TMCnet News
WINHA INTERNATIONAL GROUP LTD - 10-Q - Management's Discussion And Analysis Of Financial Condition And Results Of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following management's discussion and analysis of financial condition and results of operations provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions. Our management's discussion and analysis of financial condition and results of operations includes the following sections: ¨ Overview. Discussion of our business and overall analysis of financial and other highlights affecting the company in order to provide context for the remainder of MD&A. ¨ Critical Accounting Policies and Estimates. Accounting estimates that we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. ¨ Results of Operations. An analysis of our financial results for the period from inception to June 30, 2014. ¨ Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity. ¨ Contractual Obligations and Off-Balance-Sheet Arrangements. Overview of contractual obligations, contingent liabilities, commitments, and off-balance-sheet arrangements outstanding as of June 30, 2014. Overview WINHA retails local specialty products from different regions across China through its self-operated physical store, website, mobile store, set-top boxes for television sets, and also carries on wholesale of these products to a regional distributor. Our innovative business model utilizes a multi-channel shopping platform to sell locally-produced food, beverages, and arts and crafts that are well-known across China. Through our shopping platform, we provide customers with access to a large variety of local products that can traditionally only be found in local stores or markets in specific regions. Our vision is to promote different local cultures and traditions that exist throughout China, while bolstering local economies and raising people's awareness of each region's cultural heritage. We operate our business in China through Zhongshan WINHA, a variable interest entity of us. We expect that virtually all of our revenue, once generated, derives from Zhongshan WINHA. On August 1, 2013, we obtained the controlling interest of Zhongshan WINHA via Shenzhen WINHA through a series of contractual arrangements executed on August 1, 2013, which include an exclusive business cooperation agreement, exclusive option agreements, loan agreements, share pledge agreements, powers of attorney and spouse consents. Shenzhen WINHA, through these arrangements, became the primary beneficiary of and consolidated with its variable interest entity, Zhongshan WINHA. For more detailed information with respect to the contractual arrangements, see "Description of Business - Our Corporate History and Structure" in our Annual Report on Form 10-K filed on July 15, 2014. 16 However, if Zhongshan WINHA and its shareholders fail to perform their obligations under the contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, or if legal remedies under the PRC law that we rely on are not available or effective, our business and operations could be severely disrupted, which could materially and adversely affect our results of operations, revenue generated in the PRC and damage our reputation, which could materially and adversely affect our results of operations and our ability to generate revenue in the PRC and damage our reputation. Further, if the Company is deemed to have lost control of Zhongshan WINHA, we may not able to continue to consolidate Zhongshan WINHA's financials. As a result, we may be unable to pay any dividend to our shareholders and the price of our common stock may drop drastically which could cause our shareholder to experience severe loss in their investment in our Company. See a more detailed discussion of the relevant risks on page 8 under the heading "Risk Factors" in our Annual Report on Form 10-K filed on July 15, 2014. On August 1, 2013, Chung Yan Winnie Lam, our President and sole director as well as the sole shareholder of PILOT International, entered into a Share Transfer Agreement with Zening Lai, the director of PILOT International, pursuant to which Ms. Lam agreed to grant to Ms. Lai an Option to purchase 100% of the outstanding ordinary shares of PILOT International currently held by Ms. Lam in three installments, provided that WINHA achieves certain performance thresholds in each given time period. On August 1, 2013, Ms. Lam entered into a Power of Attorney with Ms. Lai to grant Ms. Lai as her agent, attorney and proxy to exercise any and all shareholder rights with the same powers in respect of all the shares of PILOT International on any and all matters on behalf of Ms. Lam. Pursuant to the Share Transfer Agreement and Power of Attorney, as well as the contractual control of Zhongshan WINHA by the Company (the "Restructuring"), Ms. Lai, who also had a controlling interest in Zhongshan WINHA with ownership of 70.2% of its shares, was deemed to have retained a financial controlling interest in the combined entity, and the combined entity remained under common control. As a result, the Restructuring was accounted for as a combination of entities under common control. On December 5, 2013, Zhongshan WINHA as the 90% equity holder and a non-affiliate party as the 10% equity holder, formed Zhongshan