UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from              to             

 

Commission File No. 333-108715

 

Joway Health Industries Group Inc.

(Exact Name of Registrant as Specified in Its Charter) 

 

Nevada		98-0221494
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
No. 2, Baowang Road, Baodi Economic Development Zone, Tianjin, PRC 301800		86-22-22533666
(Address of Principal Executive Offices)		(Issuer’s Telephone Number)

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

The number of shares outstanding of the Issuer’s Common Stock as of November 14, 2014 was 20,054,000 shares.

 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	31
Item 4. Controls and Procedures	32
PART II - OTHER INFORMATION	33
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3. Defaults Upon Senior Securities	33
Item 4. Mine Safety Disclosures	33
Item 5. Other Information	33
Item 6. Exhibits	33
SIGNATURES	34

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements included in this Form 10-Q reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.

 

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

	Page
Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013	4
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and the Nine Months Ended September 30, 2014 and 2013 (Unaudited)	5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)	6
Notes to Unaudited Condensed Consolidated Financial Statements	7-21

 

 

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30,				December 31,
		2014				2013
		(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS:
Cash		$	512,336			$	477,642
Accounts receivable			-				1,486
Other receivables			39,878				37,333
Inventories			974,883				1,197,640
Advances to suppliers			138,574				180,968
Prepaid taxes			78,400				109,774
Prepaid expense			1,895				6,924
Total current assets			1,745,966				2,011,767
PROPERTY, PLANT AND EQUIPMENT, net			5,871,642				6,258,336
OTHER ASSETS:
Long-term investment			-				245,339
Intangible assets, net			630,393				653,321
Total other assets			630,393				898,660
Total assets		$	8,248,001			$	9,168,763
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable		$	50,353			$	76,267
Advances from customers			159,322				18,178
Other payables			44,761				58,984
Due to related parties			44,246				71,168
Total current liabilities			298,682				224,597
COMMITMENTS			-				-
STOCKHOLDERS' EQUITY:
Preferred stock - par value $0.001; 1,000,000 shares authorized; no shares issued and outstanding			-				-
Common stock - par value $0.001; 200,000,000 shares authorized; 20,054,000  shares issued and outstanding at September 30, 2014 and December 31, 2013			20,054				20,054
Additional paid-in-capital			7,361,665				7,361,665
Statutory reserves			354,052				354,052
Accumulated deficits			(1,016,658	)			(82,531	)
Accumulated other comprehensive income			1,230,206				1,290,926
Total stockholders' equity			7,949,319				8,944,166
Total liabilities and stockholders' equity		$	8,248,001			$	9,168,763

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

		Three months ended September 30,								Nine months ended September 30,
		2014				2013				2014				2013
REVENUES		$	490,749			$	389,863			$	991,166			$	874,469
COST OF REVENUES			238,129				146,114				459,796				327,130
GROSS PROFIT			252,620				243,749				531,370				547,339
Selling expenses			116,704				99,245				341,092				346,222
General and administrative expenses			344,330				433,451				1,143,974				1,492,349
OPERATING EXPENSES			461,034				532,696				1,485,066				1,838,571
LOSS FROM OPERATIONS			(208,414	)			(288,947	)			(953,696	)			(1,291,232	)
Interest income			100				189				373				675
Other income			27,527				712				27,991				8,361
Other expenses			(4,964	)			(808	)			(7,098	)			(147,230	)
OTHER INCOME (EXPENSE), NET			22,663				93				21,266				(138,194	)
LOSS BEFORE INCOME TAXES			(185,751	)			(288,854	)			(932,430	)			(1,429,426	)
INCOME TAXES (BENEFITS)			(2	)			(2,011	)			1,697				78,237
NET LOSS			(185,749	)			(286,843	)			(934,127	)			(1,507,663	)
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment			1,715				61,082				(60,720	)			274,533
COMPREHENSIVE LOSS		$	(184,034	)		$	(225,761	)		$	(994,847	)		$	(1,233,130	)
NET LOSS PER COMMON SHARE, BASIC AND DILUTED		$	(0.01	)		$	(0.01	)		$	(0.05	)		$	(0.08	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED			20,054,000				20,054,000				20,054,000				20,041,077

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Nine months ended September 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(934,127	)		$	(1,507,663	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation			354,832				412,816
Amortization			17,732				20,492
Stock-based compensation			-				540
Changes in operating assets and liabilities:
Accounts receivable, trade			1,486.00				11,594
Other receivables			(2,196	)			(806	)
Inventories			223,779				(18,729	)
Advances to suppliers			63,512				(100,042	)
Prepaid expense			5,029				(13,631	)
Accounts payable			(14,543	)			14,289
Advances from customers			141,144				33,151
Other payable			1,036				(10,757	)
Salary and welfare payable			(15,259	)			(4,186	)
Taxes payable			31,374				(217,065	)
Net cash used in operating activities			(126,201	)			(1,379,997	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property plant and equipment			(1,974	)			(32,513	)
Redemption of long-term investment			245,339				-
Purchase and redemption of short-term investment			-				1,022,757
Net cash provided by investing activities			243,365				990,244
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of due to related parties			(26,922	)			(24,470	)
Net cash used in financing activities			(26,922	)			(24,470	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(55,548	)			44,023
NET INCREASE (DECREASE) IN CASH			34,694				(370,200	)
CASH, beginning of period			477,642				522,145
CASH, end of period		$	512,336			$	151,945
SUPPLEMENTAL DISCLOSURES:
Income taxes paid		$	2,883			$	172,549
Interest paid		$	-			$	-

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION

 

The unaudited condensed consolidated financial statements include the financial statements of Joway Health Industries Group Inc. (referred to herein as “Joway Health”), its subsidiaries, and variable interest entities (“VIEs”) where Joway Health is deemed the primary beneficiary. Joway Health, its subsidiaries and VIEs are collectively referred to herein as the “Company”, “we” and “us”.

 

Joway Health (formerly G2 Ventures, Inc.) was originally incorporated under the laws of the State of Texas on March 21, 2003. On September 21, 2010, Joway Health entered into a Share Exchange Agreement (the “Share Exchange”) with the sole stockholder of Dynamic Elite International Limited. As a result of the Share Exchange, Dynamic Elite became a wholly-owned subsidiary of Joway Health and the stockholders of Dynamic Elite acquired approximately 76.08% of the issued and outstanding stock of Joway Health. The share exchange transaction resulted in the shareholders of Dynamic Elite acquiring a majority voting interest in Joway Health. Generally accepted accounting principles in the United States of America require that the company whose shareholders retain the majority interest in the combined business be treated as the acquirer for accounting purposes. The reverse acquisition process utilizes the capital structure of Joway Health and the assets and liabilities of Dynamic Elite recorded at historical cost. On December 22, 2010, Joway Health changed its jurisdiction of incorporation from the State of Texas to the State of Nevada.

 

Dynamic Elite International Limited (referred to herein as “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 Management Consulting Co., Ltd. was incorporated on September 15, 2010 in Tianjin, People’s Republic of China (“PRC”). Other than the equity interest in Junhe Consulting, Dynamic Elite does not own any assets or conduct any operations.

 

Tianjin Junhe Management Consulting Co., Ltd. (referred to herein as “Junhe Consulting”) conducts its business through Tianjin Joway Shengshi Group Co., Ltd. that is consolidated as a variable interest entity.

 

Tianjin Joway Shengshi Group Co., Ltd. (referred to herein as “Joway Shengshi”) was incorporated in PRC on May 17, 2007. Joway Shengshi is currently owned 99% by Jinghe Zhang, the Company’s current CEO and President and 1% by Song Baogang. Joway Shengshi engages in manufacturing and distributing tourmaline products in China. Shenyang Joway Electronic Technology Co., Ltd., Tianjin Joway Decoration Engineering Co., Ltd. and Tianjin Oriental Shengtang Trading Import & Export Trading Co., Ltd are subsidiaries of Joway Shengshi.

