.3% to $1.9 million for the year ended December
31, 2009, compared to $0.1 million for the year ended December 31, 2008. This
increase was due to the increase of sales. Our gross margin increased from 28.1%
for the year ended December 31, 2008 to 62.5% for the year ended December 31,
2009. This increase was mainly due to the increase in sales of healthcare
knitgoods which has higher gross profit margin.
Operatingexpenses. Our total
operating expenses consist of sales and marketing expenses and general and
administrative expenses. Our total operating expenses increased by $0.8 million,
or 336.7%, from $0.3 million for the year ended December 31, 2008 to$1.1 million
for the year ended December 31, 2009. This increase was mainly due to the
increase of our market operation and the expansion of our administrative
organization. Operating expenses for healthcare knitgoods series increased by
$0.5 million or 417.2% to $0.7 million for the year ended December 31, 2009 from
$0.1 million for the year ended December 31, 2008.
Income from
operations. As a result of the foregoing, our income from
operations was $1.0 million for the year ended December 31, 2009,compared to
loss from operations of$0.1 million for the year ended December 31,
2008, an increase of $1.1 million. This increase was mainly due to Joway Group,
our primarily operating company, expanding operations in 2009 compared to no
sales for the first eleven months in 2008 when it was being
established. For the year ended December 31, 2009,income from
operations for healthcare knitgoods series was $0.6 million from $0.1 million of
loss for the year ended December 31, 2008.
Income taxes. Our
income tax expenses increased from $0.01 million for the year ended December 31,
2008 to $0.1 million for the year ended December 31, 2009. The increase was
primarily due to the increase of income.
Net income. For the
year ended December 31, 2009, our net income was $0.6 million, as compared to
net loss of $0.1 millionfor the year ended December 31, 2008.This increase was
primarily brought by Joway Group.
Franchising
We enter
into franchising agreements to develop retail outlets for our products. The
agreements provide that franchisees will sell our products exclusively. In
exchange we provide them with geographic exclusivity, discounted product,
training and support. The agreements also require franchisees to adhere to
certain standards of product merchandising, promotion and presentment. The
agreements do not require any initial franchise fees from the franchisees, nor
do they require the franchisees to pay continuing royalties. The agreements are
generally for terms of threeyears and are renewable at the mutual agreement of
both parties. The Agreements are cancelable at our discretion if franchisees do
not purchase a certain minimum level of product annually.
45
The
following is a breakdown of revenue between franchise and non-franchise
customers:
Six Months ended June 30,
|
Year ended December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Sales
to franchise customers
|
$ | 2,016,731 | $ | 622,592 | $ | 2,238,586 | $ | - | ||||||||
Sales
to non-franchise customers
|
307,110 | 361,864 | 870,473 | 422,612 | ||||||||||||
Total
sales
|
$ | 2,323,841 | $ | 984,456 | $ | 3,109,059 | $ | 422,612 | ||||||||
Change in franchise
outlets:
|
||||||||||||||||
Number
of franchise outlets open at beginning of period
|
175 | - | - | - | ||||||||||||
Number
of franchise outlets opened during the period
|
58 | 69 | 182 | - | ||||||||||||
Number
of franchise outlets closed during the period
|
(14 | ) | - | (7 | ) | - | ||||||||||
Number
of franchise outlets open at the end of the period
|
219 | 69 | 175 | - |
Liquidity
and Capital Resources
Our cash
and cash equivalents at the beginning of the six months ended June 30, 2010 was
$0.9 million and decreased to $0.6 million by the end of the period, a decrease
of $0.3 million. We had net working capital of $2.3 million at June 30, 2010, an
increase of $0.4 million over $1.9 million at December 31, 2009.
Our cash
and cash equivalents at the beginning of the year ended December 31, 2009 was
$0.1 million and increased to $0.9 million by the end of the year, an increase
of $0.8 million. We had net working capital of $1.9 million at December 31,
2009, an increase of $5.6 million from negative $3.7 million at December 31,
2008.
Our cash
flow information summary is as follows:
For the six months ended June 30,
|
For the year ended December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Audited)
|
(Audited)
|
|||||||||||||
Net
cash provided by (used in):
|
||||||||||||||||
Operating
activities
|
$ | 549,237 | $ | (302,667 | ) | $ | 629,579 | $ | (251,536 | ) | ||||||
Investing
activities
|
(114,694 | ) | (2,103,920 | ) | (2,665,012 | ) | (3,600,661 | ) | ||||||||
Financing
activities
|
$ | (713,804 | ) | $ | 2,735,990 | $ | 2,845,472 | $ | 3,508,862 |
Net Cash Provided By (Used
In) Operating Activities
Net cash
provided by operating activities was $0.5 million for the six months ended June
30, 2010 while $0.3 million was used in operating activities for the six months
ended June 30, 2009. This change from net cash used in operating activities to
net cash provided by activities reflects an increase in net income of $0.6
million between the two comparable periods.
Net cash
provided by operating activities was $0.6 million for the year ended December
31, 2009 while $0.3 million was used in operating activities for the year ended
December 31, 2008. This change from net cash used in operating
activities to net cash provided by activities was primarily due to the increase
of net income.
46
Net Cash Used In Investing
Activities
Net cash
used in investing activities decreased $2.0 million, from $2.1 million for the
six months ended June 30, 2009 to $0.1 million for the six months ended June 30,
2010. For the six months ended June 30, 2009, we paid $1.5 million to Mr. Si
Changlong who was appointed to use the $1.5 million to purchase CITIC trust fund
on behalf of the company. In addition, this increase reflects expenditures of
$0.5 million associated with our construction offactories and administrative
officesin Baodi, Tianjin, which started from the year of 2008 and ended in March
2010.
Net cash
used in investing activities decreased $1.0 million, from $3.6 million for the
year ended December 31, 2008 to $2.6 million for the ended December 31,
2009. In 2008 we started construction of our factories and
andadministrative offices incurred significant construction
expenditures.
Net Cash Provided By(Used
In) Financing Activities
Net cash
provided byfinancing activities was $2.7 million for the six months ended June
30, 2009 while $0.7 million was used in financing activities for the six months
ended June 30, 2010. Between 2007 and 2008, we borrowed a total of $4.6 million
from Jinghe Zhang for the construction of our factories and administrative
offices in Baodi, Tianjin and have to date, repaid a total of $4.2 million. In
addition, we received $6.6 million of capital contribution from Jinghe Zhang in
March 2009 which resulted in a net cash inflow of approximately $2.7 million for
the six months ended June 30, 2009. From 2007
through 2009, the Company was advanced $0.7 million by Shenyang Joway. The
advances were non-interest bearing and had no specified repayment terms. The
Company repaid $0.5 million of these advances during the period January 1, 2010
through June 30, 2010.
Net cash
provided by financing activities was $2.8 million for the year ended December
31, 2009 and $3.5 million for the year ended December 31, 2008. This decrease
was primarily due to the decrease of financing from Jinghe Zhang. We borrowed
$3.5 million from Jinghe Zhang for construction of our factories and
administrative offices in Baodi, Tianjin in 2008 and paid back $4.0 million of
the loan to Jinghe Zhang in 2009. While in 2009, we also received $6.6 million
capital contribution from Jinghe Zhang.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We
entered into two agreements to lease the headquarters office for 5 years
starting from November 2009. Since we paid decoration expenses of the office for
the owners, the lease fees of the first year were halved. The future minimum
obligations under the afore mentioned agreements are as follows:
Fiscal Year
|
Minimum Lease fees
|
|||
2010
|
$ | 89,189 | ||
2011
|
152,895 | |||
2012
|
152,895 | |||
2013
|
152,895 | |||
2014
|
127,413 | |||
Total
|
$ | 675,287 |
Off-Balance Sheet
Arrangements
We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our
securities.
47
Critical
Accounting Policies
Management’s
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. We believe that the following reflect the more critical accounting
policies that currently affect our financial condition and results of
operations.
Basis of
Consolidation
The
accompanying consolidated financial statements include G2 Ventures and its
wholly owned subsidiary and controlled VIEs. All significant inter-company
accounts and transactions have been eliminated in the consolidation. Pursuant to
Accounting Standards Codification Topic 810, “Consolidation”, Joway Group, as a
VIE of Junhe Consulting, have been consolidated in our financial statements.
JowayGroup’s sales are included in our total sales, its income from operations
isconsolidated with ours, and our net income includes all of JowayGroup’s net
income. Based on the various VIE Agreements, we are able to exercise
control over the VIEs, and to obtain in full the economic benefits. Accordingly,
the non–controlling interests have no economic interest in the
VIEs.
Revenue
Recognition
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the purchase price is fixed or
determinable and collectability is reasonably assured.
We sell
most products to the company’s franchise customers who, in turn, sell the
products to their customers. We are not contractually obligated to accept
returns from our franchise customers. Revenue is recognized upon the shipment of
goods to customers. Sales are presented net of value added tax
(VAT).
For
Tourmaline Wellness House sale, we use the completed contract method. A contract
is considered complete when all significant costs have been incurred and the
project has been accepted by the customer. Contract costs consist primarily of
materials and labor costs.
Accounts
Receivable
Accounts
receivable are carried at net realizable value. We provide reserves for
potential credit losses on accounts receivable. Management reviews the
composition of the accounts receivable and analyzes historical bad debts,
customer concentrations, customers credit worthiness, currents economic trends
and changes in customers payment patterns to evaluate the adequacy of these
reserves.
Inventories
Inventories
are stated at the lower of cost, as determined by the specific identification
method on contract level (For each individual contract, inventories cost flow
are determined by weighted-average method), or the net realizable value, which
is determined on selling prices less any further costs expected to be incurred
for completion and disposal. Management regularly evaluates the composition of
its inventories to identify slow-moving and obsolete inventories to determine
whether a valuation allowance is required.
Property, Plant, and
Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation, and
include expenditure that substantially increase the useful lives of existing
assets.
48
Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets. Estimated useful lives are as follows:
Building
|
20
years
|
|
Operating
Equipment
|
10
years
|
|
Office
furniture and equipment
|
3
or 5 years
|
|
Vehicles
|
10
years
|
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts, and any gain or loss is included in the
consolidated statements of income and other comprehensive income. Maintenance,
repairs and minor renewals are charged directly to expenses as incurred.
Significant renewals and betterment to buildings and equipment are
capitalized.Leasehold improvements are depreciated over the lesser of the useful
life or the life of the lease.
Recent
Accounting Pronouncements
In June
2009, the FASB issued Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 105-10 (formerly Statement of Financial
Accounting Standards (“SFAS”) No. 168, the FASB ASC and Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement No.
162). ASC 105-10 establishes the FASB ASC as the source of
authoritative accounting principles recognized by the FASB to be applied in
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America. The adoption of this
topic has no impact on our consolidated financial statements. However, reference
to specific accounting standards have been changed to refer to appropriate
section of the ASC. Subsequent revisions to GAAP by the FASB will be
incorporated into ASC through issuance of Accounting Standards Updates
(“ASU”).
In August
2009, the FASB issued FASB ASU 2009-05, “Measuring Liabilities at Fair
Value”, which provide amendments to FASB ASC 820, “Fair Value
Measurements”. Specifically, FASB ASU 2009-05 clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, an entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). This ASU also indicates that when estimating the fair value of a
liability, a reporting entity is not required to adjust to include inputs
relating to the existence of transfer restrictions on that liability. This ASU
is effective October 1, 2009. The adoption of this topic has no material impact
on our consolidated financial statements.
In
October 2009, the FASB issued FASB ASU 2009-13, “Multiple-deliverable Revenue
Arrangements”. FASB ASU 2009-13 provides amendments to the criteria
for separating deliverables, measuring and allocating arrangement consideration
to one or more units of accounting. As a result of these amendments,
multiple-deliverable revenue arrangements will be separated in more
circumstances than under existing U.S. GAAP. The amendments in this ASU also
establish a selling price hierarchy for determining the selling price of a
deliverable. The selling price used for each deliverable will be based on
vendor-specific objective evidence if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price
if neither vendor-specific objective evidence nor third-party evidence is
available. The amendments also require providing information about the
significant judgments made and changes to those judgments and about how the
application of the relative selling-price method affects the timing or amount of
revenue recognition. This ASU is effective prospectively for revenue
arrangements entered into or materially modified in the fiscal years beginning
on or after June 15, 2010. The adoption of this topic has no material impact on
our consolidated financial statements.
49
In
October 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That
Include Software Elements.” FASB ASU 2009-14 changes the accounting model for
revenue arrangements that include both tangible products and software elements
that are “essential to the functionality,” and scopes these products out of
current software revenue guidance. Under the amendments, the following
components would be excluded from the scope of software revenue recognition
guidance: the tangible element of the product, software products bundled with
tangible products where the software components and non-software components
function together to deliver the product’s essential functionality, and
undelivered components that relate to software that is essential to the tangible
product’s functionality. This ASU also provides guidance on how to allocate
transaction consideration when an arrangement contains both deliverables within
the scope of software revenue guidance (software deliverables) and deliverables
not within the scope of that guidance (non-software deliverables). This
amendment will be effective prospectively for revenue arrangements entered into
or materially modified in the fiscal years beginning on or after January 1,
2011. We are currently evaluating the impact that this topic will have on our
consolidated financial statements.
In
January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair
Value Measurements”, which amends FASB ASC 820, “Fair Value Measures and
Disclosures.” FASB ASU 2010-06 require companies to make new disclosures about
recurring or nonrecurring fair value measurements including significant
transfers into and out of Level 1 and Level 2 fair value hierarchies and
information on purchases, sales, issuance and settlements on a gross basis in
the reconciliation of Level 3 fair value measurements. This ASU is effective
prospectively for financial statements issued for fiscal years and interim
periods beginning after December 15, 2009. The adoption of this topic will not
have a material impact on our consolidated financial statements.
In
February 2010, the FASB issued ASU 2010-09, “Amendments to Certain Recognition
and Disclosure Requirements”, which amends FASB ASC 855, “Subsequent Events”.
The update provides that SEC filers, as defined in ASU 2010-09, are no longer
required to disclose the date through which subsequent events have been
evaluated in originally issued and revised financial statements. The update also
requires SEC filers to evaluate subsequent events through the date the financial
statements are issued rather than the date the financial statements are
available to be issued. We adopted ASU 2010-09 upon issuance. The adoption of
this topic has no material impact on our consolidated financial statements.
50
PROPERTIES
There is
no private land ownership in the PRC. Individuals and companies are permitted to
acquire land use rights for specific purposes.
Our main
offices are located at 16th Floor,
Tianjin Global Zhiye Square, 309 Nanjing Road, Nankai District, Tianjin, PRC.
Our manufacturing facilities are located in Baodi District, Tianjin,
PRC.
We have
been issued a Land Use Rights and Property Ownership Certificate for the land
and buildings located in Baodi district, Tianjin, PRC by the People’s Government
of Tianjin City, which expires October 10, 2057.
We
believe that our existing facilities are well maintained and in good operating
condition and sufficient for our present needs.
Below is
a detailed description of the Land Use Rights and Property Ownership
Certificate.