Supermarket in Guangdong, China. Zhongshan Supermarket was formed to operate the storefront in Zhongshan city. The Company's fiscal year end is March 31. Plan of Operation We market and sell the local specialty goods to customers through four retail channels: self-operated physical store, online store, mobile store, set-top box store and one wholesale channel: a regional distributor. Our revenue comes from the sales of local specialty goods made at our self-operated physical store, online store, mobile store and set-top box store and wholesale. ¨ Opening up self-operated stores. We established one self-operated storefront in December 2013. In addition, we established three self-operated storefront in the second quarter of 2014. Our self-operating stores are engaged in the retail of local specialty products. We plan to carry out record-filing with MOFCOM or its local counterparts after our self-operated storefronts operate for one year. It is roughly estimated that we could satisfy the requirements under PRC laws and regulations related to commercial franchising within the first quarter of 2015. The expense associated with opening up these self-operated storefronts is estimated to be approximate RMB 500,000, or approximately $81,780. ¨ Developing direct suppliers. To ensure a healthy and stable supply networks, we recently modified our supplier network by adding non-franchisee supplier chain. We have established supply relationship with over 50 direct suppliers across 15 provinces. We intend to add about 300 direct suppliers in the next twelve months. We estimate that the expense associated with achieving this goal is approximate RMB 300,000, or approximately $49,080. 17 ¨ Developing of an intelligent logistic system We have started developing a logistics system that integrates delivery and inventory control systems and expect to complete this system within the next 12 months. Under this system, a sales order will automatically be filled and delivered from a most cost-effective location, whether it is our self-operated store or the Company's headquarter. The expense associated with achieving this goal is estimated to be approximate RMB 400,000, or approximately $65,439. ¨ Active marketing of our website. We do not plan to actively promote our website before September 2014, but intend to launch targeted marketing thereafter. The expense associated with this project is estimated to be approximate RMB 1,500,000, or approximately $245,399. ¨ Fine-tuning and ramping up of our mobile store. Our mobile store became live at the end of August 2013.We are currently conducting a series of tests on the mobile store in interfacing with WeChat and smart phones. Because the cost of this project was included in the expense of creating the mobile store, we do not expect to incur further cost in this regard. Beginning September 2014, we plan to actively promote our mobile store by engaging third-party platform marketing, instant message marketing, and email marketing during the next twelve months. The expense associated with this project is estimated to be approximate RMB 160,800 or approximately $26,307. ¨ Introduction of our set-top box store. We have worked with a third-party developer and completed programming our store of local specialty products into set-top boxes. Our set-top boxes are available for purchase at our self-operated stores. Our set-top box store has been open to customers in Zhongshan since June 2014 and is scheduled to open up to customers in entire Guangdong province by 2015. The expense associated with this project is estimated to be nominal. Our business operations are subject to primarily PRC laws and regulations on telecommunications services, Internet content services, advertising business, and may be subject to PRC laws and regulations on commercial franchising and other business sectors. There are substantial uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations, including, but not limited to, the laws and regulations governing our business, the validity and enforcement of our contractual arrangements, our corporate structure and this offering. If the PRC government determines that we are in violation of applicable PRC laws, rules or regulations, we could be subject to sanctions, including but not limited to levying fines, confiscating illegal income, revoking business and operating licenses of our variable interest entity, Zhongshan WINHA, and other penalties that would severely disrupt our ability to conduct business, severely damage our reputation and have a material adverse effect on our business, financial condition, results of operations and prospects. For more detailed information, see "Risk Factors" and "Government Regulations" in our Annual Report on Form 10-K filed on July 15,2014. Critical Accounting Policies and Estimates 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 United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements, "Basis of Presentation and Summary of Significant Accounting Policies." We believe that the following paragraphs reflect the more critical accounting policies that currently affect our financial condition and results of operations: 18 Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires 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 amount of