 

Shenyang Joway Electronic Technology Co., Ltd. (referred to herein as “Joway Technology”) was originally named Liaoning Joway Technology Engineering Co., Ltd. which was incorporated on March 28, 2007 in PRC. The name was changed on June 22, 2011. It engages in the distribution of Tourmaline Activated Water Machines and Tourmaline Wellness Houses. Prior to July 25, 2010, Joway Shengshi owned 90.91% of Joway Technology. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, 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 Joway Shengshi.

 

Tianjin Joway Decoration Engineering Co., Ltd. (referred to herein as “Joway Decoration”) was incorporated on April 22, 2009 in PRC. It engages in the distribution of Tourmaline Activated Water Machines, Tourmaline Wellness House for family use and Tourmaline Wellness House materials. Prior to July 9, 2010, Joway Shengshi owned 90% of Joway Decoration. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, 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 Joway Shengshi. Jingyun Chen is currently the General Manager of Joway Decoration.

 

 

Tianjin Oriental Shengtang Import & Export Trading Co., Ltd (referred to herein as “Shengtang Trading”) 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, Joway Shengshi owned 95% of Shengtang Trading. Joway Shengshi entered into a share acquisition agreement with Wang Aiying, another stockholder of Shengtang Trading on July 28, 2010 to acquire the remaining 5% of the shares of Shengtang Trading. As a result of the share acquisition, Shengtang Trading became a wholly-owned subsidiary of Joway Shengshi.

 

The following table lists the Company and its subsidiaries:

 

Name		Domicile and Date of Incorporation		Paid in Capital		Percentage of Effective Ownership		Principal Activities
Joway Health Industries Group Inc.		March 21, 2003,  Nevada		USD 20,054		86.8% owned by Crystal Globe Limited 13.2%owned by other institutional and individual investors		Investment Holding
Dynamic Elite International Limited		June 2, 2010,  British Virgin Islands		USD 10,000		100% owned by Joway Health Industries Group Inc.		Investment Holding
Tianjin Junhe 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 Baogang Song		Production and distribution of Healthcare Knit Goods and Daily Healthcare and Personal Care products
Shenyang Joway Electronic Technology 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 Joway Decoration Engineering Co., Ltd.		April 22, 2009, PRC		USD 292,367.74		100% owned by Tianjin Joway Shengshi Group Co., Ltd		Distribution of Wellness House for family use and Activated Water Machine and construction of Tourmaline Wellness House
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

 

On September 16, 2010, prior to the share exchange, Junhe Consulting entered into a series of contractual agreements (the “Contractual Agreements”) with Joway Shengshi and Joway Shengshi’s owners. The following is a brief description of the Contractual Agreements entered into between Junhe Consulting and Joway Shengshi or Joway Shengshi’s owners:

 

1. Consulting Services Agreement. Pursuant to the consulting services agreement between Junhe Consulting and Joway Shengshi, Junhe Consulting has the right to advise, consult, manage and operate Joway Shengshi, and collect and own all of the net profits of the Operating Entities.

 

2. Operating Agreement. Under the operating agreement between Junhe Consulting and Joway Shengshi, Junhe Consulting has the right to recommend director candidates and appoint the senior executives of Joway Shengshi, approve any transactions that may materially affect the assets, liabilities, rights or operations of Joway Shengshi, and guarantee the contractual performance by Joway Shengshi of any agreements with third parties, in exchange for a pledge by Joway Shengshi of its accounts receivable and assets.

 

3. Voting Rights Proxy Agreement. Under the voting rights proxy agreement between Joway Shengshi’s owners and Junhe Consulting, the owners of Joway Shengshi have vested their collective voting control over Joway Shengshi to Junhe Consulting and will only transfer their respective equity interests in Joway Shengshi to Junhe Consulting or its designee.

 

4. Option Agreement. Under the option agreement between Joway Shengshi’s owners and Junhe Consulting, the owners of Joway Shengshi have granted Junhe Consulting the irrevocable right and option to acquire all of their equity interests in Joway Shengshi.

 

5. Equity Pledge Agreement. Under the equity pledge agreement between Joway Shengshi’s owners and Junhe Consulting, the owners of Joway Shengshi have pledged all of their rights, titles and interests in Joway Shengshi to Junhe Consulting to guarantee Joway Shengshi’s performance of its obligations under the Consulting Services Agreement.

 

As a result of the Contractual Agreements, Joway Shengshi is effectively a variable interest entity of Junhe Consulting. Accordingly, the Company through its wholly-owned subsidiary Junhe Consulting, consolidates Joway Shengshi’s results of operation, assets and liabilities in its financial statements.

 

In connection with the Share Exchange and as consideration for entering into the VIE Agreements the shareholders of Joway Shengshi, entered into a Call Option Agreement with the sole shareholder of Crystal Globe (the controlling shareholder of Dynamic Elite), pursuant to which the shareholders of Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an aggregate price equal to $20,000 over the next three years. The Call Option vests as to 34% of the shares of Crystal Globe on April 2, 2011 and as to 33% on April 2 of 2012 and 2013. As a result, the shareholders of Joway Shengshi are now the indirect beneficial owners of the shares of the Company held by Crystal Globe.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). Accordingly, they do not include all of the information and the footnotes required by generally accepted accounting principles for complete financial statements. The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the accompanying unaudited condensed 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.

 

Operating results for the nine month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s form 10-K for the fiscal year ended December 31, 2013 which was filed on March 31, 2014.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with US GAAP 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 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 subsidiaries and controlled VIEs. All significant inter-company accounts and transactions have been eliminated in the consolidation.

 

Pursuant to Accounting Standards Codification Topic 810 “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.

 

Based on the various Contractual Agreements, the Company is able to exercise control over the VIEs, and to obtain the full economic benefits. The terms of the exclusive option agreement are currently exercisable and legally enforceable under PRC laws and regulations. The minimum amount of consideration permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for the Company to exercise its rights under the exclusive option agreement. A simple majority vote of the Company’s board of directors is required to pass a resolution to exercise its rights under the exclusive option agreement, for which consent of the shareholder of VIEs is not required. Therefore, this gives the Company the power to direct the activities that most significantly impact VIEs’ economic performance. The Company’s ability to exercise effective control, together with the consulting service agreements and the equity pledge agreements, give the Company the rights to receive substantially all of the economic benefits from VIEs in consideration for the services provided by its wholly owned subsidiaries in China. Accordingly, as the primary beneficiary of VIEs and in accordance with U.S. GAAP, Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading, as VIEs of Junhe Consulting, has been consolidated in the Company’s financial statements. Sales from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading are included in the Company’s total sales, their incomes or losses from operations are consolidated with the Company’s, and the Company’s net income or loss includes net income or loss from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading.

 

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 period-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.

 

		For the nine months ended September 30,								For the year ended December 31,
		2014				2013				2013
Period ended RMB: USD Exchange rate			6.156				6.1514				6.114
Average RMB: USD Exchange rate			6.15023				6.22152				6.19817

 

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.

 

 

Foreign currency translation adjustments have been reported as comprehensive income in the consolidated financial statements and totaled $1,715 and $61,082 for the three months ended September 30, 2014 and 2013, respectively, and ($60,720) and $274,533 for the nine months ended September 30, 2014 and 2013, respectively.

 

Other Comprehensive Income

 

Other comprehensive income is defined as the change in equity during the period 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.

 

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. 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 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. 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 financial instruments with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at any point during the period of the financial statements presented. 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.