Land
Land
No.
|
1201150240000790000
Zi D-4-7-039
|
Land
Use Right Certificate No.
|
124031002677
|
User
of Land
|
Tianjin
Joway Shengshi Group Co.,Ltd
|
Location
|
Baodi
District, Tianjin, PRC
|
Usage
|
Industrial
|
Area
(Square Meters)
|
27,520.4
|
Form
of Acquisition
|
Grant
from related Land Management Authority
|
Expiration
Date
|
October
10, 2057
|
Buildings
Building
1
|
Building
2
|
Building
3
|
Building
4
|
|
Certificate
No.
|
124031002677
|
|||
Owner
|
Tianjin
Joway Shengshi Group Co.,Ltd
|
|||
Location
|
Baodi
District, Tianjin, PRC
|
|||
Category
|
Private
|
|||
Area
(Square Meters)
|
5,585.31
|
3,389.48
|
2,999.28
|
1,186.79
|
Usage
of Design
|
Nonresidential
|
|||
Structure
|
Mixture
|
Building
5
|
Building
6
|
Building
8&9
|
Building
7
|
|
Certificate
No.
|
124031002677
|
|||
Owner
|
Tianjin
Joway Shengshi Group Co.,Ltd
|
|||
Location
|
Baodi
District, Tianjin, PRC
|
|||
Category
|
Private
|
|||
Area
(Square Meters)
|
95.64
|
202.69
|
4,470.56
|
4,043.91
|
Usage
of Design
|
Nonresidential
|
Residential
|
||
Structure
|
Mixture
|
Among the
nine buildings, five buildings are used for production, one for employee
accommodation, one for storage, and one for parking.
51
We also
lease offices from Aiying Wang and Guifen Feng. The terms of the leases are
summarized as follows:
Lessor
|
Lessee
|
Location
|
Term
|
Rent
Per Year
|
Aiying
Wang
|
Tianjin
Joway Shengshi Group Co.,Ltd.
|
Rooms
1601-1603, 16th
floor, Tianjin Global Zhiye Square, 309 Nanjing Road, Nankai District,
Tianjin, PRC
|
November
1, 2009 – October 31, 2014
|
RMB
216,000 (approximately $31,764.71) for the first year and RMB 432,000
(approximately $63,529.41) per year thereafter.
|
Guifen
Feng
|
Tianjin
Joway Shengshi Group Co., Ltd.
|
Rooms
1604-1606, 16th
floor, Tianjin Global Zhiye Square, 309 Nanjing Road, Nankai District,
Tianjin, PRC
|
November
1, 2009 – October 31, 2014
|
RMB
306,500 (approximately $ 45,073.53) for the first year and RMB 613,000
(approximately $90,147.06) per year
thereafter.
|
52
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
AND MANAGEMENT
The
following table sets forth certain information with respect to the beneficial
ownership of our voting securities following the completion of the Reverse
Merger described in Items 1.01 and 3.02 of this report by (i) any person or
group owning more than 5% of any class of voting securities, (ii) each director,
(iii) our chief executive officer and (iv) all executive officers and directors
as a group as of October 6, 2010.
Name and Address
|
Number of Shares of
Common Stock
Beneficially Owned(1)
|
Percentage
Ownership of
Shares of
Common
Stock
|
||||||
Owner
of More than 5% of Class
|
||||||||
Crystal
Globe Limited (4)
P.O.
Box 957, Offshore Incorporations Centre, Road Town,
Tortola,
British Virgin Islands
|
18,515,426 | 92.58 | % | |||||
Directors
and Executive Officers
|
||||||||
Gust
C. Kepler
(2)
1810
ThreeGalleriaTower
13155
Noel Road,
Dallas,
TX75240
|
— | — | ||||||
Jinghe
Zhang(3)
16th
Floor, 309 Nanjing Road,
Nankai
District, Tianjin, PRC
|
— | — | ||||||
Yuan
Huang(3)
16th
Floor, 309 Nanjing Road,
Nankai
District, Tianjin, PRC
|
— | — | ||||||
All
directors and executive officers (2 persons)
|
*Under1%
of the issued and outstanding shares as of October 6, 2010.
(1) In
determining beneficial ownership of our common stock as of a given date, the
number of shares shown includes shares of common stock which may be acquired on
exercise of warrants or options or conversion of convertible securities within
60 days of that date. In determining the percent of common stock owned by a
person or entity on October 6, 2010, (a) the numerator is the number of shares
of the class beneficially owned by such person or entity, including shares which
may be acquired within 60 days on exercise of warrants or options and conversion
of convertible securities, and (b) the denominator is the sum of (i) the total
shares of common stock outstanding on October 6, 2010 (20,000,000), and (ii) the
total number ofshares that the beneficial owner may acquire upon conversion of
the preferred and on exercise of the warrants and options, subject to
limitations on conversion and exercise. Unless otherwise stated, each beneficial
owner has sole power to vote and dispose of its shares.
53
(2) Gust
C. Kepler was our former President, Chief Executive Officer, Chief Financial
Officer, Secretary and sole director until his resignation on September 28,2010
in connection with the sale of 3,300,000 ofhis shares of common stock to Crystal
Globe Limited.
(3)
Jinghe Zhang was appointed our new President, Chief Executive Officer, and sole
director andYuan Huang was appointed our new Chief Financial Officer
,Secretary and Treasurer with effect from September 28,
2010.
(4)
Lionel Evan Liu is the sole shareholder of Crystal Globe Limited and
accordingly, has the sole investment and voting power of over the shares owned
by Crystal Globe Limited.
54
DIRECTORS
AND EXECUTIVE OFFICERS, PROMOTERS
AND
CONTROL PERSONS
Our
Directors and Executive Officers
In
connection with the change in control of the Company on September 28, 2010, Gust
Keplerresigned as our sole director and officer and we appointed Jinghe Zhang as
our new President, Chief Executive Officer and sole director, Yuan Huang as our
new Chief Financial Officer, Secretary and Treasurer on September 28,
2010.
As such,
as of the date of this Report, all our officers and sole director are residents
of the PRC.As a result, it may be difficult for investors to effect service of
process within the United States upon any of them or to enforce court judgments
obtained against them in the United States courts.
The
following table sets forth certain information concerning our directors and
executive officers:
Name
|
Age
|
Position
|
||
Jinghe
Zhang
|
45
|
President,
Chief Executive Officer, and sole director
|
||
Yuan
Huang
|
39
|
Chief
Financial Officer, Secretary and
Treasurer
|
The
following is a summary of the biographical information of our directors and
officers:
JINGHE ZHANG, age 45,
is the founder of Tianjin Joway Group. Mr. Zhang has extensive experience in
business management and product marketing. He has served as Chairman of the
Board and CEO for Joway Group since its incorporation in 2007. From January 2005
to May 2007, he was the Chairman and general manager for Shenyang Joway. From
May 2003 to December 2004, he served as Chairman and general manager of Shenyang
Dazhou Healthcare Products Co., Ltd. He headed the marketing department of
Tianjin Tianshi Biological Engineering Co., Ltd. from July 2000 to May
2003. From July 1988 to July 2000, he was employed as sales manager
by Tianjin Hardware Procurement & Supply Station. Mr. Zhang
received his bachelor degree in economics from Tianjin University of Finance and
Economics in July 1988.
YUAN HUANG, age 39,
has served as Chief Financial Officer for Joway Group since September 2009. He
worked as Senior Financial Manager of Tianjin Tianshi Group Co., Ltd. from
September 2005 to August 2009. He was the financial manager of Herbie (Tianjin)
Electronics Co., Ltd. from November 2003 to July 2005. He served as
Section Chief of the Budget Department of Bridgestone Tires (Tianjin) Co., Ltd
from December 1998 to November 2003. Mr. Huang received his master
degree and bachelor degree in accounting from Tianjin University of Finance and
Economics in July 2009 and July 1993, respectively.
Our
director holds his position until the next annual meeting of shareholders and
until successors are elected and qualified by our shareholders, or until earlier
death, retirement, resignation or removal.
Save as
otherwise reported above, none of our directors hold directorships in other
reporting companies.
There are
no family relationships among our director or officers.
To our
knowledge, during the last ten years, none of our director and executive
officers (including those of our subsidiaries) has:
|
·
|
Had
a bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of
the bankruptcy or within two years prior to that
time.
|
|
·
|
Been
convicted in a criminal proceeding or been subject to a pending criminal
proceeding, excluding traffic violations and other minor
offenses.
|
55
|
·
|
Been
subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking
activities.
|
|
·
|
Been
found by a court of competent jurisdiction (in a civil action), the SEC,
or the Commodities Futures Trading Commission to have violated a federal
or state securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
|
|
·
|
Been
the subject to, or a party to, any sanction or order, not subsequently
reverse, suspended or vacated, of any self-regulatory organization, any
registered entity, or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons
associated with a member.
|
Directors
and Officers of the PRC Operating Entities
Under
each of the PRC Operating Entities’ Articles of Association and PRC law, each
company is managed by one executive director instead of a board of directors.
The executive director is elected and appointed by the shareholders for a term
of three years and can be re-elected for consecutive terms. The
appointment and termination of the CEO (sometimes called the General Manager) is
determined by the executive director.
In
accordance with the PRC Subsidiaries’ Articles of Association and PRC law, each
of the PRC Operating Entities’ executive director is monitored by a supervisor,
appointed by the shareholders for a term of three years.
The
following table sets forth certain information as concerning executive officers
of each of our PRC Operating Entities:
Joway
Group
Name
|
Age
|
Position
|
||
Jinghe
Zhang
|
45
|
General
Manager
|
||
Yuan
Huang
|
39
|
Financial
Manager
|
Joway
Technology
Name
|
Age
|
Position
|
||
Jingyun
Chen
|
46
|
General
Manager
|
||
Yuan
Huang
|
39
|
Financial
Manager
|
Joway
Decoration
Name
|
Age
|
Position
|
||
Jingyun
Chen
|
46
|
General
Manager
|
||
Yuan
Huang
|
39
|
Financial
Manager
|
Shengtang
Trading
Name
|
Age
|
Position
|
||
Yanli
Feng
|
38
|
General
Manager
|
||
Yuan
Huang
|
39
|
Financial
Manager
|
Audit
Committee Financial Expert
Our board
of directors currently acts as our audit committee. Because we only
recently executed the Reverse Merger, our board of directors is still in the
process of finding an “audit committee financial expert” as defined in
Regulation S-K and directors that are “independent” as that term is used in
Section 10A of the Securities Exchange Act.
56
Audit
Committee
We have
not yet appointed an audit committee. At the present time, we believe
that our board of directors is capable of analyzing and evaluating our financial
statements and understanding internal controls and procedures for financial
reporting. We do, however, recognize the importance of good corporate
governance and intend to appoint an audit committee comprised entirely of
independent directors, including at least one financial expert, in the near
future.
Compensation
Committee
We do not
presently have a compensation committee. Our board of directors currently acts
as our compensation committee.
Nominating
Committee
We do not
presently have a nominating committee. Our board of directors currently acts as
our nominating committee.
Code
of Ethics
On
December 31, 2009, our sole director approved a Code of Ethics for Financial
Executives for the calendar year 2010.
Board
Leadership Structure and Role in Risk Oversight
Jinghe
Zhang is currently our sole director, President and Chief Executive Officer. We
do not have any independent directors. We believe Jinghe Zhang is
best situated to serve as chairman of the Board because he is the director most
familiar with our business and industry and the director most capable of
identifying strategic priorities and executing our business strategy. In
addition, having a single leader eliminates the potential for confusion and
provides clear leadership for our company. We believe that this leadership
structure has served our company well.
Our board
of directors has overall responsibility for risk oversight. Because we do not
have a compensation, nominating or audit committee, the board will, for the time
being, function in these capacities.
The
board’s role in the risk oversight of our company includes, among other
things:
|
·
|
appointing,
retaining and overseeing the work of the independent auditors, including
resolving disagreements between the management and the independent
auditors relating to financial
reporting;
|
|
·
|
approving
all auditing and non-auditing services permitted to be performed by the
independent auditors;
|
|
·
|
reviewing
annually the independence and quality control procedures of the
independent auditors;
|
|
·
|
reviewing
and approving all proposed related party
transactions;
|
|
·
|
discussing
the annual audited financial statements with the
management;
|
|
·
|
meeting
separately with the independent auditors to discuss critical accounting
policies, management letters, recommendations on internal controls, the
auditor’s engagement letter and independence letter and other material
written communications between the independent auditors and the
management.
|
Director
Qualifications
Directors
are responsible for overseeing our business consistent with their fiduciary duty
to stockholders. This significant responsibility requires highly-skilled
individuals with various qualities, attributes and professional experience. The
board believes that there are general requirements for service on our board of
directors that are applicable to all directors and that there are other skills
and experience that should be represented on the board as a whole but not
necessarily by each director. The board considers the qualifications of director
and director candidates individually and in the broader context of the board’s
overall composition and our current and future needs.
57
Qualifications
for All Directors
In its
assessment of each potential candidate, including those recommended by
stockholders, the board considers the nominee’s judgment, integrity, experience,
independence, understanding of our business or other related industries and such
other factors the board determines are pertinent in light of the current needs
of the board. The board also takes into account the ability of a director to
devote the time and effort necessary to fulfill his or her responsibilities to
us.
The board
requires that each director be a recognized person of high integrity with a
proven record of success in his or her field. Each director must demonstrate
innovative thinking, familiarity with and respect for corporate governance
requirements and practices, an appreciation of multiple cultures and a
commitment to sustainability and to dealing responsibly with social issues. In
addition to the qualifications required of all directors, the board conducts
interviews of potential director candidates to assess intangible qualities
including the individual’s ability to ask difficult questions and,
simultaneously, to work collegially. The board does not have a specific
diversity policy, but considers diversity of race, ethnicity, gender, age,
cultural background and professional experiences in evaluating candidates for
board membership. Diversity is important because a variety of points of view
contribute to a more effective decision-making process.
Qualifications,
Attributes, Skills and Experience to be Represented on the Board as a
Whole
The board
has identified particular qualifications, attributes, skills and experience that
are important to be represented on the board as a whole, in light of our current
needs and business priorities. The board believes that it should include some
directors with a high level of financial literacy and some directors who possess
relevant business experience as a Chief Executive Officer or a President or like
position. Marketing is the core focus of our business and we seek to develop and
deploy the world’s most innovative and effective marketing and technology.
Therefore, the board believes that marketing and technology experience should be
represented on the board. We are involved in the healthcare business in the
PRC. Therefore our business also requires compliance with a variety
of regulatory requirements and relationships with various governmental entities.
Therefore, the board believes that governmental, political or diplomatic
expertise should be represented on the board.
Set forth
below are a chart and a narrative disclosure that summarize the specific
qualifications, attributes, skills and experiences described above. An “X” in
the chart below indicates that the item is a specific reason that the director
has been nominated to serve on ourboard. The lack of an “X” for a particular
qualification does not mean that the director does not possess that
qualification or skill. Rather, an “X” indicates a specific area of focus
or expertise of a director on which the board currently relies.
|
High level of
financial literacy
|
Diversity of race,
ethnicity, gender,
age, cultural
background or
professional
experience
|
Extensive
knowledge of the
Company’s
business
|
Marketing/Marketing
related technology
experience
|
Governmental,
political or
diplomatic
expertise
|
|||||||
Jinghe
Zhang
|
X
|
X
|
X
|
We will
strive to identify and appoint more directors to the board that possess the
qualifications and qualities that will fulfill our current needs and business
priorities.