revenues and expenses during the reporting periods. We make these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those results. Fair Value Measurements The Company applies the provisions of ASC Subtopic 820-10, "Fair Value Measurements", for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: ¨ Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. ¨ Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. ¨ Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. There were no assets or liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of June 30, 2014 and March 31, 2014. Cash and Cash Equivalents For statement of cash flows purposes, we consider all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. Revenue Recognition The Company develops local franchisees across the country. The Company, through its franchisees, markets the local specialty goods through the following four channels: ¨ Franchise stores - The Company collects annual franchise fee from each franchisee for its services including but not limited to management, marketing and consulting. The Company accounts for franchise fee revenue on a deferred basis, whereby revenue is recognized ratably over the one-year agreement period. In December 2013, the Company decided to unwind the six existing franchise stores and keep the Company's physical distribution channel free of franchise stores until the Company is fully in compliance with the PRC laws and regulation of commercial franchise. Consequently, the Company terminated all the existing franchise agreements and refunded the collected website construction and maintenance fees. Even though the existing franchise agreements were terminated, the Company keeps the option of franchise model open. No revenue from franchise store was generated for the period from April 15, 2013 (inception) to June 30, 2014. 19 ¨ Retail Store - The Company recognizes sales revenue from retail store net of sales taxes and estimated sales returns at the time it sells merchandise to the customer. Customer purchases of shopping cards are not recognized as revenue until the card is redeemed and the customer purchases merchandise by using the shopping card. Revenue generated from retail store was $115,169 and $0 for the three months ended June 30, 2014 and the period from April 15, 2013 (inception) to June 30, 2013. ¨ Online Store- Each franchise owner is required to pay us a website construction and maintenance fee. The Company accounts for this website construction and maintenance fee revenue on a deferred basis, whereby revenue is recognized ratably over the service agreement period. No revenue from online store was generated from April 15, 2013 (inception) to June 30, 2014. ¨ Mobile store - Revenue is recognized on the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. No revenue from mobile store was generated from April 15, 2013 (inception) to June 30, 2014. ¨ Set-Top Box Store - Customers can browse the Company's products on a television set (TV) screen if they choose to install a pre-programmed set-top box on their TVs without additional charge. A set-top box turns a TV into a display device, and customers with a set-top box pre-programmed with our product information can view and select products and complete purchases on a TV screen, among other functions of set-top boxes such as accessing internet web pages, streaming videos and movies, and playing games. Commission revenue is recognized on the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. In addition, set-top boxes are available for customer, and the related revenue is recognized upon delivery and acceptance of set-top boxes by our customers. No revenue from set-top box store was generated from April 15, 2013 (inception) to June 30, 2014. ¨ Wholesale - Wholesale revenue is recognized upon delivery and acceptance of products by our distributor, provided in each case that the other conditions of sales are satisfied: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred, upon shipment when title passes, or services have been rendered; (iii) our price to the buyer is fixed or determinable; and (iv) collectability is reasonably assured. No revenue from wholesale store was generated from April 15, 2013 (inception) to June 30, 2014. ¨ Consignment sales-For the sales of goods which are held by retail stores as merchandise on consignment without included in the Company's inventory, revenue is recognized on a net basis. Revenue generated from consignment sales was$3,580 and $0 for the three months ended June 30, 2014 and the period from April 15, 2013 (inception) to June 30, 2013. 