 

 

Accounts Receivable

 

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. On a periodic basis, the Company reviews the composition of the accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these allowances. Accounts are written off after exhaustive efforts at collection. As of September 30, 2014 and December 31, 2013, based on a review of its outstanding balances, the Company allowance for doubtful accounts had a zero balance, respectively.

 

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 a valuation allowance is required. As of September 30, 2014 and December 31, 2013, the Company recorded $148,797 and $149,819 for inventory valuation allowance, respectively.

 

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 $138,574 and $180,968 as of September 30, 2014 and December 31, 2013, respectively.

 

Long-term Investments

 

Investments in which the Company has a 20% to 50% interest are accounted for by the equity method. Under the equity method the carrying value of the investment is adjusted for the Company’s proportionate share of the investee’s income or loss.

 

Investments in which the Company has less than a 20% interest are accounted for by the cost method. Under the cost method, investments are carried at cost and income is recorded when dividends are received from those investments.

 

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

 

 

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.

 

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. 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 nine months ended September 30, 2014 and 2013.

 

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.

 

With respect to sales of product to both franchisee and non-franchisee customers, the Company prepares product shipments upon the receipt of a customer’s purchase order. Sales prices are based on fixed price lists that are different depending on whether the price list is for a franchisee customer or for non-franchisee customers. The Company recognizes revenue when the product is shipped. The Company does not sell product to any customers with a right of return as defined in ASC 605-15-25-4. Sales are presented net of value added tax (VAT).

 

For Tourmaline Wellness House sales, the Company recognizes revenue under the completed contract method. Customers contact the Company with requests to construct a Wellness House. The Company and the customer enter into a contract, at which time the customer pays a deposit of at least one-half of the sales price. A contract is considered completed when all significant costs have been incurred and the project has been accepted by the customer. The contracts have a place for the customer to sign indicating their acceptance of the completed Wellness House. At this time the customer will also pay any remaining balance on the contract. The Company recognizes the full contract revenue at this point. Contract costs consist primarily of materials and labor costs. The construction period of a Wellness House generally does not exceed five days.

 

Shipping Costs

 

Shipping costs are included in selling expenses and totaled $7,516 and $6,152 for the three months ended September 30, 2014 and 2013, respectively, and $16,100 and $13,867 for the nine months ended September 30, 2014 and 2013, 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”, 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.

 

Basic and Diluted Earnings per Share

 

The Company reports earnings per share in accordance with FASB ASC 260 “Earnings per share”. The Company’s basic earnings per share are computed using the weighted average number of shares outstanding for the periods presented. Diluted earnings per share are computed based on the assumption that any dilutive options or warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, the Company’s outstanding stock warrants are assumed to be exercised, and funds thus obtained were assumed to be used to purchase common stock at the average market price during the period. There were no dilutive instruments outstanding during the nine months periods ended September 30, 2014 and 2013.

 

Segment Information

 

The Company follows FASB ASC 280-Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance.

 

For the nine months ended September 30, 2014 and the year ended December 31, 2013, management has determined that the Company is operating in three reportable business segments, (1) Healthcare Knit Goods 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.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-9, “Revenue from Contracts with Customers” (“ASU 2014-9”). ASU 2014-9 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

 

Step 1: Identify the contract(s) with a customer.

 

Step 2: Identify the performance obligations in the contract.

 

Step 3: Determine the transaction price.

 

Step 4: Allocate the transaction price to the performance obligations in the contract.

 

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

The updated guidance related to revenue recognition which affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for us starting on January 1, 2017. We are currently evaluating the impact this guidance will have on our combined financial position, results of operations and cash flows.

 

 

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard that raises the threshold for disposals to qualify as discontinued operations and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The standard revised the definition of a discontinued operation to cover only asset disposals that are considered to be a strategic shift with a major impact on an entity's operations and finances, such as the disposal of a major geographic area or a significant line of business. Application of the standard, which is to be applied prospectively, is required for fiscal years beginning on or after December 15, 2014, and for interim periods within that year. The Company currently plans to adopt the standard in January 2015.

 

NOTE 3 – ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following:

 

		September 30,				December 31,
		2014				2013
Accounts receivable		$	-			$	1,486
Less: allowance for bad debt			-				-
		$	-			$	1,486

 

As of the periods presented, the Company has no allowance for bad debts, because the management, based on their analysis, considers all the accounts receivable to be collectible.

 

NOTE 4 – INVENTORIES

 

Inventories consisted of the following:

 

		September 30,				December 31,
		2014				2013
Raw materials		$	221,134			$	326,245
Packages			5,488				5,878
Finished goods			856,253				974,382
Low value consumables			40,805				40,954
Total			1,123,680				1,347,459
Less: impairment loss			(148,797	)			(149,819	)
Inventory, net		$	974,883			$	1,197,640

 

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 of.

 

As of September 30, 2014 and December 31, 2013, the Company recognized $148,797 and $149,819, respectively, as a reserve for impairment loss from inventory.

 

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

		September 30,				December 31,
		2014				2013
Building		$	6,430,586			$	6,442,048
Operating Equipment			387,807				390,119
Office furniture and equipment			343,435				343,809
Vehicles			1,096,142				1,113,856
Total			8,257,970				8,289,832
Less: accumulated depreciation			(2,386,328	)			(2,031,496	)
Property, plant and equipment, net		$	5,871,642			$	6,258,336

 

Depreciation expense for the three months ended September 30, 2014 and 2013 amounted to $119,377 and $134,658, respectively, and for the nine months ended September 30, 2014 and 2013 amounted to $354,832 and $412,816, respectively.

 

NOTE 6 – INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

		September 30,				December 31,
		2014				2013
Land use rights		$	670,575			$	675,182
Other intangible assets			85,797				86,386
Total			756,372				761,568
Less: accumulated amortization			(125,979	)			(108,247	)
Intangible assets, net		$	630,393			$	653,321

 

Amortization expense of intangible assets for the three months ended September 30, 2014 and 2013 was $6,136 and $6,675, respectively, and for the nine months ended September 30, 2014 and 2013 amounted to $17,732 and $20,492, respectively.

 

The estimated amortization expense for the next five years is as follows:

 

Estimated amortization expense for
the year ending December 31,				Amount
	2014			$	24,581
	2015			$	24,581
	2016			$	24,581
	2017			$	24,581
	2018			$	24,581
	Thereafter			$	530,416

 

 

NOTE 7 – RELATED PARTY TRANSACTIONS

 

Payables due to related parties consist of the following:

 

		September 30,				December 31,
		2014				2013
Shenyang Joway Industrial Development Co., Ltd.		$	7,268			$	30,915
Jinghe Zhang			36,978				40,253
Total		$	44,246			$	71,168

 

Transactions with Shenyang Joway

 

Shenyang Joway Industrial Development Co., Ltd. (“Shenyang Joway”) was formed in 2005 in Shenyang, China by Mr. Jinghe Zhang and three other individuals. Mr. Zhang holds more than 50% of the equity in Shenyang Joway. Shenyang Joway was in the business of marketing and distributing clothing and related products to other companies. In 2009, Mr. Zhang decided to shut down the operations of Shenyang Joway in order to focus his attention on Joway Shengshi’s business. Shenyang Joway has ceased operations, although it still exists as a legal entity, and Joway Shengshi was able to find new suppliers with no material adverse impact to the Company.

 

●

On December 1, 2009, the Company, through its subsidiary Joway Shengshi, entered into a royalty-free license agreement with Shenyang Joway. Pursuant to the license agreement, the Company is authorized to use the trademark “Xi” for a term of nine years.