Mr. Jinghe Zhang, our
current President, Chief Executive Officer, and sole director possesses many of
the attributes we are looking for in our board membersMr. Zhang has over 20
years of experience in business management and product marketing and 10 years’
experience in the PRC healthcare product industry. He has led healthcare
products companies in a managerial capacity, more recently as general manager of
Shenyang Dazhou Healthcare Products Co., Ltd. and Tianjin Tianshi Biological
Engineering Co., Ltd. He is also the founder of Joway Group and has served as
Chairman of the Board and CEO for Joway Group since its incorporation in
2007. Mr. Zhang received his bachelor degree in economics from
Tianjin University of Finance and Economics in 1988.
58
EXECUTIVE
COMPENSATION
The
following is a summary of the compensation we paid to our former Chief Executive
Officer, Chief Financial Officer, sole director and Chairman, Gust Kepler, for
the three years ended December 31, 2007, 2008 and 2009. No executive officer
received compensation in excess of $100,000 for any of those years.
Annual Compensation
|
Long Term Compensation
|
|||||||||||||||||||||
Name and Principal Position
|
Fiscal
Year
End
|
Salary ($)
|
Bonus ($)
|
All other
and annual
Compensa-
tion and
LTIP
Payouts ($)
|
Securities
under
Options/
SARS
Granted
(#)
|
Restricted
Shares or
Restricted
Share
Units
(#)
|
||||||||||||||||
Gust
Kepler
|
2009
|
0 | 0 | 0 | 0 | 0 | ||||||||||||||||
President,
Chief Executive Officer,
|
2008
|
0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Chief
Financial Officer, Secretary, and Sole Director
|
2007
|
0 | 0 | 0 | 0 | 0 |
Our
current Chief Executive Officer and Chief Financial Officer assumed their
respective positions in our companyon September 28, 2010. On September 28, 2010,
we entered into an employment agreement with each of the
officers. Under their respective agreements, Jinghe Zhang is employed
as our new Chief Executive Officer, President and director for a term of three
years and a monthly salary of RMB7,000 (approximately $1,044.78), and
Yuan Huang is employed as our Chief Financial Officer, Secretary o and Treasurer
for a term of three years and a monthly salary of RMB 5,000 (approximately
$746.27). Pursuant to these agreements, neither party may terminate the
employment agreementwithout cause.
The
following is a summary of the compensation paid by Joway Group to Jinghe Zhang,
its General Manager, and Yuan Huang, its Finance Manager for the two years ended
December 3, 2009 and 2008, respectively. No other executive officer of Joway
Group received compensation in excess of $100,000 for any of those
years.
Name and
Principal
Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive Plan
Compensation
($)
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Jinghe
Zhang
|
2008
|
12,352.94
|
0
|
0
|
0
|
0
|
0
|
0
|
12,352.94
|
|||||||||||||||||||||||||
General Manager
|
2009
|
12,352.94
|
0
|
0
|
0
|
0
|
0
|
0
|
12,352.94
|
|||||||||||||||||||||||||
Yuan
Huang
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
Finance
Manager
|
2009
|
735.29
|
0
|
0
|
0
|
0
|
0
|
0
|
735.29
|
The
following is a summary of the compensation paid by Joway Technology to Jingyun
Chen, its General Manager, and Yuan Huang, its Finance Manager for the two years
ended December 31, 2009 and 2008, respectively. No other executive officer of
Joway Technology received compensation in excess of $100,000 for any of those
years.
Name and
Principal
Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive Plan
Compensation
($)
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Jingyun
Chen
|
2008
|
5,294.12
|
0
|
0
|
0
|
0
|
0
|
0
|
5,294.12
|
|||||||||||||||||||||||||
General Manager
|
2009
|
5,294.12
|
0
|
|
0
|
0
|
0
|
0
|
0
|
|
5,294.12
|
|||||||||||||||||||||||
Yuan
Huang
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
Finance
Manager
|
2009
|
735.29
|
0
|
0
|
0
|
0
|
0
|
0
|
735.29
|
59
The
following is a summary of the compensation paid by Joway Decoration to Jingyun
Chen, its General Manager, and Yuan Huang, its Finance Manager for the two years
ended December 31, 2009 and 2008, respectively. No other executive officer of
Joway Decoration received compensation in excess of $100,000 for any of those
years.
Name and
Principal
Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive Plan
Compensation
($)
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Jingyun
Chen
|
2008
|
5,294.12
|
0
|
0
|
0
|
0
|
0
|
0
|
5,294.12
|
|||||||||||||||||||||||||
General Manager
|
2009
|
5,294.12
|
0
|
0
|
0
|
|
0
|
|
0
|
0
|
5,294.12
|
|||||||||||||||||||||||
Yuan
Huang
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
Finance
Manager
|
2009
|
735.29
|
|
0
|
0
|
0
|
0
|
0
|
0
|
735.29
|
The
following is a summary of the compensation paid by Shengtang Trading to Yanli
Feng, its General Manager, and Yuan Huang, its Finance Manager for the two years
ended December 31, 2009 and 2008, respectively. No other executive officer of
Shengtang Trading received compensation in excess of $100,000 for any of those
years.
Name and
Principal
Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive Plan
Compensation
($)
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Yanli
Feng
|
2008
|
5,294.12 | 0 | 0 | 0 | 0 | 0 | 0 | 5,294.12 | |||||||||||||||||||||||||
General
Manager
|
2009
|
5,294.12 | 0 | 0 | 0 | 0 | 0 | 0 | 5,294.12 | |||||||||||||||||||||||||
Yuan
Huang
|
2008
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
Finance
Manager
|
2009
|
735.29 | 0 | 0 | 0 | 0 | 0 | 0 | 735.29 |
Compensation
Discussion and Analysis
We strive
to provide our named executive officers (as defined in Item 402 of Regulation
S-K) with a competitive base salary that is in line with their roles and
responsibilities when compared to peer companies of comparable size in similar locations.
It is not
uncommon for PRC private companies in China to have base salaries as the sole
form of compensation. The base salary level is established and reviewed based on
the level of responsibilities, the experience and tenure of the individual and
the current and potential contributions of the individual. The base salary is
compared to the list of similar positions within comparable peer companies and
consideration is given to the executive’s relative experience in his or her
position. Base salaries are reviewed periodically and at the time of
promotion or other changes in responsibilities.
We plan
to implement a more comprehensive compensation program, which takes into account
other elements of compensation, including, without limitation, short and long
term compensation, cash and non-cash, and other equity-based compensation such
as stock options. We expect that this compensation program will be comparable to
the programs of our peer companies and aimed to retain and attract talented
individuals.
We will
also consider forming a compensation committee to oversee the compensation of
our named executive officers. The majority of the members of the compensation
committee would be independent directors.
60
Compensation
of Directors
Directors
are permitted to receive fixed fees and other compensation for their services as
directors. The board of directors has the authority to fix the
compensation of directors. No amounts have been paid to, or accrued
to, directors in such capacity.
As of the
date of this report, our directors have received no compensation for their
service on the board of directors. We plan to implement a compensation program
for our independent directors, as and when they are appointed, which we
anticipate will include such elements as an annual retainer, meeting attendance
fees and stock options. The details of that compensation program will be
negotiated with each independent director.
Option
Grants Table
There
were no individual grants or stock options to purchase our common stock made to
the executive officer named in the Executive Compensation Table through October
6, 2010.
Aggregated
Option Exercises and Fiscal Year-End Option Value Table
There
were no stock options exercised during the fiscal year ended December 31, 2009,
by the executive officer named in the Executive Compensation Table.
Long-Term
Incentive Plan (“LTIP”) Awards Table
There
were no awards made to a named executive officer in the last completed fiscal
year under any LTIP.
Employment
Agreements
On
September 28, 2010, we entered into an employment agreement with each of Jinghe
Zhang and Yuan Huang. Under their respective agreements, Jinghe Zhang
is employed as our President, Chief Executive Officer and director for a term of
three years and a monthly salary of RMB7,000 (approximately
$1,044.78), and Yuan Huang is employed as our Chief Financial
Officer,Secretary and Treasurerfor a term of three years and a monthly salary of
RMB 5,000 (approximately $746.27).Pursuant to these agreements, neither party
may terminate the employment agreementwithout cause.
61
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Except
for the ownership of our securities, and except as set forth below, none of the
directors, executive officers, holders of more than five percent of our
outstanding common stock, or any member of the immediate family of any such
person have, to our knowledge, had a material interest, direct or indirect, in
any transaction or proposed transaction which may materially affect our
company.
|
·
|
On
December 1, 2009, we entered into a license agreement with Jinghe Zhang,
our President, Chief Executive Officer and director. Pursuant to the
license agreement, we are authorized to use for free the trademark “Joway”
for a term of nine years and five patents from December 1, 2009 till the
expiration dates of the patents.
|
|
·
|
On
May 10, 2007, Joway Group entered into a cash advance agreement with
Jinghe Zhang, our President, Chief Executive Officer and director.
Pursuant to the agreement, Jinghe Zhang agreed to lend money foroperating
capital to Joway Group. The advances are interest free, unsecuredand have
no specified repayment terms. The agreement is valid throughout Joway
Group’s term of operation. During the period beginning May 17, 2007
(inception of Joway Group) through June 30, 2010, Joway Group received
cash operating advances in the aggregate principal amount of $4,637,397
from Jinghe Zhang and $ 4,184,273 has been paid off by Joway Group. As of
June 30,2010, the total unpaid principal balance due Jinghe Zhang for
advances was $453,124.
|
|
·
|
On
May 10, 2007, Joway Technology entered into a cash advanceagreement with
Jinghe Zhang, our President, Chief Executive Officer and director.
Pursuant to the loan agreement, Jinghe Zhang agrees to lend money as
operating capital to Joway Technology. The advances are interest free,
unsecuredand have no specified repayment terms. The agreement is valid
throughout Joway Technology’s term of operation. During the period
beginning March 28, 2007 (inception of Joway Technology) through June 30,
2010, Joway Technology received cash operating advances in the aggregate
principal amount of $22,031 from Jinghe Zhang and $ 22,031 has been paid
off by Joway Technology. As of June 30, 2010, the total unpaid principal
balance due Jinghe Zhang for advances was
$0.
|
|
·
|
For
the fiscal years 2008 and 2009, we purchased inventory of $115,619 and
$328,088, respectively, from Shenyang Joway, which is controlled by Jinghe
Zhang, our President, Chief Executive Officer and
director.
|
|
·
|
From
2007 through 2009, the Company was advanced $694,458 by Shenyang Joway.
The advances were non-interest bearing and had no specified repayment
terms. The Company repaid $556,365 of these advances during the period
January 1, 2010 through June 30, 2010. As of June 30, 2010, the total
unpaid principal balance due Shenyang Joway for advances was
$138,093.
|
|
·
|
On
February 20, 2009, Joway Group entered into an entrust agreement with
its cashier (treasurer) Changlong Si. Pursuant to the entrust agreement,
Changlong Si was to receive RMB 10 million (approximately$ 1,465,620) from
Joway Group and to purchase a CITIC(China International Trust and
Investment Company) trust investment product on behalf of Joway Group
under his own name.. This investment product is available for purchase by
individuals only and has a higher interest rate than the standard bank
interest rate. The total amount of RMB10 million was invested
from February 25, 2009 to August 25, 2010. The principal of RMB 10 million
and interest of RMB 408,000 on the investment were returned to Joway Group
on August 26, 2010 by Si Changlong.
|
Except as
disclosed above, no executive officer, director or any member of these
individuals’ immediate families, any corporation or organization with whom any
of these individuals is an affiliate or any trust or estate in which any of
these individuals serve as a trustee or in a similar capacity or has a
substantial beneficial interest in is or has been indebted to us at any time
since the beginning of our last fiscal year.
Procedures
for Approval of Related Party Transactions
Our board
of directors is charged with reviewing and approving all potential related party
transactions. All such related party transactions must then be
reported under applicable SEC rules. We have not adopted other procedures for
review, or standards for approval, of such transactions, but instead review them
on a case-by-case basis.
62
LEGAL
PROCEEDINGS
We know
of no material, active, pending or threatened proceeding against us or our
subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or
defendant in any material proceeding or pending litigation.
63
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANTS
COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock has been traded on OTCBB since September 11, 2009 under the
designation “GTVI.” However, to date there has been no trading market for our
common stock.
The
market price of our common stock is subject to significant fluctuations in
response to variations in our quarterly operating results, general trends in the
market, and other factors, over many of which we have little or no
control. In addition, broad market fluctuations, as well as general
economic, business and political conditions, may adversely affect the market for
our common stock, regardless of our actual or projected
performance.
Holders
of Our Common Stock
As of
October 6, 2010, we had 39 shareholders of our common stock, including the
shares held in street name by brokerage firms. The holders of common stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of stockholders. Holders of the common stock have no preemptive rights and
no right to convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common
stock
Dividends
We have
not paid dividends on our common stock and do not anticipate paying such
dividends in the foreseeable future. We will rely on dividends from our PRC
Operating Entities for our funds and PRC regulations may limit the amount of
funds distributed to us from our PRC Operating Entities, which will affect our
ability to declare any dividends.
Stock
Option Grants
To date,
we have not granted any stock options.
Registration
Rights
We have
not granted registration rights to the selling shareholders or to any other
persons.
Securities
authorized for issuance under equity compensation plans
As of the
date of this Current Report, we do not have any securities authorized for
issuance under any equity compensation plans and we do not have any equity
compensation plans.
Penny
Stock Regulations
Our
shares of common stock are subject to the "penny stock" rules of the Securities
Exchange Act of 1934 and various rules under this Act. In general terms, "penny
stock" is defined as any equity security that has a market price less than $5.00
per share, subject to certain exceptions. The rules provide that any equity
security is considered to be a penny stock unless that security is registered
and traded on a national securities exchange meeting specified criteria set by
the SEC, issued by a registered investment company, and excluded from the
definition on the basis of price (at least $5.00 per share), or based on the
issuer's net tangible assets or revenues. In the last case, the issuer's net
tangible assets must exceed $3,000,000 if in continuous operation for at least
three years or $5,000,000 if in operation for less than three years, or the
issuer's average revenues for each of the past three years must exceed
$6,000,000.
64
Trading
in shares of penny stock is subject to additional sales practice requirements
for broker-dealers who sell penny stocks to persons other than established
customers and accredited investors. Accredited investors, in general, include
individuals with assets in excess of $1,000,000 or annual income exceeding
$200,000 (or $300,000 together with their spouse), and certain institutional
investors. For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of the security and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, the rules
require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
65
On
October1, 2010, we entered into and consummated a Share Exchange Agreement with
Crystal Globe, the sole shareholder of Dynamic Elite and Dynamic Elite to
acquire all the issued and outstanding capital stock of Dynamic Elite, a British
Virgin Islands company, in exchange for the issuance to Crystal Globe 15,215,426
restricted shares of our common stock.