20 Under related PRC laws and regulations, commercial franchising refers to the business activities where an enterprise that possesses the registered trademarks, enterprise logos, patents, proprietary technology or any other business resources, the franchisor, allows such business resources to be used by another business operator, the franchisee, through contract and the franchisee follows the uniform business model to conduct business operation and pays franchising fees according to the contract to conduct commercial franchising activities. A franchisor must have certain prerequisites including a mature business model, the capability to provide long-term business guidance and training services to franchisees and ownership of at least two self-operated storefronts that have been in operation for at least one year within China. We may be recognized as a commercial franchisor for authorizing other business entities to use our trademark and adopting a uniform business model. We have four self-operated storefronts, but none of them has been in operation for one year or longer as of June 30, 2014. Besides, we have not carried out record-filing with MOFCOM or its counterparts until June 30, 2014. Therefore, we may be subject to penalties such as forfeit of illegal income, imposition of fines ranging fromRMB 10,000(approximately US $16,527) to RMB 500,000(approximately US $82,633) and may be bulletined by MOFCOM or its local counterparts. However, we will attempt to carry out record-filing with MOFCOM or its local counterparts after our self-operated storefronts operate for one year. It is roughly estimated that we could satisfy the requirements under PRC laws and regulations related to commercial franchising within the first quarter of 2015. Until we become compliant with the relevant PRC laws and regulations, we do not plan to develop any franchise stores. VIP Club Program At our existing and any future self-operated physical retail store(s) in Guangdong Province, we offer prepaid cards to customers for purchase. The prepaid cards are only available for purchase at our self-operated physical store(s) in Guangdong Province, not any of our online, mobile, and set-top box stores. Customers can use the prepaid cards to purchase local specialty products at all of our self-operated physical retail store(s), online, mobile or set-top box stores. The cash collected from the sales of prepaid cards is initially recorded as advance from customers on the consolidated balance sheets and subsequently recognized as revenues when the prepaid cards are redeemed to purchase products. In connection with prepaid card sales, we offer club memberships (VIP Club Memberships") to qualified VIP customers (the "VIP Club Members). To receive one VIP Club Membership, a customer is required to purchase at once prepaid cards in an amount of RMB 30,000 (approximately US $4,958) and, recruit 30 registered members (the "Registered Members") to our self-operated physical store(s). Registered Members receive special promotions and discounts as do VIP Club Members, but unlike VIP Club Members, they do not have to meet the thresholds of prepaid card purchase or member recruiting and are not entitled to profit sharing discussed below. We plan to grant up to 2,500 VIP Club Memberships at the self-operated physical retail store(s) in total. Each individual customer can receive up to three VIP Club Memberships. In return for joining the VIP club, the VIP Club Members receive in cash each quarter, a total of 40% of the quarterly net income of all of our self-operated physical retail store(s) in Guangdong Province on an aggregated basis, if these self-operated physical retail store(s), on an aggregated basis, record net income (under the U.S. GAAP standard) for that quarter. The cash award is distributed within 15 calendar days after each quarter end among the VIP Club Members pro rata according to the number of their membership(s). If any adjustment is made to the net income amount of the self-operated physical retail store(s) after the review or audit by our auditor, we reflect the difference in the next immediate distribution. In addition, when a VIP Club Member refers a new member to the VIP club, the referrer is awarded in the form of prepaid cards, 10% of the amount that the referee spends on his or her first-time purchase. This VIP Club Membership program is designed to improve the cash flow of our self-operated physical retail store(s) at the development stage and enhance their operating performance in the long run by utilizing the VIP club members as a marketing force. Both "net income" and "referral" awards are treated as promotional expenses to promoting self-operated physical retail store(s). The Company has historically reported a net loss and is currently operating on a going concern basis. The Company's expenses at this stage are principally professional fees, relating to organizing the Company and its subsidiaries. Our self-operated physical retail store(s), which are controlled and managed by Zhongshan Supermarket, is not expected to incur substantial expenses of professional fees as the Company does, and rather, they are only expected to incur costs of sales, operating and other expenses in line with revenues generation. Therefore, we expect that when the self-operated physical retail stores(s) record net income there will most likely be positive cash flow to fund the distribution to our VIP Club Members. If the self-operated physical retail stores(s) encounter insufficient cash and cash equivalents to fund the distribution of cash awards, the shareholders of Zhongshan Supermarket will fund the distribution pro rata in accordance with their shareholdings. However, they are not under any contractual obligations to do so. If any distribution due is not promptly funded, we may face legal actions taken by the VIP Club Members and the operation of our self-operated physical retail store(s) may be severely disrupted. During the period