 

●

On May 7, 2007, the Company’s subsidiary Joway Shengshi entered into an agreement with Shenyang Joway pursuant to which Joway Shengshi and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. On May 10, 2007, the Company’s subsidiary Joway Technology and Shenyang Joway entered into an agreement pursuant to which Joway Technology and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. Through December 31, 2008, Joway Technology advanced $58,568 to Shenyang Joway, which was paid off by Shenyang Joway to Joway Technology in 2009. Through December 31, 2010, Shenyang Joway advanced an aggregate of $791,701 to Joway Shengshi and Joway Technology of which $784,433 has been repaid. For the nine months ended September 30, 2014 and 2013, the Company repaid $23,647 and $22,930 of these advances, respectively. As of September 30, 2014, the total unpaid principal balance due Shenyang Joway for advances was $7,268. Shenyang Joway ceased operations at the end of 2009.

 

Transactions with Jinghe Zhang

 

●

On December 1, 2009, the Company, through its subsidiary Joway Shengshi, entered into a royalty-free license agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the license agreement, we are authorized to use 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 Shengshi entered into a cash advance agreement with Jinghe Zhang, the Company’s President, Chief Executive Officer and director. Pursuant to the agreement, Jinghe Zhang agreed to advance operating capital to Joway Shengshi. The advances are interest free, unsecured, and have no specified repayment terms. The agreement is valid throughout Joway Shengshi’s term of operation. During the period beginning May 17, 2007 (inception of Joway Shengshi) through December 31, 2009, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang of which $4,600,419 has been repaid. For the nine months ended September 30, 2014 and 2013, the Company repaid $3,275 and $1,540 of these advances, respectively. As of September 30, 2014, the total unpaid principal balance due Jinghe Zhang for advances was $36,978.

 

The amounts owed to related parties are non-interest bearing and have no specified repayment terms.

 

 

NOTE 8 – INCOME TAXES

 

The Company operations in the People’s Republic of China are subject to the Income Tax Law of the People’s Republic of China. Pursuant to the PRC Income Tax Laws, the Company is subject to the Enterprise Income Tax (“EIT”) which is generally a statutory rate of 25% beginning January 2008, on income as reported in its statutory financial statements after appropriate tax adjustments.

 

The table below summarizes the differences between the PRC statutory federal rate and the Company’s effective tax rate:

 

		For the nine months ended September 30,
		2014				2013
Tax computed at China statutory rates			25	%			25	%
Tax adjustment from China tax authority for 2012 income tax (1)			0	%			(6	%)
Effect of losses			(25	%)			(25	%)
Effective rate			0	%			(6	%)

 

(1)

The Company’s 2012 Corporate Income Tax Filing in China was reviewed by the PRC tax authority and reduced the Company’s income tax deduction for the 2012 taxable year. As a result, the Company paid additional income tax of $70,224.

 

NOTE 9 – STATUTORY RESERVES

 

Pursuant to the laws and regulations of the PRC, annual income of the Company’s subsidiaries is 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 reserves 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. As of September 30, 2014, the Company had allocated $354,052 to statutory reserves.

 

 

NOTE 10 – SEGMENTS

 

In 2014 and 2013, the Company operated in three reportable business segments: (1) Healthcare Knit Goods 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 three months ended September 30, 2014

 

		Sales				COGS				Gross profit				Loss from operations				Depreciation and amortization				Assets
Healthcare Knit Goods Series		$	112,191			$	55,186			$	57,005			$	(30,633	)		$	28,694			$	375,396
Daily Healthcare and Personal Care Series			118,184				50,059				68,125				(26,146	)			30,227				264,027
Wellness House and Activated Water Machine Series			260,374				132,884				127,490				(151,635	)			66,592				312,643
Segment Totals		$	490,749			$	238,129			$	252,620				(208,414	)		$	125,513				952,066
Other Income, net															22,663
Income Tax															(2	)
Unallocated Assets																							7,295,935
Net Loss														$	(185,749	)
Total Assets																						$	8,248,001

 

For the three months ended September 30, 2013

 

		Sales				COGS				Gross profit				Loss from operations				Depreciation and amortization				Assets
Healthcare Knit Goods Series		$	100,023			$	25,957			$	74,066			$	(77,078	)		$	36,260			$	564,910
Daily Healthcare and Personal Care Series			123,129				40,211				82,918				(71,808	)			44,637				334,836
Wellness House and Activated Water Machine Series			166,711				79,946				86,765				(140,061	)			60,436				613,187
Segment Totals		$	389,863			$	146,114			$	243,749				(288,947	)		$	141,333				1,512,933
Other Income, net															93
Income Tax															(2,011	)
Unallocated Assets																							8,298,774
Net Loss														$	(286,843	)
Total Assets																						$	9,811,707

 

 

For the nine months ended September 30, 2014

 

		Sales				COGS				Gross profit				Loss from operations				Depreciation and amortization				Assets
Healthcare Knit Goods Series		$	258,999			$	125,659			$	133,340			$	(254,718	)		$	97,354			$	375,396
Daily Healthcare and Personal Care Series			269,277				120,329				148,948				(254,510	)			101,217				264,027
Wellness House and Activated Water Machine Series			462,890				213,808				249,082				(444,468	)			173,993				312,643
Segment Totals		$	991,166			$	459,796			$	531,370				(953,696	)		$	372,564				952,066
Other Income, net															21,266
Income Tax															1,697
Unallocated Assets																							7,295,935
Net Loss														$	(934,127	)
Total Assets																						$	8,248,001

 

For the nine months ended September 30, 2013

 

		Sales				COGS				Gross profit				Loss from operations				Depreciation and amortization				Assets
Healthcare Knit Goods Series		$	199,915			$	54,804			$	145,111			$	(275,211	)		$	99,060			$	564,910
Daily Healthcare and Personal Care Series			298,992				98,208				200,784				(427,847	)			148,153				334,836
Wellness House and Activated Water Machine Series			375,562				174,118				201,444				(588,174	)			186,095				613,187
Segment Totals		$	874,469			$	327,130			$	547,339				(1,291,232	)		$	433,308				1,512,933
Other Expense, net															(138,194	)
Income Tax															78,237
Unallocated Assets																							8,298,774
Net Loss														$	(1,507,663	)
Total Assets																						$	9,811,707

 

 

NOTE 11 - 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 at a predetermined retail price. In exchange the Company provides them with geographic exclusivity, discounted products, training and support. The agreements also require franchisees to adhere to certain standards of product merchandising, promotion and presentment. The agreements also prohibit franchisees from selling competitor’s products. The agreements do not require any initial franchise fees from the franchisees, nor do they require the franchisees to pay continuing royalties. The agreements do not require the franchisees to purchase any minimum levels of product, but do require that they make at least one purchase during each year. The Company does not act to manage the franchisees’ levels of product. Franchisees hold periodic conferences, assisted by the Company’s marketing department, to promote product awareness and the introduction of new products. The franchising agreements are generally for terms of three years and are renewable at the mutual agreement of both parties. The franchising agreements are cancelable at the Company’s discretion if franchisees violate the terms of the agreements.

  

The following is a breakdown of revenue between franchise and non-franchise customers:

 

		For the three months ended September 30,								For the nine months ended September 30,
		2014				2013				2014				2013
Sales to franchise customers		$	338,884			$	374,234			$	731,075			$	820,998
Sales to non-franchise customers			151,865				15,629				260,091				53,471
Total sales		$	490,749			$	389,863			$	991,166			$	874,469

 

NOTE 12 - INVESTMENT

 

Long-Term Investment:

 

On August 28, 2011, Joway Shengshi and Tianjin Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Tianjin Hezhi”) entered a cooperative contract, pursuant to which Joway Shengshi and Tianjin Hezhi established a new company named Tianjin Joway Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Joway Hezhi”) with registered capital of RMB 20,000,000. Joway Hezhi was incorporated on October 21, 2011 with initial registered capital of RMB 5,000,000. It will engage in the production and distribution of Chinese-Western preparations, health food, healthcare products, medical instruments and plain food. On October 11, 2011, Joway Shengshi contributed RMB 1,500,000 and owned 30% of Joway Hezhi. Since Joway Hezhi failed to finish its early preparatory period for three years, the Company withdrew its investment from Joway Hezhi in the amount of RMB 1,500,000 on June 26, 2014. No gain or loss was recognized from this withdrawal. As of September 30, 2014, the Company owned no shares of Joway Hezhi.