We claim
an exemption from the registration requirements of the Act for the private
placement of these securities pursuant to Section 4(2) of the Act and/or
Regulation D promulgated thereunder since, among other things, the transaction
did not involve a public offering, the recipient is an accredited
investor and had access to information about our company and their
investment, the recipient took the securities for investment and not resale, and
our company took appropriate measures to restrict the transfer of the
securities.
66
DESCRIPTION
OF SECURITIES
The
following is a summary description of our capital stock and certain provisions
of our certificate of incorporation and by-laws, copies of which have been filed
as exhibits to this report. The following discussion is qualified in its
entirety by reference to such exhibits.
General
We are
authorized to issue 200,000,000 shares of Common Stock, par value $0.001 per
share, and 1,000,000 shares of preferred stock, par value $0.001 per
share.
Common
Stock
The
holders of our common stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors then up for election. The holders of our common stock
are entitled to receive dividends when, as and if declared by the board of
directors out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of our company, the holders of common stock are
entitled to share ratably in all assets remaining which are available for
distribution to them after payment of liabilities and after provision has been
made for each class of stock, if any, having preference over the common stock.
Holders of shares of our common stock, as such, have no conversion, preemptive
or other subscription rights, and there are no redemption provisions applicable
to the common stock. All of the outstanding shares of common stock are fully
paid and nonassessable.
Preferred
Stock
In
addition to the 200,000,000 shares of common stock, we are authorized to issue
up to 1,000,000 shares of preferred stock. Shares of our preferred stock may be
issued from time to time in one or more classes or series, each of which class
or series shall have such distinctive designation or title as shall be fixed by
the board of directors prior to the issuance any shares thereof.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Limitations
on Liability
Our
Articles of Incorporation provide that we must indemnify and hold harmless
directors, officers, employees, and agents of G2 Ventures, as and to the extent
permitted by the Texas Business Corporation Act. One of our officers or
directors could take the position that this duty on our behalf to indemnify the
director or officer may include the duty to indemnify the officer or director
for the violation of securities laws.
Indemnification
against Public Policy
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to our
Articles of Incorporation, Bylaws, Texas laws or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by one of our directors, officers, or control persons, and the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or control person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
67
Item
3.02 Unregistered
Sales of Equity Securities.
On
October 1, 2010, we entered into and consummated a Share Exchange Agreement with
Crystal Globe, the sole shareholder of Dynamic Elite and Dynamic Elite to
acquire all the issued and outstanding capital stock of Dynamic Elite, a British
Virgin Islands company, in exchange for the issuance to Crystal Globe 15,215,426
restricted shares of our common stock.
We claim
an exemption from the registration requirements of the Securities Act of 1933,
as amended (the “Act”) for the private placement of the shares of our
common stock to Crystal Globe pursuant to Section 4(2) of the Act and/or
Regulation D promulgated thereunder since, among other things, the transaction
did not involve a public offering, the recipient is an accredited
investor and had access to information about our company and their
investment, the recipient took the securities for investment and not resale, and
our company took appropriate measures to restrict the transfer of the
securities.
On
October 5, 2010, we dismissed Turner, Stone & Company, LLP (“TSC”)as our
independent registered public accounting firm. The reports of TSC on
our financial statements for each of the past two fiscal years contained no
adverse opinion or a disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. The decision to change
independent accountants was approved by our board of directors on October 5,
2010.
During
our two most recent fiscal years and through the date of this report, we have
had no disagreements with TSCon any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of TSC, would have caused it
to make reference to the subject matter of such disagreements in its report on
our financial statements for such periods.
During
our two most recent fiscal years and through the date of this report on Form
8-K, there have been no reportable events as defined under Item 304(a)(1)(v) of
Regulation S-K adopted by the SEC.
We
provided TSC with a copy of this disclosure before its filing with the SEC. We
requested that TSC provide us with a letter addressed to the SEC stating whether
or not it agrees with the above statements, and we received a letter from TSC
stating that it agrees with the above statements.
New
Independent Accountant
Our board
of directors appointed Sherb & Co., LLP(“Sherb”) as our new independent
registered public accounting firm effective as of October 5, 2010. During the
two most recent fiscal years and through the date of our engagement, we did not
consult with Sherb regarding either (1) the application of accounting principles
to a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements, or (2) any matter
that was either the subject of a disagreement (as defined in Regulation S-K Item
304(a)(1)(v)), during the two most recent fiscal years.
Prior to
engaging Sherb, Sherb did not provide our company with either written or oral
advice that was an important factor considered by our company in reaching a
decision to change our independent registered public accounting firm from TSC to
Sherb.
Item
5.06 Change
in Shell Company Status
We were a
“shell company” (as such term is defined in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended) immediately before the Closing of the Reverse
Merger. As a result of the Reverse Merger, Dynamic Elite is now our wholly-owned
subsidiary. Dynamic Elite is the holding company of all the
equity of Junhe Counsulting.
68
On
September 16, 2010, prior to the Reverse Merger, Junhe Consulting and Joway
Group entered into a series of VIE Agreementspursuant to which Joway Group
became Junhe Consulting’s contractually controlled affiliate. Through Junhe
Consulting, we effectively and substantially control Joway Group and its three
wholly owned subsidiaries.
Consequently,
we are now, through our PRC Operating Entities, namely Joway Group, Joway
Technology, Joway Decoration and Shengtang Trading in the business of research
and development, manufacture and sales of tourmaline-related healthcare products
and as a result of the Reverse Merger on October 1, 2010, have ceased to be a
“shell” company.
Item
9.01 Financial
Statements and Exhibits.
(a) Financial
statements of businesses acquired.
The
audited financial statements of Dynamic Elite as of December 31, 2009 and 2008
and unaudited financial statements as for the six months ended June 30, 2010 and
2009 are appended to this report beginning on page F-1.
DYNAMIC
ELITE INTERNATIONAL LIMITED AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Financial Statements:
|
|
Consolidated
Balance Sheets
|
|
As
of June 30, 2010 (unaudited) and,
|
|
As
of December 31, 2009 and 2008(audited)
|
F-2
|
Consolidated
Statements of Operations and Comprehensive Income (Loss)
|
|
For
the Six Months Ended June 30, 2010 and 2009 (unaudited)
and,
|
|
For
the Years Ended December 31, 2009 and 2008 (audited)
|
F-3
|
Consolidated
Statement of Changes in Stockholders’ Equity
|
|
For
the Six Months Ended June 30, 2010 (unaudited) and,
|
|
For
the Years Ended December 31, 2009 and 2008(audited)
|
F-4
|
Consolidated
Statements of Cash Flows
|
|
For
the Six Months Ended June 30, 2010 and 2009 (unaudited)
and,
|
|
For
the Years Ended December 31, 2009 and 2008 (audited)
|
F-5
|
Notes
to Consolidated Financial Statements
|
F-6
|
69
F-1
Consolidated
Financial Statements
DYNAMIC
ELITE INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
As
of June 30,
|
As
of December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
(Unaudited)
|
(Audited)
|
(Audited)
|
||||||||||
ASSETS
|
||||||||||||
CURRENT
ASSETS:
|
||||||||||||
Cash
and cash equivalent
|
$ | 659,316 | $ | 935,719 | $ | 98,039 | ||||||
Accounts
receivable, net
|
16,318 | 57,532 | 18,589 | |||||||||
Other
receivables
|
395,339 | 389,712 | 21,184 | |||||||||
Due
from related parties
|
1,468,730 | 1,462,587 | 9,484 | |||||||||
Inventories
|
1,053,688 | 593,805 | 215,742 | |||||||||
Advances
to suppliers
|
149,580 | 192,733 | 854,814 | |||||||||
Prepaid
expense
|
- | 118,123 | 11,634 | |||||||||
Total
current assets
|
3,742,971 | 3,750,211 | 1,229,486 | |||||||||
PROPERTY,
PLANT AND EQUIPMENT, net
|
5,718,852 | 3,191,180 | 158,289 | |||||||||
OTHER
ASSETS:
|
||||||||||||
Construction
in progress
|
- | 2,215,567 | 3,681,034 | |||||||||
Intangible
assets, net
|
587,879 | 581,054 | 587,483 | |||||||||
Total
other assets
|
587,879 | 2,796,621 | 4,268,517 | |||||||||
Total
assets
|
$ | 10,049,702 | $ | 9,738,012 | $ | 5,656,292 | ||||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||||||
CURRENT
LIABILITIES:
|
||||||||||||
Accounts
payable
|
$ | 426,293 | $ | 141,683 | $ | - | ||||||
Advances
from customers
|
126,759 | 361,993 | 198,213 | |||||||||
Taxes
payable
|
216,519 | 55,091 | 324 | |||||||||
Other
payables
|
108,974 | 16,197 | 10,884 | |||||||||
Due
to related parties
|
583,873 | 1,299,258 | 4,715,086 | |||||||||
Total
current liabilities
|
1,462,418 | 1,874,222 | 4,924,507 | |||||||||
COMMITMENTS
|
- | - | - | |||||||||
STOCKHOLDERS'
EQUITY:
|
||||||||||||
Common
stock - $1 par value; 50,000 shares authorized; 10,000 shares issued and
outstandings at June 30, 2010
|
10,000 | - | - | |||||||||
Additional
paid-in-capital
|
7,272,954 | 7,272,954 | 788,327 | |||||||||
Statutory
reserves
|
49,788 | 49,788 | 1,600 | |||||||||
Retained
earnings (deficit)
|
1,133,561 | 445,776 | (156,571 | ) | ||||||||
Accumulated
other comprehensive income
|
130,981 | 95,272 | 98,429 | |||||||||
Subscription
receivable
|
(10,000 | ) | - | - | ||||||||
Total
stockholders' equity
|
8,587,284 | 7,863,790 | 731,785 | |||||||||
Total
liabilities and stockholders' equity
|
$ | 10,049,702 | $ | 9,738,012 | $ | 5,656,292 |
The
accompanying notes are an integral part of these financial
statements
F-2
DYNAMIC
ELITE INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For
six months ended June 30,
|
For
the year ended December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Audited)
|
(Audited)
|
|||||||||||||
REVENUES
|
$ | 2,323,841 | $ | 984,456 | $ | 3,109,059 | $ | 422,612 | ||||||||
COST
OF REVENUES
|
639,488 | 448,437 | 1,164,683 | 303,854 | ||||||||||||
GROSS
PROFIT
|
1,684,353 | 536,019 | 1,944,376 | 118,758 | ||||||||||||
Selling
expenses
|
235,670 | 1,806 | 165,994 | 30,741 | ||||||||||||
General
and administrative expenses
|
525,825 | 399,755 | 967,255 | 228,791 | ||||||||||||
OPERATING
EXPENSES
|
761,495 | 401,561 | 1,133,249 | 259,532 | ||||||||||||
INCOME
(LOSS) FROM OPERATIONS
|
922,858 | 134,458 | 811,127 | (140,774 | ) | |||||||||||
Interest
income
|
1,175 | 450 | 1,952 | 121 | ||||||||||||
Other
income
|
1,092 | 2,876 | 2,902 | - | ||||||||||||
Other
expenses
|
(26,107 | ) | - | (24,198 | ) | (1,252 | ) | |||||||||
OTHER
(EXPENSE) INCOME, NET
|
(23,840 | ) | 3,326 | (19,344 | ) | (1,131 | ) | |||||||||
INCOME
BEFORE INCOME TAXES
|
899,018 | 137,784 | 791,783 | (141,905 | ) | |||||||||||
INCOME
TAXES
|
211,233 | 34,592 | 141,248 | 5,083 | ||||||||||||
NET
INCOME (LOSS)
|
687,785 | 103,192 | 650,535 | (146,988 | ) | |||||||||||
OTHER
COMPREHENSIVE INCOME (LOSS):
|
||||||||||||||||
Foreign
currency translation adjustments
|
35,709 | 5,256 | (3,157 | ) | 53,080 | |||||||||||
COMPREHENSIVE
INCOME (LOSS)
|
$ | 723,494 | $ | 108,448 | $ | 647,378 | $ | (93,908 | ) |
The
accompanying notes are an integral part of these financial
statements
F-3
DYNAMIC
ELITE INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
|
||||||||||||||||||||||||||||||||
Retained
|
other
|
|||||||||||||||||||||||||||||||
Number
|
Common
|
Additional
|
Statutory
|
earnings
|
comprehensive
|
Subsription
|
||||||||||||||||||||||||||
of
shares
|
stock
|
paid-in
capital
|
reserves
|
(deficit)
|
income
|
receivable
|
Total
equity
|
|||||||||||||||||||||||||
BALANCE,
January 1, 2008
|
$ | $ | 788,327 | $ | $ | (7,983 | ) | $ | 45,349 | $ | - | $ | 825,693 | |||||||||||||||||||
Net
Loss
|
(146,988 | ) | (146,988 | ) | ||||||||||||||||||||||||||||
Appropriation
to statutory reserves
|
1,600 | (1,600 | ) | - | ||||||||||||||||||||||||||||
Foreign
currency translation gain
|
53,080 | - | 53,080 | |||||||||||||||||||||||||||||
BALANCE,
December 31, 2008
|
- | - | 788,327 | 1,600 | (156,571 | ) | 98,429 | - | 731,785 | |||||||||||||||||||||||
Net
Income
|
650,535 | 650,535 | ||||||||||||||||||||||||||||||
Appropriation
to statutory reserves
|
48,188 | (48,188 | ) | - | ||||||||||||||||||||||||||||
Capital
contribution
|
6,876,914 | 6,876,914 | ||||||||||||||||||||||||||||||
Capital
distribution
|
(392,287 | ) | (392,287 | ) | ||||||||||||||||||||||||||||
Foreign
currency translation loss
|
(3,157 | ) | (3,157 | ) | ||||||||||||||||||||||||||||
BALANCE,
December 31, 2009
|
- | - | 7,272,954 | 49,788 | 445,776 | 95,272 | - | 7,863,790 | ||||||||||||||||||||||||
Net
Income (Unaudited)
|
687,785 | 687,785 | ||||||||||||||||||||||||||||||
Issuance
of Common Stock (Unaudited)
|
10,000 | 10,000 | (10,000 | ) | - | |||||||||||||||||||||||||||
Foreign
currency translation gain (Unaudited)
|
35,709 | 35,709 | ||||||||||||||||||||||||||||||
BALANCE,
June 30, 2010 (Unaudited)
|
10,000 | $ | 10,000 | $ | 7,272,954 | $ | 49,788 | $ | 1,133,561 | $ | 130,981 | $ | (10,000 | ) | $ | 8,587,284 |
The
accompanying notes are an integral part of these financial
statements
F-4
DYNAMIC
ELITE INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
six months ended June 30,
|
For
the year ended December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Audited)
|
(Audited)
|
|||||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||
Net
income (loss)
|
$ | 687,785 | $ | 103,192 | $ | 650,535 | $ | (146,988 | ) | |||||||
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities
|
||||||||||||||||
Depreciation
|
145,649 | 65,173 | 158,248 | 11,366 | ||||||||||||
Amortization
|
6,255 | 456 | 12,812 | 11,858 | ||||||||||||
Changes
in current assets and liabilities
|
||||||||||||||||
Accounts
receivable, trade
|
41,298 | (84,456 | ) | (38,943 | ) | (18,300 | ) | |||||||||
Other
receivables
|
(3,974 | ) | (145,786 | ) | (368,528 | ) | (20,855 | ) | ||||||||
Due
from related parties
|
(4,281 | ) | 67,066 | 65,152 | 85,700 | |||||||||||
Inventories
|
(455,605 | ) | (305,014 | ) | (378,063 | ) | (209,909 | ) | ||||||||
Advances
to suppliers
|
(97,539 | ) | 80,072 | 158,465 | (103,303 | ) | ||||||||||
Prepaid
expense
|
- | (323 | ) | 106,489 | - | |||||||||||
Accounts
payable
|
94,397 | 128,164 | 141,683 | - | ||||||||||||
Advance
from customers
|
(235,849 | ) | (163,783 | ) | 163,780 | 147,738 | ||||||||||
Other
payable
|
17,967 | 10,203 | (4,573 | ) | 2,459 | |||||||||||
Salary
and welfare payable
|
33,970 | (2,592 | ) | (2,874 | ) | - | ||||||||||
Income
tax payable
|
92,033 | 30,914 | 54,767 | - | ||||||||||||
Other
taxes payable
|
186,712 | (85,953 | ) | (102,101 | ) | 5,682 | ||||||||||
Accrued
expenses
|
40,419 | - | 12,730 | (16,984 | ) | |||||||||||
Net
cash provided by (used in) operating activities
|
549,237 | (302,667 | ) | 629,579 | (251,536 | ) | ||||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||
Purchase
of property plant and equipment
|
(104,073 | ) | (637,697 | ) | (1,052,106 | ) | (110,249 | ) | ||||||||
Increase
in construction in progress
|
- | - | - | (3,489,565 | ) | |||||||||||
Investment
in trust
|
- | (1,461,298 | ) | (1,607,980 | ) | - | ||||||||||
Decrease
in long-term prepaid expenses
|
- | - | - | (578 | ) | |||||||||||
Purchase
of intangible assets
|
(10,621 | ) | (4,925 | ) | (4,926 | ) | (269 | ) | ||||||||
Net
cash used in investing activities
|
(114,694 | ) | (2,103,920 | ) | (2,665,012 | ) | (3,600,661 | ) | ||||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||
Capital
Contribution
|
- | 6,868,140 | 6,876,914 | - | ||||||||||||
Capital
Distribution
|
- | - | (392,287 | ) | - | |||||||||||
Due
to related parties
|
(713,804 | ) | (4,132,150 | ) | (3,639,155 | ) | 3,508,862 | |||||||||
Net
cash provided (used) by financing activities
|
(713,804 | ) | 2,735,990 | 2,845,472 | 3,508,862 | |||||||||||
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
2,858 | 59 | 27,641 | 28,591 | ||||||||||||
NET
INCREASE (DECREASE) IN CASH
|
(276,403 | ) | 329,462 | 837,680 | (314,744 | ) | ||||||||||
CASH,
beginning balance
|
935,719 | 98,039 | 98,039 | 412,783 | ||||||||||||
CASH,
ending balance
|
$ | 659,316 | $ | 427,501 | $ | 935,719 | $ | 98,039 | ||||||||
SUPPLEMENTAL
DISCLOSURES:
|
||||||||||||||||
Income
taxes paid
|
$ | 119,200 | $ | 7,062 | $ | 94,981 | $ | - | ||||||||
Interest
paid
|
$ | - | $ | - | $ | - | $ | - |
The
accompanying notes are an integral part of these financial
statements
F-5
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
NOTE
1–
ORGANIZATION
The
consolidated financial statements include the financial statements of Dynamic
Elite International Limited (referred to herein as “Dynamic Elite”), its
subsidiary, and variable interest entities (“VIEs”) where Dynamic Elite is
deemed the primary beneficiary. Dynamic Elite, its subsidiary and VIEs are
collectively referred to herein as the “Company”, “we” and
“us”.
