中国陶瓷 2010年财报(14)

中国陶瓷 2010年财报

We may lose revenue if our intellectual property rights are not protected and counterfeit HD, Hengda, HDL, Hengdeli or TOERTO brand products are sold in the market.

We believe our intellectual property rights are important to our success and competitive position. A portion of our products are manufactured and marketed under our “HD” or “Hengda,” “HDL” or “Hengdeli,” “TOERTO” and “WULIQIAO” labels. We have filed our labels as trademarks in the PRC. WULIQIAO is a trademark owned by Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. Hengda signed a Trademark Licensing Contract with Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. and has been licensed the exclusive right to use WULIQIAO during the terms of that trademark. In addition, we own four utility model patents, have exclusive licenses to use 11 design patents owned by our CEO, Huang Jia Dong, and have certain trade secrets and unpatented proprietary technology. We cannot assure you that there will not be any unauthorized usage or misuse of our trademarks and patent rights or that our intellectual property rights will be adequately protected as it may be difficult and costly to monitor any infringements of our intellectual property rights in the PRC. If we cannot adequately protect our intellectual property, we may lose revenue.

In addition, we believe the branding of our products and the brand equity in our “HD” or “Hengda,” “HDL or Hengdeli,” “TOERTO” and “WULIQIAO” trademarks is critical to our expansion effort and the continued success of our business. Our efforts to build our brand may be undermined by the sale of counterfeit goods. The counterfeiting of our products may increase if our products become more popular.

In order to preserve and enforce our intellectual property rights, we may have to resort to litigation against the infringing or counterfeiting parties. Such litigation could result in substantial costs and diversion of management resources which may have an effect on our financial performance.

We may lose revenue if Huang Jia Dong does not continue to allow us to use the design patents held in his name.

We use 11 design patents owned by our chief executive officer, Huang Jia Dong pursuant to license agreements of indefinite term and for no consideration. However, we have not registered the license agreements and, in the event Mr. Huang breaches such license agreements and does not continue to allow us to use such design patents, we would not be able to enforce the license agreements and would therefore not be able protect our intellectual property rights and our operations may suffer. We may inadvertently infringe third-party intellectual property rights, which could negatively impact our business and financial results.

We are not aware of, nor have we received any claims from third parties for, any violations or infringements of intellectual property rights of third parties by us as of the date of this Annual Report. Nevertheless, there can be no assurance that as we develop new product designs and production methods, we would not inadvertently infringe the intellectual property rights of others or others would not assert infringement claims against us or claim that we have infringed their intellectual property rights. Claims against us, even if untrue or baseless, could result in significant costs, legal or otherwise, cause product shipment delays, require us to develop non-infringing products, enter into licensing agreements or may be a distraction to our management. Licensing agreements, if required, may not be available on terms acceptable to us or at all. In the event of a successful claim of intellectual property rights infringement against us and our failure or inability to develop non-infringing products or to license the infringed intellectual property rights in a timely or cost-effective basis, our business and/or financial results will be negatively impacted.

Our manufacturing operations are partially dependent upon outsourcing aspects of our manufacturing operations, making us vulnerable to supply problems and price fluctuations, which could harm our business.

We outsource certain aspects of our manufacturing operations to meet the demand for our products, which, despite the additional production from Hengdali, currently exceeds our current capacity. We currently outsource to the following original equipment manufacturers: Fujian Jinjiang Xinrong Ceramics Co., Ltd. and Jinjiang Jinzhuang Ceramics Co., Ltd., to manufacture and supply basic porcelain ceramics tiles. 8

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