  

Short-Term Investment:

 

On December 31, 2013, the Company had a short-term wealth-management certificate with Industrial and Commercial Bank of China. This is classified as a level 2 investment within the fair value hierarchy. During the first quarter of 2013, this short-term investment of $1,266,604 were redeemed in full and returned to the Company. On June 18, 2014, the Company invested the same wealth-management certificate in the amount of RMB 500,000 or $81,199, which was fully redeemed on September 10, 2014.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2014.

 

FORWARD-LOOKING STATEMENTS:

 

Certain statements made in this report may constitute “forward-looking statements on our current expectations and projections about future events.” 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

 

General

 

We develop, manufacture, market, distribute, and sell products, including knit goods, daily healthcare and personal care products, and wellness house and activated water machine products, that are coated, embedded or filled with tourmaline. Most of our products, such as clothing, bedding, and mattresses are purchased as finished products which we then coat and/or infuse with liquid or granular tourmaline using one or more of our manufacturing techniques. We conduct all of our operations in Tianjin City, China and distribute most of our products to more than 100 franchisees in China. Our franchisees, in turn, sell the products to their customers. All of our revenues to date have been generated by sales to customers located in the PRC.

 

Beginning in 2009, we began to develop a franchise network to distribute our healthcare knit goods, daily healthcare products and personal care products. Through these franchisees, we were able to significantly increase sales of our healthcare knit goods segment and daily healthcare and personal care segment. In 2010, we began distributing our wellness house and activated water machine products through our franchise network.

 

We are a holding company with no material operations of our own. All of our operations are conducted through Joway Shengshi and its three subsidiaries, Joway Technology, Joway Decoration and Shengtang Trading. Joway Shengshi engages in the manufacture and distribution of tourmaline health-related products such as knit goods, and daily healthcare and personal care products. Joway Technology and Joway Decoration engage in the manufacture and distribution of activated water machines and wellness houses. We utilize our Shengtang Trading subsidiary to purchase raw materials, which are then sold to Joway Shengshi and Joway Decoration. 

 

As a holding company, our ability to pay dividends and other cash distributions to our shareholders depends in part upon dividends and other distributions paid to us by our PRC subsidiaries. The amount of dividends paid by our PRC subsidiaries to us primarily depends on the service fees paid to our PRC subsidiaries from Joway Shengshi and its subsidiaries, and, to a lesser degree, our PRC subsidiaries’ retained earnings. Conducting our operations through contractual arrangements with Joway Shengshi and its subsidiaries has a risk that we may lose the power to direct the activities that most significantly affect the economic performance of Joway Shengshi and its subsidiaries, which may result in our being unable to consolidate their financial results with our results and may impair our access to their cash flow from operations and thereby reduce our liquidity.

 

Description of Selected Income Statement Items

 

Revenues. We generate revenue from sales of our Healthcare Knit goods Series, Daily Healthcare and Personal Care Series and Wellness House and Activated Water Machine Series. 

 

Cost of goods sold.  Cost of goods sold consists of costs directly attributable to production, including the cost of raw materials, salaries for staff engaged in production activity, electricity, depreciation, packing materials, and related expenses.

 

Operating expenses.  Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Sales and marketing expenses consist primarily of salaries and traveling expenses of our marketing department employees, transportation expenses, and advertising expenses. General and administrative expenses consist primarily of salaries of our administrative department employees, payroll taxes and benefits, general office expenses and depreciation.

 

 

Other (expense) income. Our other (expense) income consists primarily of interest income, investment income and bank service fee.

 

Income taxes. According to the revised Enterprise Income Tax Law effective as of January 1, 2008, the income tax rate of our PRC subsidiaries is generally 25%. Joway Health Industries Group Inc. was established under the laws of the State of Nevada and is subject to U.S. federal income tax and Nevada annual reporting requirements.

 

Results of Operations

 

The following table sets forth certain information regarding our results of operations.

 

CONSOLIDATED STATEMENTS OF OPERATION
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
		For the three months ended September 30,								For the nine months ended September 30,
		2014				2013				2014				2013
REVENUES		$	490,749			$	389,863			$	991,166			$	874,469
COST OF REVENUES			238,129				146,114				459,796				327,130
GROSS PROFIT			252,620				243,749				531,370				547,339
OPERATING EXPENSES			461,034				532,696				1,485,066				1,838,571
LOSS FROM OPERATIONS			(208,414	)			(288,947	)			(953,696	)			(1,291,232	)
OTHER (EXPENSE) INCOME, NET			22,663				93				21,266				(138,194	)
LOSS BEFORE INCOME TAXES			(185,751	)			(288,854	)			(932,430	)			(1,429,426	)
INCOME TAXES (BENEFITS)			(2	)			(2,011	)			1,697				78,237
NET LOSS		$	(185,749	)		$	(286,843	)		$	(934,127	)		$	(1,507,663	)

 

Business Segments

 

In 2014 and 2013, we operated in three reportable business segments: (1) Healthcare Knit Goods, (2) Daily Healthcare and Personal Care Products and (3) Wellness House and Activated Water Machine Products. The following table sets forth the contributions of each reportable business segment in dollars and as a percent of revenue:

 

For the three months ended September 30, 2014

 

		Healthcare Knitgoods Series				% of Total				Daily Healthcare and Personal Care Series				% of Total				Wellness House and Activated Water Machine Series				% of Total				Total
REVENUES		$	112,191				22.9	%		$	118,184				24.1	%		$	260,374				53.1	%		$	490,749
COST OF REVENUES			55,186				23.2	%			50,059				21.0	%			132,884				55.8	%			238,129
GROSS PROFIT			57,005				22.6	%			68,125				27.0	%			127,490				50.5	%			252,620
GROSS MARGIN			50.8	%							57.6	%							49.0	%							51.5	%
OPERATING EXPENSES			87,638				19.0	%			94,271				20.4	%			279,125				60.5	%			461,034
LOSS FROM OPERATIONS		$	(30,633	)			14.7	%		$	(26,146	)			12.5	%		$	(151,635	)			72.8	%		$	(208,414	)

 

 

For the three months ended September 30, 2013

 

		Healthcare Knitgoods Series				% of Total				Daily Healthcare and Personal Care Series				% of Total				Wellness House and Activated Water Machine Series				% of Total				Total
REVENUES		$	100,023				25.7	%		$	123,129				31.6	%		$	166,711				42.8	%		$	389,863
COST OF REVENUES			25,957				17.8	%			40,211				27.5	%			79,946				54.7	%			146,114
GROSS PROFIT			74,066				30.4	%			82,918				34.0	%			86,765				35.6	%			243,749
GROSS MARGIN			74.0	%							67.3	%							52.0	%							62.5	%
OPERATING EXPENSES			151,144				28.4	%			154,726				29.0	%			226,826				42.6	%			532,696
LOSS FROM OPERATIONS		$	(77,078	)			26.7	%		$	(71,808	)			24.9	%		$	(140,061	)			48.5	%		$	(288,947	)

 

For the nine months ended September 30, 2014

 