Dynamic Elite
was incorporated under the laws of the British Virgin Islands on June 2,
2010 as a limited liability company (a BVI company). Dynamic Elite engages
in manufacturing and distributing tourmaline products in China. Its wholly
owned subsidiary, Tianjin Junhe Enterprise Management Consulting Co., Ltd.
(referred to herein as “Junhe”) was incorporated on September 15, 2010 in
Tianjin, People Republic of China (“PRC”). Other than the equity interest in
Junhe, Dynamic Elite does not own any assets or conducts any
operations.
Junhe
conducts its business through Tianjin Joway Shengshi Group Co., Ltd. (“Shengshi
Group”) that is consolidated as a variable interest entity.
Shengshi
Group was incorporated in PRC on May 17, 2007. Shengshi Group is
currently owned 99% by Jinghe Zhang, the Company’s current CEO and President and
1% by Song Baogang. Shengshi Group engages in manufacturing and
distributing tourmaline products in China. Liaoning Joway Technology
Engineering Co., Ltd. (“Joway Technology”), Tianjin Joyway Decoration
Engineering Co., Ltd. (“Joyway Decoration”) and Tianjin Oriental Shengtang
Import & Export Trading Co., Ltd. (“Shengtang”) are subsidiaries of
Shengshi Group.
Joway
Technology was incorporated on March 28, 2007 in PRC. It engages in the
distribution of Tourmaline Activated Water Machines and the construction of
Tourmaline Wellness Houses. Prior to July 25, 2010, Shengshi Group owned 90.91%
of Joway Technology. Shengshi Group entered into a share acquisition agreement
with Chen Jingyun, another stockholder of Joway Technology on July 25, 2010
to acquire the remaining 9.09% of the share of Joway Technology. As a result of
the share acquisition, Joway Technology became a wholly-owned subsidiary of
Shengshi Group.
Joway
Decoration was incorporated on April 22, 2009 in PRC. It engages
in the distribution of Tourmaline Activated Water Machines and Tourmaline
Wellness House materials. Prior to July 9, 2010, Shengshi Group owned 90% of
Joway Decoration. Shengshi Group entered into a share
acquisition agreement with Chen Jingyun, another stockholder of Joway
Decoration on July 9, 2010 to acquire the remaining 10% of the shares of Joway
Decoration. As a result of the share acquisition, Joway Decoration became a
wholly-owned subsidiary of Shengshi Group.
F-6
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
Shengtang
was incorporated on September 18, 2009 in the PRC. It engages in purchasing
raw materials which it sells to other companies of the group. Prior to July 28,
2010, Shengshi Group owned 95% of Shengtang. Shengshi Group entered into a share
acquisition agreement with Wang Aiying, another stockholder of
Shengtang on July 28, 2010 to acquire the remaining 5% of the shares of
Shengtang. As a result of the share acquisition, Shengtang became a wholly-owned
subsidiary of Shengshi Group.
Name
|
Domicile and
Date of
Incorporation
|
Paid in
Capital
|
Percentage of
Effective
Ownership
|
Principal Activities
|
||||
Dynamic
Elite International Limited
|
June
2, 2010,
British
Virgin Islands
|
0
|
100%
owned by Crystal Globe Limited
|
Investment
Holding
|
||||
Tianjin
Junhe Enterprise Management Consulting Co., Ltd.
|
September
15, 2010, PRC
|
USD
20,000
|
100%
owned by Dynamic Elite International Limited
|
Advisory
|
||||
Tianjin
Joway Shengshi Group Co.,Ltd
|
May
17, 2007, PRC
|
USD
7,216,140.72
|
99%
owned by Jinghe Zhang, and 1% owned by Song
Baogang
|
Production
and distribution of tourmaline products
|
||||
Liaoning
Joway Technology Engineering Co., Ltd.
|
March
28, 2007, PRC
|
USD
142,072.97
|
100%
owned by Tianjin Joway Shengshi Group Co., Ltd
|
Distribution
of Tourmaline Activated Water Machine and construction of Tourmaline
Wellness House
|
||||
Tianjin
Joyway Decoration Engineering Co., Ltd.
|
April
22, 2009, PRC
|
USD
292,367.74
|
100%
owned by Tianjin Joway Shengshi Group Co., Ltd
|
Distribution
of Tourmaline Activated Water Machine and Tourmaline Wellness House
materials
|
||||
Tianjin
Oriental Shengtang Import & Export Trading Co., Ltd.
|
September
18, 2009, PRC
|
USD
292,463.75
|
100%
owned by Tianjin Joway Shengshi Group Co., Ltd
|
Distribution
of tourmaline
products
|
F-7
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
On September
16, 2010, Junhe entered into a series of contractual agreements (the
“Contractual Agreements”) with Shengshi Group and Shengshi Group’s owners.
The following is a brief description of the Contractual Agreements entered
between Junhe and Shengshi Group or Shengshi Group’s owners:
1. Consulting Services
Agreement. Pursuant to the consulting services agreement between Junhe
and Shengshi Group, Junhe has the right to advise, consult, manage and operate
Shengshi Group, and collect and own all of the net profits of the Operating
Entities.
2. Operating Agreement. Under
the operating agreement between Junhe and Shengshi Group, Junhe has the right to recommend director
candidates and appoint the senior executives of Shengshi
Group, approve any transactions
that may materially affect the assets, liabilities, rights or operations of
Shengshi Group, and
guarantee the contractual performance by Shengshi Group of any agreements with third parties,
in exchange for a pledge
by Shengshi Group of its
accounts receivable and assets.
3. Voting Rights Proxy
Agreement. Under the voting rights proxy agreement between Shengshi
Group’s owners and Junhe, the owners of Shengshi Group have vested their
collective voting control over Shengshi Group to Junhe and will only transfer
their respective equity interests in Shengshi Group to Junhe or its
designee.
4. Option Agreement. Under the
option agreement between Shengshi Group’s owners and Junhe, the owners of
Shengshi Group have granted Junhe the irrevocable right and option to acquire
all of their equity interests in Shengshi Group.
5. Equity Pledge Agreement.
Under the equity pledge agreement between Shengshi Group’s owners and Junhe, the
owners of Shengshi Group have pledged all of their rights, titles and interests
in Shengshi Group to Junhe to guarantee Shengshi Group’s performance of its
obligations under the Consulting Services Agreement.
As a
result of the Contractual Agreements, Shengshi Group is effectively a variable
interest entity of Junhe. Accordingly, Dynamic Elite through its wholly-owned
subsidiary Junhe consolidates Shengshi Group’s results of operation, assets and
liabilities in its financial statements. Hereafter, Dynamic Elite, Junhe,
Shengshi Group and its subsidiaries are collectively referred to as the
“Company” unless specific reference is made to an individual
entity.
F-8
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
NOTE
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
(“US GAAP”). The Company’s functional currency is the Chinese Renminbi (“RMB”);
however the accompanying consolidated financial statements have been translated
and presented in United States Dollars (“USD”). All significant inter-company
transactions and balances have been eliminated. The consolidated financial
statements include all adjustments that, in the opinion of management, are
necessary to make the financial statements not misleading.
Unaudited
Financial Statements
The
accompanying consolidated financial statements as of June 30, 2010 and for six
months ended June 30, 2010 and 2009 are unaudited. In the opinion of
management, all necessary adjustments (which include only normal recurring
adjustments) have been made to present fairly the financial position,
results of operations and cash flows for the periods presented. Certain
information and footnote disclosure normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. However,
the Company believes that the disclosures are adequate to make
the information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the year ended December
31, 2009 and 2008 financial statements. The results of operations for the six
month period ended June 30, 2010 and 2009 are not necessarily indicative of the
operating results to be expected for the full year ended December 31, 2010,
or that have been achieved in the year ended December 31, 2009.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America which
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the
time the estimates are made. Actual results could differ from those
estimates.
Basis
of Consolidation
The
accompanying consolidated financial statements include the Company and its
wholly owned subsidiary and controlled VIEs. All significant inter-company
accounts and transactions have been eliminated in the
consolidation.
Pursuant
to Accounting Standards Codification Topic 810, “Consolidation”, Shengshi
Group, as a VIE of Junhe, have been consolidated in the Company’s financial
statements. Shengshi Group’s sales are included in the Company’s total sales,
its income from operations is consolidated with the Company’s, and the
Company’s net income includes all of Shengshi Group’s net
income.
F-9
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
Based on
the various Contractual Agreements, the Company is able to exercise control over
the VIEs, and to obtain in full the economic benefits. Accordingly, the
non–controlling interests have no economic interest in the VIEs.
Foreign
Currency Translation
The
accompanying consolidated financial statements are presented in USD. The
functional currency of the Company is RMB. The consolidated financial statements
are translated into United States dollars from RMB at year-end exchange rates as
to assets and liabilities and average exchange rates as to revenues and
expenses. Equity accounts are translated at their historical exchange rates when
the equity transactions occurred. The resulting transaction adjustments are
recorded as a component of stockholders’ equity. Gains and losses from foreign
currency transactions are included in net income.
June 30,
|
December
31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
Year
ended RMB: USD Exchange rate
|
6.8086 | 6.8448 | 6.8372 | 6.8542 | ||||||||||||
Average
yearly RMB: USD Exchange rate
|
6.83474 | 6.84323 | 6.84088 | 6.96225 |
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into USD at
the rates used in translation.
For the
years ended December 31, 2009 and 2008, foreign currency translation adjustments
of $ (3,157) and $53,080, respectively, have been reported as comprehensive
(loss) or income in the consolidated financial statements. For the six months
ended June 30, 2010 and 2009, foreign currency translation adjustments of
$35,709 and $5,256, respectively, have been reported as comprehensive income
(unaudited) in the consolidated financial statements.
Other
Comprehensive Income
Other
comprehensive income is defined as the change in equity during the year from
transactions and other events, excluding the changes resulting from investments
by owners and distributions to owners, and is not included in the computation of
income tax expense or benefit. Accumulated other comprehensive income represents
the accumulated balance of foreign currency translation
adjustments.
F-10
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
Concentrations
of Credit Risk
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced
by the political, economic and legal environment in the PRC, and by the general
state of the PRC's economy. The Company's operations in the PRC are subject
to specific considerations and significant risks not typically associated with
companies in North America. The Company's results may be adversely affected
by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things. Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable.
Substantially all of the Company’s cash is maintained with state-owned banks
within the PRC, and no deposits are covered by insurance. The Company has
not experienced any losses in such accounts and believes it is not exposed to
any risks on its cash in bank accounts.
Fair
Value of Financial Instruments
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
820 (formerly Statement of Financial Accounting Standard (“SFAS”) No. 157
Fair Value Measurements) establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:
|
•
Level 1—defined as observable inputs such as quoted prices in active
markets for
identical assets or
liabilities;
|
|
•
Level 2—defined as inputs other than quoted prices in active markets that
are either directly or indirectly observable;
and
|
|
•
Level 3—defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own
assumptions.
|
The
carrying amounts reported in the balance sheets for cash, accounts receivable,
other receivable, accounts payable, other payable, and amounts due from related
parties generally approximate their fair market values based on the short-term
maturity of these instruments. The Company has not identified any assets or
liabilities that are required to be presented at fair value in these financial
statements.