from April 15, 2013 (inception) toJune 30, 2014, no cash awards were distributed to the VIP Club Members as the self-operated physical retail store recorded net loss. 21 Membership Reward Program The Company has a membership points program in which the Company awards points to customers when they firstly join the program. The customers also earn one point for each Renminbi spent at the online store or the mobile store. Under the membership points program, the points earned can be used to pay for future purchases at the online store or the mobile store. The membership points never expire and cannot be exchanged for cash. The Company estimated that there would be no breakage of the point redemption. The free points offered when the customers firstly join the membership program are recorded as expense at the time of use. Regarding the points which the customers earn from money spent on the online store or mobile store, the Company allocates the transaction price to the product and the points on a relative standalone selling price basis whereas the portion of the points will be recognized upon redemption. The Company accrues liabilities for the estimated value of the points earned and expected to be redeemed. The accrual is based on all outstanding reward points related to prior purchases at the end of each reporting period, as the Company does not currently have sufficient historical data to reasonably estimate the usage rate of these reward points. These liabilities reflect our management's best estimate of the cost of future redemptions. Deferred revenue of $12,055 and $6,264 was recorded as of June 30, 2014 and March 31, 2014, respectively. Results of operations of Our Company Revenue During the three months ended June 30, 2014, we had total revenue of $118,749, compared to $0 for the period from April 15, 2013 (inception) to June 30, 2013. The Company has begun to generate revenue since the third quarter of 2013. Cost of Sales Cost of revenue for the three months ended June 30, 2014 was $82,356, compared to $0 for the period from April 15, 2013 (inception) to June 30, 2013. The increase was in line with the Company's revenue generating activities. Selling Expenses Selling expenses represented the staff cost and expense related to the sales departments and retail stores. Selling expenses for the three months ended June 30, 2014 was $84,253, as compared to $0 for the period from April 15, 2013 (inception) to June 30, 2013. The increase was directly related to the Company's retail stores operating at the beginning of 2014. 22 General and Administrative Expenses The following table sets forth main components of the Company's general and administrative expenses for the three months ended June 30, 2014 and the period from April 15, 2013 (inception) to June 30, 2013. April 15, 2013 Three months ended (inception) through June 30, 2014 June 30, 2013 Amount % of Total Amount % of Total Legal and professional fees 39,313 16.4 % 158,331 80.7 % Salary and welfare 86,430 36.1 % 16,518 8.4 % Office expense 81,235 33.9 % 20,127 10.3 % Rental expense 19,801 8.3 % - - Others 12,624 5.3 % 1,112 0.6 % Total G&A $ 239,403 100.0 $ 196,088 100.0 % General and administrative expenses for the three months ended June 30, 2014 was $239,403, compared to $196,088 for the period from April 15, 2013 (inception) to June 30, 2013, an increase of $43,315, or approximately 22%. The increase was mainly a result of the increase in the salary and welfare, office expense, rental expense and others as the scale of our operation enlarged in the third quarter of 2013, albeit offset by the decrease in the legal and professional fees. The significant amount of legal and professional fees in the period from April 15, 2013 (inception) to June 30, 2013 was primarily incurred in connection with the incorporation of the Company and its subsidiaries and the professional fees paid to become a public company. Net Loss As a result of the above, our net loss for the three months ended June 30, 2014 was $289,802, as compared to $196,166 for the period from April 15, 2013 (inception) to June 30, 2013. The increase of net loss was mainly due to an increase of operating expense by $91,175, which was partially offset by an increase of gross margin by $36,393. Liquidity and Capital Resources As of June 30, 2014, the Company had cash and cash equivalent of $469,620, compared to $155,160 as of March 31, 2014. There was an increase of $314,460 in cash and cash equivalents from March 31, 2014 to June 30, 2014. During the three months ended June 30, 2014, we have financed our operations through capital contribution by our shareholders of $320,806. We have invested $84,231 in purchasing fixed assets and $6,816 in intangible assets. Net cash provided by operations amounted to $83,442 during the period ended June 30, 2014, which was primarily attributable to the increase in advance from customers, accrued expenses and other payable, and the decrease in the other receivables, albeit offset by operating loss and the increase of inventory. The following table summarizes our cash flows for the three months ended June 30, 2014 and for the period from April 15, 2013 (inception) to June 30, 2013: For the period For three from April 15, months ended 2013 (inception) June 30, 2014 to June 30, 