		Healthcare Knitgoods Series				% of Total				Daily Healthcare and Personal Care Series				% of Total				Wellness House and Activated Water Machine Series				% of Total				Total
REVENUES		$	258,999				26.1	%		$	269,277				27.2	%		$	462,890				46.7	%		$	991,166
COST OF REVENUES			125,659				27.3	%			120,329				26.2	%			213,808				46.5	%			459,796
GROSS PROFIT			133,340				25.1	%			148,948				28.0	%			249,082				46.9	%			531,370
GROSS MARGIN			51.5	%							55.3	%							53.8	%							53.6	%
OPERATING EXPENSES			388,058				26.1	%			403,458				27.2	%			693,550				46.7	%			1,485,066
LOSS FROM OPERATIONS		$	(254,718	)			26.7	%		$	(254,510	)			26.7	%		$	(444,468	)			46.6	%		$	(953,696	)

 

For the nine months ended September 30, 2013

 

		Healthcare Knitgoods Series				% of Total				Daily Healthcare and Personal Care Series				% of Total				Wellness House and Activated Water Machine Series				% of Total				Total
REVENUES		$	199,915				22.9	%		$	298,992				34.2	%		$	375,562				42.9	%		$	874,469
COST OF REVENUES			54,804				16.8	%			98,208				30.0	%			174,118				53.2	%			327,130
GROSS PROFIT			145,111				26.5	%			200,784				36.7	%			201,444				36.8	%			547,339
GROSS MARGIN			72.6	%							67.2	%							53.6	%							62.6	%
OPERATING EXPENSES			420,322				22.9	%			628,631				34.2	%			789,618				42.9	%			1,838,571
LOSS FROM OPERATIONS		$	(275,211	)			21.3	%		$	(427,847	)			33.1	%		$	(588,174	)			45.6	%		$	(1,291,232	)

 

For The Three Months Ended September 30, 2014 Compared to September 30, 2013

 

Revenue. For the three months ended September 30, 2014, revenue was $490,749 compared to $389,863 for the three months ended September 30, 2013, an increase of $100,886 or 25.9%. This increase was mainly due to the increase in revenue from wellness houses and activated water machines segment.

 

Revenue from healthcare knit goods segment increased by $12,168 or 12.2% to $112,191 for the three months ended September 30, 2014 from $100,023 for the three months ended September 30, 2013. This increase was mainly due to increase in sales of our mattress products. In 2014, we offered more discount to our franchisees in our mattress products to promote their sales. 

 

 

Revenue from daily healthcare and personal care products decreased by $4,945 or 4% to $118,184 for the three months ended September 30, 2014 from $123,129 for the three months ended September 30, 2013. This was primarily due to the decrease in sales of our cosmetic products.

 

Revenue from wellness houses and activated water machines increased by $93,663 or 56.2% to $260,374 for the three months ended September 30, 2014 from $166,711 for the three months ended September 30, 2013. This increase was mainly due to the increase in construction of wellness house. Starting from the second quarter of 2014, we strengthen our promotion on wellness house and cause the increase in sale.

 

Cost of Goods Sold. For the three months ended September 30, 2014, cost of goods sold was $238,129 compared to $146,114 for the three months ended September 30, 2013, an increase of $92,015 or 63%. This increase was mainly due to the increase in the cost of wellness houses and activated water machines segment and healthcare knit goods segment.

 

Cost of goods sold for healthcare knit goods segment increased to $55,186 for the three months ended September 30, 2014 from $25,957 for the three months ended September 30, 2013, an increase of $29,229 or 112.6%. This increase was due to the increase in sales and much more discount to our franchisees for our mattress products.

 

Cost of goods sold for the daily healthcare and personal care segment increased to $50,059 for the three months ended September 30, 2014 from $40,211 for the three months ended September 30, 2013, an increase of $9,848 or 24.5%. This increase was due to the increase in the cost of tourmaline waist protector as a result of the increase in sales.

 

Cost of goods sold for our wellness house and activated water machine segment increased to $132,884 for the three months ended September 30, 2014 from $79,946 for the three months ended September 30, 2013, an increase of $52,938 or 66.2%. This increase was mainly due to the increase in the cost of foot sauna bucket and activated water machine.

 

Gross profit. Our gross profit increased by $8,871 or 3.6% to $252,620 for the three months ended September 30, 2014, compared to $243,749 for the three months ended September 30, 2013. This increase was mainly due to the increase in gross profit for wellness houses and activated water machines segment. Our gross margin decreased from 62.5% for the three months ended September 30, 2013 to 51.5% for the three months ended September 30, 2014. This decrease was mainly due to the healthcare knit goods segment.

 

Gross profit for the healthcare knit goods segment decreased by $17,061 or 23% to $57,005 for the three months ended September 30, 2014 compared to $74,066 for the three months ended September 30, 2013. This decrease was mainly due to decrease in gross profit from tourmaline four-piece bed linens. The gross margins of healthcare knit goods segment decreased from 74% for the three months ended September 30, 2013 to 50.8% for the three months ended September 30, 2014. In 2014, we offered much more discount to our franchisees for our mattress product than in 2013, as a result, the gross margin decreased.

 

Gross profit of daily healthcare and personal care segment decreased by $14,793 or 17.8% to $68,125 for the three months ended September 30, 2014, compared to $82,918 for the three months ended September 30, 2013. This decrease was mainly due to the decrease in sales. The gross margin of daily healthcare and personal care segment decreased from 67.3% for the three months ended September 30, 2013 to 57.6% for the three months ended September 30, 2014. This decrease was mainly due to more discounts for our franchisees in 2014.

 

Gross profit of the wellness house and activated water machine segments increased by $40,725 or 46.9% to $127,490 for the three months ended September 30, 2014, compared to $86,765 for the three months ended September 30, 2013. This increase was mainly due to the increase in gross profit from construction of wellness house. The gross margin of our wellness house and activated water machine segments decreased from 52% for the three months ended September 30, 2013 to 49% for the three months ended September 30, 2014. This decrease was mainly due to the fact that we gave our franchisees more discounts on foot sauna bucket and activated water machine in the third quarter of 2014.

 

 

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $71,662 or 13.5%, from $532,696 for the three months ended September 30, 2013 to $461,034 for the three months ended September 30, 2014. This decrease was mainly due to the decrease of salary and equipment maintenance expenses. Operating expenses for healthcare knit goods segment decreased by $63,506 or 42% to $87,638 for the three months ended September 30, 2014 from $151,144 for the three months ended September 30, 2013. Operating expenses for daily healthcare and personal care segment decreased by $60,455 or 39.1% to $94,271 for the three months ended September 30, 2014 from $154,726 for the three months ended September 30, 2013. Operating expenses for our wellness house and activated water machine segment increased by $52,299 or 23.1% to $279,125 for the three months ended September 30, 2014 from $226,826 for the three months ended September 30, 2013.

 

Loss from operations. As a result of the foregoing, our loss from operations was $208,414 for the three months ended September 30, 2014, compared to $288,947 for the three months ended September 30, 2013, a decrease of $80,533. This decrease was mainly due to the decrease in operating expenses.

 

Income taxes. Our income tax expenses were negative $2 for the three months ended September 30, 2014, compared to negative $2,011 for the three months ended September 30, 2013. In the third quarter of 2013, we reversed the excess income tax accrued in 2012 amounted to $1,567. In addition, the negative income tax for the third quarter of 2014 and 2013 were also due to the change of currency translation rate.

 

Net loss. For the three months ended September 30, 2014, our net loss was $185,749 compared to $286,843 for the three months ended September 30, 2013. This decrease was mainly due to decrease in operating expenses and increase in other income.

 

For the Nine Months Ended September 30, 2014 Compared to September 30, 2013

 

Revenue. For the nine months ended September 30, 2014, revenue was $991,166 compared to $874,469 for the nine months ended September 30, 2013, an increase of $116,697 or 13.3%. This increase was mainly due to the increase in revenue from healthcare knit goods segment and wellness house and activated water machine segment.