ASC
825-10 “ Financial Instruments ” allows entities to voluntarily choose to
measure certain financial assets and liabilities at fair value (fair value
option). The fair value option may be elected on an instrument-by-instrument
basis and is irrevocable, unless a new election date occurs. If the fair value
option is elected for an instrument, unrealized gains and losses for that
instrument should be reported in earnings at each subsequent reporting date. The
Company did not elect to apply the fair value option to any outstanding
instruments.
Cash
and Cash Equivalents
For
financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturity of six months or less to be cash
equivalents. Balances at financial institutions or state-owned banks within the
PRC are not covered by insurance. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant risks on its
cash in bank accounts.
F-11
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
Accounts
Receivable
Accounts
receivable are carried at net realizable value. The Company maintains reserves
for potential credit losses on accounts receivable. Management reviews the
composition of the accounts receivable and analyzes historical bad debts,
customer concentrations, customers credit worthiness, currents economic trends
and changes in customer payment patterns to evaluate the adequacy of these
reserves. As of June 30, 2010 (unaudited), December 31, 2009 and December 31,
2008, respectively, the Company has no allowance for doubtful
accounts.
Inventories
Inventories are
stated at the lower of cost, as determined by the specific identification method
on contract level (for each individual contract, inventories cost flow are
determined by weighted-average method), or the net realizable value, which is
determined on selling prices less any further costs expected to be incurred for
completion and disposal. The Company regularly evaluates the composition of
its inventories to identify slow-moving and obsolete inventories to determine
whether valuation allowance is required. As of June 30, 2010 (unaudited),
December 31, 2009 and December 31, 2008, respectively, the Company has no
reserves for inventories.
Advances
to suppliers
Advances
to suppliers represent the cash paid in advance for inventory items or
construction in progress. The advance payments are meant to ensure preferential
pricing and delivery. The amounts advanced under such arrangements totaled
$192,733 and $854,814 as of December 31, 2009 and 2008, respectively.
The amounts advanced under such arrangements totaled $149,580 as of June 30,
2010 (unaudited).
Property,
Plant, and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation, and
include expenditures that substantially increase the useful lives of existing
assets.
Depreciation
is computed using the straight-line method over the estimated useful
lives of the assets. Estimated useful lives are as follows:
Building
|
20
years
|
|
Operating
Equipment
|
10
years
|
|
Office
furniture and equipment
|
3
or 5 years
|
|
Vehicles
|
10
years
|
F-12
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts, and any gain or loss is included in the
consolidated statements of operations. Maintenance, repairs and minor renewals
are charged directly to expenses as incurred. Significant renewals and
betterment to buildings and equipment are capitalized. Leasehold improvements
are depreciated over the lesser of the useful life or the life of the
lease.
Construction
in progress
Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company's plant facilities. No depreciation is
provided for construction in progress until such time as the related assets
are completed and are ready for their intended use.
Intangible
assets
Intangible
assets mainly consist of land use rights. All land located in the PRC is owned
by the government and cannot be sold to any individual or company. The land use
rights granted to the Company are being amortized using the straight-line method
over the lease term of 50 years. Other intangible assets are software
programs that are amortized over their estimated useful life of 10
years.
Impairment
of Long-Lived Assets
Long-lived
assets of the Company are reviewed annually as to whether their carrying value
has become impaired, pursuant to the guidelines established in FASB ASC 360
(formerly SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets). The Company considers assets to be
impaired if the carrying value exceeds the future projected cash flows from the
related operations. The Company also re-evaluates the periods of depreciation
and amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. The Company did not record any
impairment loss for the years ended December 31, 2009 and 2008, and the six
months ended June 30, 2010 and 2009.
Revenue
Recognition
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the purchase price is
fixed or determinable and collectability is reasonably assured.
The
Company’s sales to customers are recorded when the product is shipped. The
Company does not sell product to customers with the right of return. Sales are
presented net of value added tax (VAT).
F-13
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
For
Tourmaline Wellness House sales, the Company uses the completed contract method.
A contract is considered complete when all significant costs have been incurred
and the project has been accepted by the customer. Contract costs consist
primarily of materials and labor costs. The construction of wellness house
generally does not exceed a period of five days.
Shipping
expense
Shipping
costs are included in selling expenses and totaled $19,573 and $606 for the
years ended December 31, 2009 and 2008, respectively, and $17,273 and
$2,509 for the six months (unaudited) ended June 30, 2010 and 2009,
respectively.
Income Taxes
The
Company is governed by the Income Tax Law and associated legislations of the
PRC. The Company accounts for income taxes in accordance with FASB ASC 740
“Income Taxes” (formerly
SFAS No. 109 Accounting for
Income Taxes),
which is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. ASC 740 additionally requires the establishment of a valuation
allowance to reflect the likelihood of realization of deferred tax assets.
Realization of deferred tax assets is dependent upon future earnings, if any, of
which the timing and amount are uncertain.
According
to ASC 740, the evaluation of a tax position is a two-step process. The first
step is to determine whether it is more likely than not that a tax position will
be sustained upon examination, including the resolution of any related appeals
or litigation based on the technical merits of that position. The second step is
to measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50% likelihood of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met. ASC 740 also provides guidance
on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition.
Recently
Issued Accounting Pronouncements
In June
2009, the FASB issued Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 105-10 (formerly Statement of
Financial Accounting Standards (“SFAS”) No. 168, the FASB ASC and Hierarchy of
Generally Accepted Accounting Principles, a replacement of FASB Statement No.
162). ASC 105-10 establishes the FASB ASC as the source of
authoritative accounting principles recognized by the FASB to be applied in
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America. The adoption of this
topic has no impact on the Company’s consolidated financial statements. However,
references to specific accounting standards have been changed to refer to
appropriate sections of the ASC. Subsequent revisions to GAAP by the FASB will
be incorporated into the ASC through issuance of Accounting Standards Updates
(“ASU”).
F-14
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
In August
2009, the FASB issued FASB ASU 2009-05, “Measuring Liabilities at Fair
Value”, which provides amendments to FASB ASC 820, “Fair Value
Measurements”. Specifically, FASB ASU 2009-05 clarifies that the quoted
price for an identical liability should be used. However, if such information is
not available, an entity may use, the quoted price of an identical liability
when traded as an asset, quoted prices for similar liabilities or similar
liabilities traded as assets, or another valuation technique (such as the market
or income approach). This ASU also indicates that when estimating the fair value
of a liability, a reporting entity is not required to adjust to include inputs
relating to the existence of transfer restrictions on that liability. This
ASU is effective October 1, 2009. The adoption of this topic has no material
impact on the Company’s consolidated financial statements.
In
October 2009, the FASB issued FASB ASU 2009-13, “Multiple-deliverable
Revenue Arrangements”. FASB ASU 2009-13 provides amendments to the
criteria for separating deliverables, measuring and allocating arrangement
consideration to one or more units of accounting. As a result of these
amendments, multiple-deliverable revenue arrangements will be separated in more
circumstances than under existing U.S. GAAP. The amendments in this ASU
also establish a selling price hierarchy for determining the selling price of a
deliverable. The selling price used for each deliverable will be based on
vendor-specific objective evidence if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price
if neither vendor-specific objective evidence nor third-party evidence is
available. The amendments also require providing information about the
significant judgments made and changes to those judgments and about how the
application of the relative selling-price method affects the timing or amount of
revenue recognition. This ASU is effective prospectively for revenue
arrangements entered into or materially modified in the fiscal years beginning
on or after June 15, 2010. The adoption of this topic has no material impact on
the Company’s consolidated financial statements.
In
October 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That
Include Software Elements.” FASB ASU 2009-14 changes the
accounting model for revenue arrangements that include both tangible products
and software elements that are “essential to the functionality,” and scopes
these products out of current software revenue guidance. Under the
amendments, the following components would be excluded from the scope of
software revenue recognition guidance: the tangible element of the product,
software products bundled with tangible products where the software components
and non-software components function together to deliver the product’s essential
functionality, and undelivered components that relate to software that is
essential to the tangible product’s functionality. This ASU also provides
guidance on how to allocate transaction consideration when an arrangement
contains both deliverables within the scope of software revenue guidance
(software deliverables) and deliverables not within the scope of that guidance
(non-software deliverables). This amendment will be effective prospectively for
revenue arrangements entered into or materially modified in the fiscal years
beginning on or after January 1, 2011. The Company is currently evaluating the
impact that this topic will have on its consolidated financial
statements.
F-15
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
In
January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair
Value Measurements”, which amends FASB ASC 820, “Fair Value Measures and
Disclosures.” FASB ASU 2010-06 require companies to make new
disclosures about recurring or nonrecurring fair value measurements including
significant transfers into and out of Level 1 and Level 2 fair value hierarchies
and information on purchases, sales, issuance and settlements on a gross basis
in the reconciliation of Level 3 fair value measurements. This ASU is
effective prospectively for financial statements issued for fiscal years and
interim periods beginning after December 15, 2009. The adoption of this
topic will not have a material impact on the Company’s consolidated financial
statements.
In
February 2010, the FASB issued ASU 2010-09, “Amendments to Certain Recognition
and Disclosure Requirements”, which amends FASB ASC 855, “Subsequent Events”.
The update provides that SEC filers, as defined in ASU 2010-09, are no longer
required to disclose the date through which subsequent events have been
evaluated in originally issued and revised financial statements. The update also
requires SEC filers to evaluate subsequent events through the date the financial
statements are issued rather than the date the financial statements are
available to be issued. The Company adopted ASU 2010-09 upon issuance. The
adoption of this topic has no material impact on the Company’s
consolidated financial statements.
NOTE
3 –
ACCOUNTS RECEIVABLE
Accounts
receivable consisted of the following:
June
30,
|
December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
(Unaudited)
|
(Audited)
|
(Audited)
|
||||||||||
Accounts
receivable
|
$ | 16,318 | $ | 57,532 | $ | 18,589 | ||||||
Less:
Allowance for bad debt
|
- | - | - | |||||||||
Accounts
receivable
|
$ | 16,318 | $ | 57,532 | $ | 18,589 |
NOTE
4 –
OTHER RECEIVABLES
Other
receivables are primarily comprised of payments made by the Company under a
cooperative technology development contract with Tianjin Zhong’ao Biology
Technology Co., Ltd. (“Zhong’ao”). The Company entered into this contract in
2009. Pursuant to this agreement, Zhong’ao was to develop a tourmaline solution
suitable for human consumption. The agreement provided that Zhong’ao would
provide research and development services on the product for a period
of five years commencing in January 2009 and ending in December 2014,
The fee for these services was to be RMB 3,000,000 (approximately $441,176). The
Company prepaid RMB 2,600,000 (approximately $382,352) during 2009, and the
remaining balance of RMB 400,000 was to be paid by December 31, 2014. Due to
technical problems encountered by Zhong’ao, the Company and Zhong’ao have agreed
to terminate the contract. The Company has been in negotiations with Zhong’ao
and expects the return of all, or most, of the prepaid fees in October
2010.
F-16
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
NOTE
5 –
INVENTORIES
Inventories
consisted of the following:
June
30,
|
December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
(Unaudited)
|
(Audited)
|
(Audited)
|
||||||||||
Raw
materials
|
$ | 293,606 | $ | 176,042 | $ | 114,537 | ||||||
Packages
|
11,659 | 13,297 | - | |||||||||
Finished
goods
|
680,109 | 389,573 | 92,894 | |||||||||
Goods
shipped in transit
|
19,103 | - | - | |||||||||
Consigned
processing material
|
31,485 | - | - | |||||||||
Low
value consumables
|
17,726 | 14,893 | 8,311 | |||||||||
Total
|
$ | 1,053,688 | $ | 593,805 | $ | 215,742 |
Goods
shipped in transit represent goods on the way from the suppliers to the
Company.Consigned processing material represent the materials assigned to the
processing factory by the Company. Low value consumables represent low
priced and easily worn articles and are amortized on equal-split amortization
method. Pursuant to this method, half value of the low value consumable
should be amortized once used and the remaining half value should be amortized
when disposed.
F-17
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
NOTE
6 –
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following:
June
30,
|
December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
(Unaudited)
|
(Audited)
|
(Audited)
|
||||||||||
Building
|
$ | 5,095,033 | $ | 2,514,807 | $ | - | ||||||
Operating
Equipment
|
318,530 | 298,543 | 77,592 | |||||||||
Office
furniture and equipment
|
186,803 | 170,192 | 24,016 | |||||||||
Vehicles
|
223,671 | 165,900 | 68,226 | |||||||||
Leasehold
improvements
|
211,644 | 211,644 | - | |||||||||
Total
|
6,035,681 | 3,361,086 | 169,834 | |||||||||
Less:accumulated
depreciation
|
(316,829 | ) | (169,906 | ) | (11,545 | ) | ||||||
Property,
plant and equipment, net
|
$ | 5,718,852 | $ | 3,191,180 | $ | 158,289 |
Depreciation
expense for the years ended December 31, 2009 and 2008 amounted to
$158,248 and $11,366, respectively.
Depreciation
expense for the six months (unaudited) ended June 30, 2010 and 2009 amounted to
$145,649 and $65,173, respectively.
NOTE
7 -
CONSTRUCTION
IN PROGRESS
During
2007, the Company began to construct manufacturing and logistic facilities as
well as administrative offices located in Baodi, Tianjin, PRC, a total of nine
buildings. Several of the buildings were completed and occupied during 2009, and
the remaining buildings were completed and occupied in 2010. As of December 31,
2009 and 2008, construction in progress of this project was $2,215,567 and
$3,681,034, respectively.
NOTE
8 –
INTANGIBLE ASSETS
Intangible
assets consisted of the following:
June
30,
|
December 31,
|
||||||||
2010
|
2009
|
2008
|
|||||||
(Unaudited)
|
(Audited)
|
(Audited)
|
|||||||
Land
use rights
|
$ | 606,302 | $ | 603,764 | $ | 602,267 | |||
Other
intangible assets
|
15,887 | 5,203 | 273 | ||||||
Total
|
622,189 | 608,967 | 602,540 | ||||||
Less
: accumulated amortization
|
(34,310 | ) | (27,913 | ) | (15,057 | ) | |||
Intangible
assets, net
|
$ | 587,879 | $ | 581,054 | $ | 587,483 |
F-18
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
Amortization
expense of intangible assets for the years ended December 31, 2009 and 2008 was
$12,812 and $11,858, respectively.
Amortization
expense of intangible assets for the six months (unaudited) ended June, 2010 and
2009 was $6,255 and $456, respectively.
The
estimated amortization expense for the next five years is as
follows:
Estimated
amortization expense for
|
||||
the year ending December
31,
|
Amount
|
|||
2010
|
$ | 13,662 | ||
2011
|
$ | 13,662 | ||
2012
|
$ | 13,662 | ||
2013
|
$ | 13,662 | ||
2014
|
$ | 13,662 | ||
Thereafter
|
$ | 512,744 |
NOTE
9 –
RELATED PARTY TRANSACTIONS
Due from
related parties consists of the following:
June
30,
|
December 31,
|
||||||||
2010
|
2009
|
2008
|
|||||||
(Unaudited)
|
(Audited)
|
(Audited)
|
|||||||
Si
Chang Long
|
$ | 1,468,730 | $ | 1,462,587 | $ | - | |||
Shenyang
Joway Zhiye Co.,Ltd
|
- | - | 9,484 | ||||||
Total
|
$ | 1,468,730 | $ | 1,462,587 | $ | 9,484 |
Shenyang
Joway Zhiye Co.,Ltd is controlled by Jinghe Zhang, the largest stockholder and
CEO of Shengshi Group.