2013Net cash provided by (used in) operating activities $ 83,442 $ (172,386 ) Net cash used in investing activities $ (91,047 ) $ (8,144 ) Net cash provided by financing activities $ 320,805 $ 365,697 23 Net Cash Provided by (Used in) Operating Activities. Net cash provided by operating activities was $83,442 for the three months ended June 30, 2014 and $172,386 used in operating activities for the period from April 15, 2013 (inception) to June 30, 2013, respectively. The increase in the cash flow was mainly due to the increase in advance from customers, accrued expenses and other payable, and the decrease in the other receivables, albeit offset by operating loss and the increase of inventory. Net Cash Used in Investing Activities. Our investing activities for the three months ended June 30, 2014 and the period from April 15, 2013 (inception) to June 30, 2013 used cash of $91,047 and $8,144, respectively. The increase was mainly related to the purchase of fixed assets. Net Cash Provided by Financing Activities. Net cash provided by financing activities for the three months ended June 30, 2014 and the period from April 15, 2013 (inception) to June 30, 2013 was $320,805 and $365,697, respectively. The difference was mainly the proceeds from the sales of our common stock during the three months period from April 15, 2013 to June 30, 2013. Capital Resources We had negative working capital of $106,916 and $220,204 as of June 30, 2014 and March 31, 2014, respectively. The reason for the increase in negative working capital from March 31, 2014 to June 30, 2014 was primarily the increase in advance from customers and accrued liabilities albeit offset by the increase of inventory and cash and cash equivalents. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company's operations resulted in a net loss attributable to the Company of $284,841 and cash provided by operations of $83,442 during the three months ended June 30, 2014. As of June 30, 2014, the Company had an accumulated deficit of $1,284,774. In the course of our development activities, the Company continues to sustain losses. The Company expects to finance operations primarily through cash flow from operations and capital contributions from principal shareholders. In the event that we require additional funding to finance the growth of the Company's current and expected future operations as well as to achieve our strategic objectives, our principal shareholders have indicated the intent and ability to provide additional equity financing. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company's continuation as a going concern is dependent on our ability to meet obligations as they become due, to obtain additional equity or alternative financing required to fund operations, and to generate positive cash flows from operations. There can be no assurance that the Company will be successful in its plans described above or in attracting equity or alternative financing on acceptable terms, or if at all. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Transfer of Cash According to PRC laws and regulations, in the event that we need to finance our subsidiary in the future, we are allowed to providing funding by means of capital contributions or loans. The loans are subject to applicable government registration and approval requirements. We may not be able to complete the registration or obtain these government approvals on a timely basis. If we fail to complete such registration or receive such approvals, our ability to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity. See PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC operating subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business. Current PRC regulations permit our PRC subsidiary to pay dividends to us, however, payment of dividends are subject to applicable regulatory requirements. In addition, we have no direct business operations, other than our ownership of our subsidiary and our contractual control of Zhongshan WINHA, which may limit the payment of dividends. See "Risk Factors - Risk Relating to Doing Business in China - our holding company structure may limit the payment of dividends". 24 Furthermore, cash transfers from our PRC subsidiaries to their parent companies outside of China are subject to PRC government control of currency conversion. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiary. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. As profit and dividend are current account items, our revenues generated in the PRC may be paid to shareholders outside of the PRC as profit or dividend without prior approval from SAFE so long as we comply with certain procedural requirements. However, the PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders. Our inability to obtain the requisite approvals for converting RMB into foreign currencies, any delays in receiving such approvals or any future restrictions on currency exchanges may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy its foreign currency denominated obligations. See "Risk Factors-Risks Related to Doing Business in China-Governmental control of currency conversion may affect the value of your investment." Off Balance Sheet Transactions We do not currently have any off-balance sheet arrangements. |