 

Revenue from healthcare knit goods segment increased by $59,084, or 29.6% to $258,999 for the nine months ended September 30, 2014 from $199,915 for the nine months ended September 30, 2013. This increase was mainly due to the increase in sales of our mattress products.

 

Revenue from daily healthcare and personal care products decreased by $29,715 or 9.9% to $269,277 for the nine months ended September 30, 2014 from $298,992 for the nine months ended September 30, 2013. This was primarily due to the decrease in sales of our Tourmaline Soap.

 

Revenue from wellness houses and activated water machines increased by $87,328 or 23.3% to $462,890 for the nine months ended September 30, 2014 from $375,562 for the nine months ended September 30, 2013. This increase was mainly due to the increase in construction of wellness house.

 

Cost of Goods Sold. For the nine months ended September 30, 2014, cost of goods sold was $459,796 compared to $327,130 for the nine months ended September 30, 2013, an increase of $132,666, or 40.6%. This increase was mainly due to the increase in sales.

 

Cost of goods sold for healthcare knit goods segment increased to $125,659 for the nine months ended September 30, 2014 from $54,804 for the nine months ended September 30, 2013, an increase of $70,855 or 129.3%. This increase was mainly due to the increase in the cost of our mattress products.

 

Cost of goods sold for the daily healthcare and personal care segment increased to $120,329 for the nine months ended September 30, 2014 from $98,208 for the nine months ended September 30, 2013, an increase of $22,121 or 22.5%. This increase was mainly due to the increase in the cost of our Tourmaline Waist Protector and our diet health products.

 

Cost of goods sold for our wellness house and activated water machine segment increased to $213,808 for the nine months ended September 30, 2014 from $174,118 for the nine months ended September 30, 2013, an increase of $39,690 or 22.8%. This increase was mainly due to of the increase in the cost of foot sauna bucket and activated water machine.

 

 

Gross profit. Our gross profit decreased by $15,969 or 2.9% to $531,370 for the nine months ended September 30, 2014, compared to $547,339 for the nine months ended September 30, 2013. This decrease was primarily due to the decrease in gross profit for daily healthcare and personal care segment. Our gross margin decreased from 62.6% for the nine months ended September 30, 2013 to 53.6% for the nine months ended September 30, 2014. This decrease was mainly due to healthcare knit goods segment and daily healthcare and personal care segment.

 

Gross profit for the healthcare knit goods segment decreased by $11,771 or 8.1% to $133,340 for the nine months ended September 30, 2014 compared to $145,111 for the nine months ended September 30, 2013. This decrease was mainly due to the decrease in gross profit for our mattress products. The gross margins of healthcare knit goods segment decreased from 72.6% for the nine months ended September 30, 2013 to 51.5% for the nine months ended September 30, 2014. This decrease was mainly due to the more discount to franchisees for our mattress product in 2014.

 

Gross profit of daily healthcare and personal care segment decreased by $51,836 or 25.8% to $148,948 for the nine months ended September 30, 2014, compared to $200,784 for the nine months ended September 30, 2013. This decrease was primarily due to the decrease in gross profit of Tourmaline Soap, as a result of the decrease in sale. Our gross margin of daily healthcare and personal care segment decreased from 67.2% for the nine months ended September 30, 2013 to 55.3% for the nine months ended September 30, 2014. This decrease was mainly due to the decrease in sales of our Tourmaline Soap, which have higher gross margins.

 

Gross profit of the wellness house and activated water machine segments increased by $47,638 or 23.6% to $249,082 for the nine months ended September 30, 2014, compared to $201,444 for the nine months ended September 30, 2013. This increase was mainly due to the increase in gross profit from construction of wellness house. The gross margin of our wellness house and activated water machine segments slightly increased from 53.6% for the nine months ended September 30, 2013 to 53.8% for the nine months ended September 30, 2014.

 

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $353,505 or 19.2%, from $1,838,571 for the nine months ended September 30, 2013 to $1,485,066 for the nine months ended September 30, 2014. This decrease was mainly due to the decrease of salary and conference expenses. Operating expenses for healthcare knit goods segment decreased by $32,264 or 7.7% to $388,058 for the nine months ended September 30, 2014 from $420,322 for the nine months ended September 30, 2013. Operating expenses for daily healthcare and personal care segment decreased by $225,173 or 35.8% to $403,458 for the nine months ended September 30, 2014 from $628,631 for the nine months ended September 30, 2013. Operating expenses for our wellness house and activated water machine segment decreased by $96,068 or 12.2% to $693,550 for the nine months ended September 30, 2014 from $789,618 for the nine months ended September 30, 2013.

 

Loss from operations. As a result of the foregoing, our loss from operations was $932,430 for the nine months ended September 30, 2014, compared to $1,429,426 for the nine months ended September 30, 2013, a decrease of $496,996. This decrease was mainly due to the decrease in operating expenses.

 

Income taxes. Our income tax expenses were $1,697 for the nine months ended September 30, 2014, compared to $78,237 for the nine months ended September 30, 2013. For the nine months ended September 30, 2013, we paid additional income tax for the year of 2012 requested by PRC tax authority.

 

Net loss. Our net loss was $934,127 for the nine months ended September 30, 2014, compared to $1,507,663 for the nine months ended September 30, 2013. This decrease was mainly due to the decrease in operating expenses and increase in other income.

 

Franchising

 

We enter into franchise agreements to develop retail outlets for our products. These agreements provide that franchisees will sell our products exclusively. In exchange, we provide them with geographic exclusivity, discounted products, training, and support. The agreements also require franchisees to adhere to certain standards of product merchandising, promotion, and presentment. The agreements do not require the franchisees to purchase any minimum levels of product, but do require that they make at least one purchase during each year. The agreements are generally for terms of three years and are renewable at the mutual agreement of both parties. The Agreements are cancelable at our discretion if franchisees violate the terms of the agreements.

 

 

The following is a breakdown of revenue between franchise and non-franchise customers:

 

		For the three months ended September 30,								For the nine months ended September 30,
		2014				2013				2014				2013
Sales to franchise customers		$	338,884			$	374,234			$	731,075			$	820,998
Sales to non-franchise customers			151,865				15,629				260,091				53,471
Total sales		$	490,749			$	389,863			$	991,166			$	874,469

 

Liquidity and Capital Resources

 

Our cash at the beginning of the nine months ended September 30, 2014 was $477,642 and increased to $512,336 by the end of September 30, 2014, an increase of $34,694. This increase was mainly due to our withdrawal of the investment in Joway Hezhi. On September 30, 2014, we had net working capital of $1,447,284, a decrease of $339,886 from $1,787,170 on December 31, 2013.

 

Our cash flow information summary is as follows:

 

		For the nine months ended September 30,
		2014				2013
Net cash provided by (used in):
Operating activities		$	(126,201	)		$	(1,379,997	)
Investing activities		$	243,365			$	990,244
Financing activities		$	(26,922	)		$	(24,470	)

 

Net Cash Used In Operating Activities

 

Net cash used in operating activities was $126,201 for the nine months ended September 30, 2014 compared to $1,379,997 for the nine months ended September 30, 2013. This was primarily due to less loss of $573,536, less expenditures of $248,439 in tax payable and less expenditures of $242,508 in inventory.

 

For the nine months ended September 30, 2014, cash was mainly used to cover the loss of $934,127, which was primarily offset by an add-back of $354,832 of depreciation for non-cash expense, the decrease in inventory purchase of $223,779 and the increase in advances from customer of $141,144.

 

For the nine months ended September 30, 2013, cash was mainly used to cover the loss of $1,507,663 and pay taxes of $217,065, which were primarily offset by an add-back of $412,816 of depreciation for non-cash expense.