Mr. Si Changlong is the cashier
(treasurer) of Shengshi Group and was appointed to purchase a CITIC trust
investment on behalf of the Company. This financial product which is available
for purchase by individuals only has a higher interest rate than the standard
bank interest rate. The amount invested was $ 1,465,620 ( RMB 10 million) from
February 25, 2009 to August 25, 2010. Both the principal of RMB 10 million and
interest on the investment of RMB 408,000 were paid off on August 26, 2010 from
Mr. Si Changlong.
F-19
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
Due to
related parties consists of the following:
June
30,
|
December 31,
|
||||||||
2010
|
2009
|
2008
|
|||||||
(Unaudited)
|
(Audited)
|
(Audited)
|
|||||||
Shenyang
Joway Industrial Development Co., Ltd.
|
$ | 138,093 | $ | 694,458 | $ | 77,689 | |||
Jinghe
Zhang
|
445,780 | 604,800 | 4,637,397 | ||||||
Total
|
$ | 583,873 | $ | 1,299,258 | $ | 4,715,086 |
Shenyang
Joway Industrial Development Co., Ltd (“Shenyang Joway”) is controlled
by Jinghe Zhang, the largest stockholder and CEO of the Company. The
Company purchased inventory of $115,619 and $328,088 from Shenyang Joway in 2008
and 2009 respectively.
From 2007
through 2009, the Company was advanced $694,458 by Shenyang Joway. The advances
were non-interest bearing and had no specified repayment terms. The Company
repaid $556,365 of these advances during the period January 1, 2010 through June
30, 2010.
On
December 1, 2009, we entered into a license agreement with Jinghe Zhang.
Pursuant to the license agreement, we are authorized to use for free the
trademark “Joway” for a term of nine years and five patents from December 1,
2009 till the expiration dates of the patents.
On May
10, 2007, Shengshi Group entered into a cash advance agreement with Jinghe
Zhang. Pursuant to the agreement, Jinghe Zhang agrees to lend money as daily
operation capital to Shengshi Group. The advances are interest free and
unsecured. The agreement is valid throughout Shengshi Group’s term of operation.
During the period beginning May 17, 2007 (inception of Shengshi Group) through
June 30, 2010, Shengshi Group received cash operating advances in the aggregate
principal amount of $4,637,397 from Jinghe Zhang and $4,184,273 has been paid
off by Shengshi Group. As of June 30, 2010, the total unpaid principal balance
due Jinghe Zhang for advances was $453,124.
On May
10, 2007, Joway Technology entered into a loan agreement with Jinghe Zhang.
Pursuant to the loan agreement, Jinghe Zhang agrees to lend money as daily
operation capital to Joway Technology. The loan is interest free and unsecured.
The loan agreement is valid throughout Joway Technology’s term of operation.
During the period beginning March 28, 2007 (inception of Joway Technology)
through June 30, 2010, Joway Technology received cash operating advances in the
aggregate principal amount of $22,031 from Jinghe Zhang and $22,031 has been
paid off by Joway Technology. As of June 30, 2010 , the total unpaid principal
balance due Jinghe Zhang for advances was $0.
The
amount due to and from related parties are non-interest bearing and have no
specified repayment terms.
F-20
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
NOTE 10 – INCOME TAXES
The
Company operates mainly in the People’s Republic of China and is governed by the
Income Tax Law of the People’s Republic of China. Pursuant to the PRC Income Tax
Laws, the Enterprise Income Tax (“EIT”) is at a statutory rate of 25% beginning
January 2008, on income as reported in their statutory financial statements
after appropriate tax adjustments.
Provisions
for income taxes consisted entirely of current income tax expense and for the
years ended December, 2009 and 2008 amounted to $141,248 and $5,083,
respectively. For the six months ended June 30, 2010 and 2009, income taxes were
$211,233 and $34,592, respectively.
NOTE
11 -
STATUTORY RESERVES
Pursuant
to the laws and regulations of the PRC, annual income of the subsidiaries of the
Company are required to be partly allocated to the statutory reserves funds
after the payment of the PRC income taxes. The allocation to the statutory
reserves funds should be at least 10% of income after tax until the reserve
reaches 50% of the entities’ registered capital or members’ equity. The reserve
funds are not transferable to the Company in the form of cash dividends, loans
or advances. Thus the reserve funds are not available for distribution except in
liquidation. For the years ended December 31, 2009 and 2008, the Company had
allocated $48,188 and $1,600, respectively. The Company made no allocation to
the reserve funds for the six months ended June 30, 2010 and 2009.
NOTE
12 –
COMMITMENTS
The
Company entered into two agreements to lease its headquarters office for 5 years
starting from November 2009. The future minimum obligations under the
aforementioned agreements are as follows:
Fiscal Year
|
Minimum Lease fees
|
|||
2010
|
$ | 89,189 | ||
2011
|
152,895 | |||
2012
|
152,895 | |||
2013
|
152,895 | |||
2014
|
127,413 | |||
Total
|
$ | 675,287 |
Rent
expense for the year ended December 31, 2009 was $12,730. Rent expense for the
six months (unaudited) ended June 30, 2010 was $38,224.
F-21
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
NOTE 13 – SEGMENTS
For the
year of 2010, 2009 and 2008, the Company operated in three reportable business
segments - (1) Healthcare Knitgoods Series, (2) Daily Healthcare and Personal
Care Series and (3) Wellness House and Activated Water Machine Series. The
Company's reportable segments are strategic business units that offer different
products. They are managed separately based on the fundamental differences in
their operations. Information with respect to these reportable business segments
is as follows:
For the
six months ended June 30, 2010 (unaudited)
Sales
|
COGS
|
Gross profit
|
Income from
operations
|
Depreciation
and
amortization
|
Assets
|
|||||||||||||||||||
Healthcare
Knitgoods Series
|
$ | 1,440,617 | $ | 305,383 | $ | 1,135,234 | $ | 648,495 | $ | 94,164 | $ | 424,443 | ||||||||||||
Daily
Healthcare and Personal Care Series
|
478,320 | 140,370 | 337,950 | 176,341 | 31,257 | 242,046 | ||||||||||||||||||
Wellness
House Activated Water Machine Series
|
404,904 | 193,735 | 211,169 | 98,022 | 26,483 | 443,890 | ||||||||||||||||||
Segment
Totals
|
$ | 2,323,841 | $ | 639,488 | $ | 1,684,353 | 922,858 | $ | 151,904 | 1,110,378 | ||||||||||||||
Other
Expense
|
(23,840 | ) | ||||||||||||||||||||||
Income
Tax
|
(211,233 | ) | ||||||||||||||||||||||
Unallocated
Assets
|
8,939,324 | |||||||||||||||||||||||
Net
Income
|
$ | 687,785 | ||||||||||||||||||||||
Total
Assets
|
$ | 10,049,702 |
For the
six months ended June 30, 2009 (unaudited)
Sales
|
COGS
|
Gross profit
|
Income (loss)
from
operations
|
Depreciation
and
amortization
|
Assets
|
|||||||||||||||||||
Healthcare
Knitgoods Series
|
$ | 446,112 | $ | 123,487 | $ | 322,625 | $ | 96,025 | $ | 29,747 | $ | 183,370 | ||||||||||||
Daily
Healthcare and Personal Care Series
|
250,409 | 82,463 | 167,946 | 40,753 | 16,674 | 33,838 | ||||||||||||||||||
Wellness
House Activated Water Machine Series
|
287,935 | 242,487 | 45,448 | (2,320 | ) | 19,208 | 307,721 | |||||||||||||||||
Segment
Totals
|
$ | 984,456 | $ | 448,437 | $ | 536,019 | 134,458 | $ | 65,629 | 524,929 | ||||||||||||||
Other
Income
|
3,326 | |||||||||||||||||||||||
Income
Tax
|
(34,592 | ) | ||||||||||||||||||||||
Unallocated
Assets
|
8,099,340 | |||||||||||||||||||||||
Net
Income
|
$ | 103,192 | ||||||||||||||||||||||
Total
Assets
|
$ | 8,624,269 |
F-22
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
For the
year ended December 31, 2009
Sales
|
COGS
|
Gross profit
|
Income from
operations
|
Depreciation
and
amortization
|
Assets
|
|||||||||||||||||||
Healthcare
Knitgoods Series
|
$ | 1,723,846 | $ | 428,004 | $ | 1,295,842 | $ | 586,357 | $ | 94,856 | $ | 272,284 | ||||||||||||
Daily
Healthcare and Personal Care Series
|
498,341 | 122,891 | 375,450 | 170,348 | 27,400 | 105,213 | ||||||||||||||||||
Wellness
House Activated Water Machine Series
|
886,872 | 613,788 | 273,084 | 54,422 | 48,804 | 214,458 | ||||||||||||||||||
Segment
Totals
|
$ | 3,109,059 | $ | 1,164,683 | $ | 1,944,376 | 811,127 | $ | 171,060 | 591,955 | ||||||||||||||
Other
Expense
|
(19,344 | ) | ||||||||||||||||||||||
Income
Tax
|
(141,248 | ) | ||||||||||||||||||||||
Unallocated
Assets
|
9,146,057 | |||||||||||||||||||||||
Net
Income
|
$ | 650,535 | ||||||||||||||||||||||
Total
Assets
|
$ | 9,738,012 |
For the
year ended December 31, 2008
Sales
|
COGS
|
Gross profit
|
Income (loss)
from
operations
|
Depreciation
and
amortization
|
Assets
|
|||||||||||||||||||
Healthcare
Knitgoods Series
|
$ | 14,761 | $ | 1,793 | $ | 12,968 | $ | (124,199 | ) | $ | 824 | $ | 50,188 | |||||||||||
Daily
Healthcare and Personal Care Series
|
144 | 17 | 127 | (1,211 | ) | - | 68,715 | |||||||||||||||||
Wellness
House Activated Water Machine Series
|
407,707 | 302,044 | 105,663 | (15,364 | ) | 22,400 | 274,840 | |||||||||||||||||
Segment
Totals
|
$ | 422,612 | $ | 303,854 | $ | 118,758 | (140,774 | ) | $ | 23,224 | 393,743 | |||||||||||||
Other
Expense
|
(1,131 | ) | ||||||||||||||||||||||
Income
Tax
|
(5,083 | ) | ||||||||||||||||||||||
Unallocated
Assets
|
5,262,549 | |||||||||||||||||||||||
Net
Loss
|
$ | (146,988 | ) | |||||||||||||||||||||
Total
Assets
|
$ | 5,656,292 |
NOTE
14 -
FRANCHISE REVENUES
The
Company enters into franchising agreements to develop retail outlets for the
Company's products. The agreements provide that franchisees will sell Company
products exclusively. In exchange the Company provides them with geographic
exclusivity, discounted product, training and support. The agreements also
require franchisees to adhere to certain standards of product merchandising,
promotion and presentment. The agreements do not require any initial franchise
fees from the franchisees, nor do they require the franchisees to pay continuing
royalties. The agreements are generally for terms of three years and are
renewable at the mutual agreement of both parties. The Agreements are cancelable
at the Company’s discretion if franchisees do not purchase a certain minimum
level of product annually.
F-23
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
The
following is a breakdown of revenue between franchise and non-franchise
customers:
Six Months ended June 30,
|
Year ended December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Sales
to franchise customers
|
$ | 2,016,731 | $ | 622,592 | $ | 2,238,586 | $ | - | ||||||||
Sales
to non-franchise customers
|
307,110 | 361,864 | 870,473 | 422,612 | ||||||||||||
Total
sales
|
$ | 2,323,841 | $ | 984,456 | $ | 3,109,059 | $ | 422,612 | ||||||||
Change in franchise
outlets:
|
||||||||||||||||
Number
of franchise outlets open at beginning of period
|
175 | - | - | - | ||||||||||||
Number
of franchise outlets opened during the period
|
58 | 69 | 182 | - | ||||||||||||
Number
of franchise outlets closed during the period
|
(14 | ) | - | (7 | ) | - | ||||||||||
Number
of franchise outlets open at the end of the period
|
219 | 69 | 175 | - |
NOTE
15 –
SUBSEQUENT EVENTS
On July
9, 2010, Shengshi Group entered into a share acquisition agreement with Chen
Jingyun, one of the stockholders of Joway Decoration. Joway Decoration became a
wholly-owned subsidiary of Shengshi Group.
On July
25, 2010, Shengshi Group entered into a share acquisition agreement with Chen
Jingyun, one of the stockholders of Joway Technology. Joway Technology became a
wholly-owned subsidiary of Shengshi Group.
On July
28, 2010, Shengshi Group entered into a share acquisition agreement with Wang
Aiying, one of the stockholders of Shengtang. Shengtang became a wholly-owned
subsidiary of Shengshi Group.
On
October 1, 2010, G2 Ventures, Inc., (“G2 Ventures”) a company incorporated in
Texas, entered into a Share Exchange Agreement (the “Exchange Agreement”) with
Dynamic Elite. Pursuant to the terms of the Exchange Agreement, Crystal Globe
Limited (“Crystal Globe”), the sole stockholder of Dynamic Elite transferred to
G2 Ventures all of the Dynamic Elite shares in exchange for the issuance of
15,215,426 shares (the “Shares”) of G2 Ventures common stock (the “Share
Exchange”). As a result of the Share Exchange, Dynamic Elite became a
wholly-owned subsidiary of G2 Ventures and the stockholders of Dynamic Elite
acquired approximately 76.08% of the issued and outstanding stock of G2
Ventures.
F-24
Dynamic
Elite International Limited and Subsidiaries
Notes to
consolidated Financial Statements
June 30,
2010 and 2009 (Unaudited) and December 31,2009 and 2008 (Audited)
The
effect of the share Exchange is such that effectively a reorganization of the
entities has occurred for accounting purposes that is deemed to be a reverse
acquisition. Subsequent to the share Exchange, the financial statements
presented will be those of a combined Dynamic Elite and its subsidiary and
controlled VIEs, as if the share Exchange had been in effect retroactively for
all periods presented. As previously noted the “Company” for financial statement
purposes was the consolidation of Dynamic Elite and its subsidiary, Junhe and
its controlled VIEs. Subsequent to the Share Exchange the “Company” is referred
to as the consolidation of Dynamic Elite, its subsidiary and controlled VIEs and
G2 Ventures, with G2 Ventures as the legal acquirer in Share Exchange, and
subsequent to the Share Exchange the parent company of the consolidated
entity.
F-25
(b) Pro forma
financial information.
The pro
forma financial information concerning the acquisition of the business
operations of our PRC Entities appears below.
G2
VENTURES, INC and DYNAMIC ELITE INTERNATIONAL LIMITED
PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Pro
Forma Consolidated Financial Statements:
|
|
Pro
Forma Consolidated Balance Sheets As of June 30, 2010
(unaudited)
|
F-2
|
Pro
Forma Consolidated Statement of Operations for the Six Months Ended June
30, 2010
|
F-3
|
Pro
Forma Consolidated Statement of Operations for the Year Ended
December 31, 2009
|
F-4
|
Notes
to Pro Forma Consolidated Financial Statements
|
F-5
|
F-1
Pro Forma
Consolidated Financial Statements
G2
VENTURES, INC.
UNAUDITED
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF
JUNE 30, 2010
Dynamic Elite
International Ltd.
|
G2 VENTURES,
INC. |
Pro Forma
Adjustments
|
Pro Forma
Combined
Total
|
|||||||||||||
ASSETS
|
||||||||||||||||
CURRENT
ASSETS:
|
||||||||||||||||
Cash
and cash equivalent
|
$ | 659,316 | $ | 1,446 | $ | $ | 660,762 | |||||||||
Accounts
receivable, net
|
16,318 | - | - | 16,318 | ||||||||||||
Other
receivables
|
395,339 | - | - | 395,339 | ||||||||||||
Due
from related party
|
1,468,730 | - | - | 1,468,730 | ||||||||||||
Inventories
|
1,053,688 | - | - | 1,053,688 | ||||||||||||
Advances
to suppliers
|
149,580 | - | - | 149,580 | ||||||||||||
Prepaid
other tax
|
- | - | - | - | ||||||||||||
Total
current assets
|
3,742,971 | 1,446 | - | 3,744,417 | ||||||||||||
PROPERTY,
PLANT AND EQUIPMENT, net
|
5,718,852 | - | - | 5,718,852 | ||||||||||||
OTHER
ASSETS:
|
||||||||||||||||
Intangible
assets, net
|
587,879 | - | - | 587,879 | ||||||||||||
Total
other assets
|
587,879 | - | - | 587,879 | ||||||||||||
- | ||||||||||||||||
Total
assets
|
$ | 10,049,702 | $ | 1,446 | $ | - | $ | 10,051,148 | ||||||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||||||||||
LIABILITIES:
|
||||||||||||||||
Accounts
payable
|
$ | 426,293 | $ | 13,758 | $ | - | $ | 440,051 | ||||||||
Advances
from customers
|
126,759 | - | - | 126,759 | ||||||||||||
Taxes
payable
|
216,519 | - | - | 216,519 | ||||||||||||
Other
payables
|
108,974 | - | - | 108,974 | ||||||||||||
Due
to related parties
|
583,873 | - | - | 583,873 | ||||||||||||
Stockholder
advances
|
- | 127,649 | - | 127,649 | ||||||||||||
Total
liabilities
|
1,462,418 | 141,407 | - | 1,603,825 | ||||||||||||
STOCKHOLDERS'
EQUITY:
|
||||||||||||||||
Preferred
stock of G2 Ventures, Inc. - par value $0.001; 1,000,000 shares
authorized; no shares issued and outstanding
|
- | - | - | - | ||||||||||||
Common
stock of G2 Ventures, Inc. - par value $0.001; 200,000,000 shares
authorized; 4,784,574 shares issued and outstanding; 20,000,000 shares
outstanding on pro forma
|
- | 4,785 | 15,215 | (a) | 20,000 | |||||||||||
Common
stock of Dynamic Elite International Limited - par value $1; 50,000 shares
authorized; 10,000 shares issued and outstanding
|
10,000 | - | (10,000 | )(b) | - | |||||||||||
Additional
paid-in-capital
|
7,272,954 | 167,811 | (327,772 | )(a,b) | 7,112,993 | |||||||||||
Statutory
reserves
|
49,788 | - | - | 49,788 | ||||||||||||
Retained
earnings (deficit)
|
1,133,561 | (312,557 | ) | 312,557 | (b) | 1,133,561 | ||||||||||
Accumulated
other comprehensive income
|
130,981 | - | - | 130,981 | ||||||||||||
Subscription
receivable
|
(10,000 | ) | - | 10,000 | (b) | - | ||||||||||
Total
stockholders' equity
|
8,587,284 | (139,961 | ) | - | 8,447,323 | |||||||||||
Total
liabilities and stockholders' equity
|
$ | 10,049,702 | $ | 1,446 | $ | - | $ | 10,051,148 |
The
accompanying notes are an integral part of these pro forma consolidated
financial statements
F-2
G2
VENTURES, INC.
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
SIX MONTHS ENDED JUNE 30, 2010
Dynamic Elite
International Ltd.
|
G2 VENTURES,
INC.
|
Pro Forma
Adjustments
|
Pro Forma
Combined
Total
|
|||||||||||||
REVENUES
|
$ | 2,323,841 | $ | - | - | $ | 2,323,841 | |||||||||
COST
OF REVENUES
|
639,488 | - | - | 639,488 | ||||||||||||
GROSS
PROFIT
|
1,684,353 | - | - | 1,684,353 | ||||||||||||
Selling
expenses
|
235,670 | - | - | 235,670 | ||||||||||||
General
and administrative expenses
|
525,825 | 18,674 | - | 544,499 | ||||||||||||
OPERATING
EXPENSES
|
761,495 | 18,674 | - | 780,169 | ||||||||||||
INCOME
FROM OPERATIONS
|
922,858 | (18,674 | ) | - | 904,184 | |||||||||||
Interest
income
|
1,175 | - | - | 1,175 | ||||||||||||
Other
(expense) income
|
1,092 | - | - | 1,092 | ||||||||||||
Non
operating Income (expenses)
|
(26,107 | ) | - | - | (26,107 | ) | ||||||||||
OTHER
(EXPENSE) INCOME, NET
|
(23,840 | ) | - | - | (23,840 | ) | ||||||||||
INCOME
BEFORE INCOME TAXES
|
899,018 | (18,674 | ) | - | 880,344 | |||||||||||
INCOME
TAXES
|
211,233 | - | - | 211,233 | ||||||||||||
NET
INCOME (LOSS)
|
687,785 | (18,674 | ) | - | 669,111 | |||||||||||
OTHER
COMPREHENSIVE INCOME (LOSS):
|
||||||||||||||||
Foreign
currency translation adjustments
|
35,709 | - | - | 35,709 | ||||||||||||
COMPREHENSIVE
INCOME (LOSS)
|
$ | 723,494 | $ | (18,674 | ) | - | $ | 704,820 | ||||||||
NET
INCOME PER COMMON SHARE, BASIC AND DILUTED
|
$ | - | $ | 0.04 | ||||||||||||
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
|
4,784,574 | 15,215,426 | (c) | 20,000,000 |
The
accompanying notes are an integral part of these financial
statements
F-3
G2
VENTURES, INC.
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
YEAR ENDED DECEMBER 31, 2009
Dynamic Elite
International Ltd.
|
G2 VENTURES,
INC.
|
Pro Forma
Adjustments
|
Pro Forma
Combined
Total
|
|||||||||||||
REVENUES
|
$ | 3,109,059 | $ | - | - | $ | 3,109,059 | |||||||||
COST
OF REVENUES
|
1,164,683 | - | - | 1,164,683 | ||||||||||||
GROSS
PROFIT
|
1,944,376 | - | - | 1,944,376 | ||||||||||||
Selling
expenses
|
165,994 | - | - | 165,994 | ||||||||||||
General
and administrative expenses
|
967,255 | 74,660 | - | 1,041,915 | ||||||||||||
OPERATING
EXPENSES
|
1,133,249 | 74,660 | - | 1,207,909 | ||||||||||||
INCOME
FROM OPERATIONS
|
811,127 | (74,660 | ) | - | 736,467 | |||||||||||
Interest
income
|
1,952 | - | - | 1,952 | ||||||||||||
Other
(expense) income
|
2,902 | - | - | 2,902 | ||||||||||||
Non
operating Income (expenses)
|
(24,198 | ) | - | - | (24,198 | ) | ||||||||||
OTHER
(EXPENSE) INCOME, NET
|
(19,344 | ) | - | - | (19,344 | ) | ||||||||||
INCOME
BEFORE INCOME TAXES
|
791,783 | (74,660 | ) | - | 717,123 | |||||||||||
INCOME
TAXES
|
141,248 | - | - | 141,248 | ||||||||||||
NET
INCOME (LOSS)
|
650,535 | (74,660 | ) | - | 575,875 | |||||||||||
OTHER
COMPREHENSIVE INCOME (LOSS):
|
||||||||||||||||
Foreign
currency translation adjustments
|
(3,157 | ) | - | - | (3,157 | ) | ||||||||||
COMPREHENSIVE
INCOME (LOSS)
|
$ | 647,378 | $ | (74,660 | ) | - | $ | 572,718 | ||||||||
NET
INCOME PER COMMON SHARE, BASIC AND DILUTED
|
$ | (0.02 | ) | $ | 0.03 | |||||||||||
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
|
4,784,574 | 15,215,426 | (c) | 20,000,000 |
The
accompanying notes are an integral part of these financial
statements
F-4
Description
of Pro Forma Adjustments
|
Dr
|
Cr
|
||||||
a -
Stock Issuance in reverse merger
|
|
|
||||||
Additional
paid in capital
|
15,215 | |||||||
Common
shares
|
15,215 | |||||||
b -
To eliminate retained deficit of G2 VENTURES, INC.
|
||||||||
Additional
paid in capital
|
312,557 | |||||||
Common
Stock
|
10,000 | |||||||
Retained
Deficit
|
312,557 | |||||||
Subscription
receivable
|
10,000 | |||||||
c -
To give effect to 15,215,426 common shares issued with Exchange
Agreement
|
The
unaudited pro forma consolidated financial statements for the six months ended
June 30, 2010 and for the year ended December 31, 2009 were derived from
unaudited financial statements of G2 Ventures, INC. (“G2 Ventures”) and Dynamic
Elite International Limited (“Dynamic Elite”) as of and for the six months ended
June 30, 2010. These unaudited pro forma combined financial statements should be
read in conjunction with Dynamic Elite’s unaudited and audited financial
statements and notes to those consolidated financial statements included
elsewhere in this Form 8-K and historical financial statements and notes of G2
Ventures.
The pro
forma adjustments are based on the best information available and assumptions
that management believes are reasonable given the information available;
however, such adjustments are subject to change based upon the costs incurred in
connections with the Share Exchange Agreement and related transactions and any
other material information. The unaudited pro forma financial information is for
illustrative and informational purposes only and is not intended to represent or
be indicative of what the Company’s financial position would have been had the
transactions contemplated by the Share Exchange Agreement and related
transactions occurred on June 30, 2010.
On
October 1, 2010, G2 Ventures, a company incorporated in Texas, entered into
a Share Exchange Agreement (the “Exchange Agreement”) with Dynamic Elite, a
British Virgin Island company. Pursuant to this Exchange Agreement, the
shareholders of Dynamic Elite transferred to G2 Venture all of the Dynamic Elite
Shares in exchange for the issuance of 15,215,426 shares (the “Shares”) of G2
Ventures common stock (the “Share Exchange”). As a result of the Share Exchange,
Dynamic Elite became a wholly-owned subsidiary of G2 Ventures and the
shareholders of Dynamic Elite acquired approximately 76.08% of issued and
outstanding stock of G2 Ventures. Subsequent to June 30, 2010 and prior to the
acquisition with Dynamic Elite, the liabilities and assets of G2 Ventures were
settled.
The share
exchange transaction was treated as a reverse acquisition, with G2 Ventures as
the accounting acquiree and Dynamic Elite as the accounting acquirer .
Consequently, the financial statements presented are those of a combined G2
Ventures, Dynamic Elite and its subsidiary and controlled VIE’s, as if the Share
Exchange had been in effect retroactively for all periods
presented.
F-5
(c) Shell company
transactions.
Reference
is made to Items 9.01(a) and 9.01(b) above and the exhibits referred to therein,
which are incorporated herein by reference.
(d) The
following exhibits are filed with this report:
Exhibit
Number
|
|
Description
|
3.1
|
Articles
of Incorporation *
|
|
3.2
|
Bylaws
*
|
|
3.3
|
Specimen
of Common Stock Certificate*
|
|
10.1
|
Share
Exchange Agreement, dated October 1, 2010, by and among G2 Ventures,
Crystal Globe and Dynamic Elite
|
|
10.2
|
Consulting
Services Agreement, dated September 16, 2010, by and between Junhe
Consulting and Joway Group
|
|
10.3
|
Operating
Agreement, dated September 16, 2010, by and between Junhe Consulting and
Joway Group
|
|
10.4
|
Option
Agreement, dated September 16, 2010, by and between Junhe Consulting and
Joway Group
|
70
10.5
|
Proxy
Agreement, dated September 16, 2010, by and between Junhe Consulting and
Joway Group
|
|
10.6
|
Equity
Pledge Agreement, dated September 16, 2010, by and between Junhe
Consulting and Joway Group
|
|
10.7
|
Cash
Advance Agreement, dated May 10, 2007, by and between Jinghe Zhang and
Joway Technology
|
|
10.8
|
Cash
Advance Agreement, dated May 10, 2007, by and between Jinghe Zhang and
Joway Group
|
|
10.9
|
Property
Lease Agreement, dated June 25, 2009, by and between Joway Group and
Aiying Wang
|
|
10.10
|
Property
Lease Agreement, dated June 25, 2009, by and between Joway Group and
Guifen Feng
|
|
10.11
|
Supply
Agreement, dated October 1, 2008, by and between Tianjin Daxing Import
& Export Trade Co., Ltd. and Joway
Technology
|
|
10.12
|
Supply
Agreement, dated October 9, 2008, by and between Tianjin Daxing
Import & Export Trade Co., Ltd. and Joway Group
|
|
10.13
|
Supply
Agreements, by and between Shenyang Joway and Joway
Group
|
|
10.14
|
Trademark
& Patent License Agreement, dated December 1, 2009, by and between
Joway Group and Jinghe Zhang
|
|
10.15
|
Trademark
License Agreement, dated December 1, 2009, by and between Joway Group and
Shenyang Joway.
|
|
10.16
|
Employment
Agreement, dated September 28 , 2010, by and between G2 Ventures and
Jinghe Zhang
|
|
10.17
|
Employment
Agreement, dated September 28, 2010, by and between G2 Ventures and Yuan
Huang
|
|
10.18
|
Entrust Agreement,
dated February 20, 2009, by and between Joway Group and Changlong
Si
|
|
14.1
|
Code
of Ethics **
|
|
16.1
|
Letter
from the Company to Turner, Stone & Company, LLP, CPA, dated October
5, 2010
|
|
16.2
|
Consent
Letter of Turner, Stone & Company, LLP, dated October 6,
2010
|
|
21.1
|
List
of Subsidiaries
|
|
23.1 | Consent Letter of Sherb, dated October 6, 2010 |
*Incorporated
by reference to the exhibits to our registration statement on Form SB-2 filed
with the SEC on September 11, 2003.
**Incorporated
by reference to the exhibits to our annual report on Form 10-K filed with the
SEC on March 1, 2010.
71
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
G2
VENTURES, INC.
|
|
Date:
October 6, 2010
|
|
/s/
Jinghe Zhang
|
|
Name:
Jinghe Zhang
|
|
Title:
President and Chief Executive
Officer
|
72