 

Net Cash Provided by Investing Activities

 

Net cash provided by investing activities was $243,365 for the nine months ended September 30, 2014, compared to $990,244 for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, we withdrew our investment from Joway Hezhi in the amount of RMB 1,500,000 or $245,339 on June 26, 2014. For the nine months ended September 30, 2013, we took back $1,022,757 of our short-term wealth-management investment, a kind of Marketable Security in Industrial and Commercial Bank of China in the total amount of $1,266,604, which was invested in 2012.

 

 

Net Cash Used In Financing Activities

  

Net cash used in financing activities was $26,922 for the nine months ended September 30, 2014, compared to $24,470 for the nine months ended September 30, 2013. The cash was used to repay Jinghe Zhang and Shenyang Joway for advances made in prior periods.

  

On May 10, 2007, our operating subsidiaries, Joway Shengshi entered into a cash advance agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the agreements, Jinghe Zhang agreed to advance operating capital to Joway Shengshi. These advances are interest free, unsecured and are repayable upon demand. During the period beginning May 17, 2007 (inception of Joway Shengshi) through December 31, 2010, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang. We repaid $3,275 and $1,540 of these advances for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, the total unpaid principal balance due Jinghe Zhang for advances made to Joway Shengshi was $36,978.

  

On May 7, 2007, our operating subsidiary, Joway Shengshi entered into an agreement with Shenyang Joway pursuant to which Joway Shengshi and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. On May 10, 2007, our subsidiary, Joway Technology and Shenyang Joway entered into an agreement pursuant to which Joway Technology and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. Pursuant to these agreements, Shenyang Joway advanced an aggregate of $791,701 to Joway Shengshi and Joway Technology through December 31, 2010. We repaid $23,647 and $22,930 of these advances for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, the total unpaid principal balance due Shenyang Joway for advances was $7,268. Shenyang Joway ceased operations at the end of 2009, although it still exists as a legal entity.

  

The Company has sufficient liquidity from internal and external sources to meet the Company’s operating cash needs over the next 12 months even if Mr. Zhang and Shenyang Joway were to demand immediate repayment of the remaining balance under these loans and no longer wish to provide future loans to any of our operating units.

  

STATUTORY RESERVES

  

Pursuant to the laws and regulations of the PRC, the Company’s PRC subsidiaries are required to allocate a portion of their after-tax income to statutory reserves funds. The minimum statutory reserves allocation is 10% of after-tax income until the reserves reach 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. As of September 30, 2014, the Company had allocated $354,052 to statutory reserves.

 

Off Balance Sheet Items

  

Under SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

  

●

any obligation under certain guarantee contracts,

 

●

any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,

 

●

any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in shareholder equity in our statement of financial position, and

 

●

any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

 

  

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

 

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 Joway Health and its wholly owned subsidiaries and controlled VIEs. All significant inter-company accounts and transactions have been eliminated in the consolidation.

 

Pursuant to Accounting Standards Codification Topic 810 “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.

 

Based on the various Contractual Agreements, we believe we are able to exercise control over the VIEs, and to obtain the full economic benefits. We believe that the terms of the exclusive option agreement are currently exercisable and legally enforceable under PRC laws and regulations. We also believe that the minimum amount of consideration permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for us to exercise our rights under the exclusive option agreement. A simple majority vote of our board of directors is required to pass a resolution to exercise our rights under the exclusive option agreement, for which consent of the shareholder of VIEs is not required. Therefore, we believe this gives us the power to direct the activities that most significantly impact VIEs’ economic performance. T We believe that our ability to exercise effective control, together with the consulting service agreements and the equity pledge agreements, give us the rights to receive substantially all of the economic benefits from VIEs in consideration for the services provided by its wholly owned subsidiaries in China. Accordingly, as the primary beneficiary of VIEs and in accordance with U.S. GAAP, Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading, as VIEs of Junhe Consulting, has been consolidated in the Company’s financial statements. Sales from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading are included in our total sales, their incomes or losses from operations are consolidated with ours, and our net income or loss includes net income or loss from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading.

 

Revenue Recognition

 

We recognize 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.

  

With respect to sales of product to both franchisee and non-franchisee customers, we prepare product shipment upon the receipt of a customer’s purchase order. Sales prices are based on fixed price lists that are different depending on whether the price list is for franchisee customers or for non-franchisee customers. We recognize revenue when the product is shipped. We do not sell product to any customers with a right of return as defined in ASC 605-15-25-4. Sales are presented net of value added tax (VAT).

 

  

We recognize revenue on the sale of our wellness houses under the completed contract method. At the time when we enter into a contract with a customer to build a wellness house, the customer pays a deposit of at least one-half of the sales price. We consider the contract to be completed when all significant costs have been incurred and the customer accepts the project in writing by signing in the appropriate place on the contract. At this time the customer will also pay any remaining balance on the contract. We recognize the full contract revenue at this point. Contract costs consist primarily of materials and labor costs. The construction period of a wellness house generally does not exceed five days.

 

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, current economic trends, and changes in customer’s 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 is 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 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

 

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

  

We do not anticipate that the adoption of recently issued accounting pronouncements to have a material effect on our condensed consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

  

Item 4. Controls and Procedures.

  

Evaluation of Disclosure Controls and Procedures

 

Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures as defined in SEC Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this quarterly report. The purpose of this evaluation is to determine if, as of Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2014, our disclosure controls and procedures were not effective, based on the material weakness described below:

 

We did not have sufficient skilled accounting personnel that are either qualified as Certified Public Accountants in the U.S. or that have received education from U.S. institutions or other educational programs that would provide enough relevant education relating to U.S. GAAP. The Company’s CFO and Financial Manager have worked for U.S. listed companies but have limited experience with U.S. GAAP and are not U.S. Certified Public Accountants. Further, our operating subsidiaries are based in China, and in accordance with PRC laws and regulations, are required to comply with PRC GAAP, rather than U.S. GAAP. Thus, the accounting skills and understanding necessary to fulfill the requirements of U.S. GAAP-based reporting, including the preparation of financial statements and consolidation, are inadequate, and determined to be a material weakness.

 

Remediation Initiative

 

●

We have started a training program in the principles and rules of U.S. GAAP, SEC reporting requirements and the application thereof. The program is provided by an independent training institution, for our finance and accounting personnel, including our Chief Financial Officer, Financial Manager and others.

 

●

We are in the process of designing a program to provide ongoing company-wide training regarding the Company’s internal controls, with particular emphasis on our finance and accounting staff.

 

●

In 2011 we established the position of internal audit manager. From September 2011 to July 2012, we hired an internal audit manager who implemented an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatments identified in such report have been fully implemented and confirmed by our internal control department. Currently, we are still in the process of seeking for a proper candidate to perform as our internal audit manager.

 

We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting for the nine months ended September 30, 2014 that materially affected, or were reasonably likely to materially affect our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION 

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

  

As of the date of this filing, there have been no material changes from the risk factors disclosed in Part I, Item 1A (Risk Factors) contained in our Annual Report on Form 10-K for the year ended December 31, 2013. We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. The risks, uncertainties and other factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2013 may cause our actual results, performances and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occurs, our business, financial condition or results of operations may be adversely affected.

  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

EXHIBIT INDEX

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and Rule 14d-14(a). *
31.2		Certification of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a). *
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. *
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. *
101.INS		XBRL Instance Document*
101.SCH		XBRL Schema Document*
101.CAL		XBRL Calculation Linkbase Document*
101.LAB		XBRL Label Linkbase Document*
101.PRE		XBRL Presentation Linkbase Document*
101.DEF		XBRL Definition Linkbase Document*

 

* Filed herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 14, 2014

  

	Joway Health Industries Group Inc.
	By:	/s/ Jinghe Zhang
		Jinghe Zhang
		President and Chief Executive Officer
	By:	/s/ Yuan Huang
		Yuan Huang
		Chief Financial Officer

 

 

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