10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

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 March 31, 2011

 

¨ 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)

N/A

(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  ¨    No  x

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  ¨    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 March 31, 2011 was 20,000,000 shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION     1   
Item 1. Financial Statements     1   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     20   
Item 3. Quantitative and Qualitative Disclosures About Market Risk     28   
Item 4. Controls and Procedures     28   
PART II - OTHER INFORMATION     29   
Item 1. Legal Proceedings     29   
Item 1A. Risk Factors  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     29   
Item 3. Defaults Upon Senior Securities     29   
Item 4. Removed and Reserved     29   
Item 5. Other Information     29   
Item 6. Exhibits     29   
SIGNATURES     30   

 

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

In the opinion of management, the accompanying unaudited 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 March 31, 2011 (Unaudited) and December  31, 2010 (Audited)

     2   

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2011 and 2010 ( Unaudited )

     3   

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March  31, 2011 and 2010 ( Unaudited )

     4   

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March  31, 2011 ( Unaudited )

     5   

Notes to Condensed Consolidated Financial Statements

     6-19   

 

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JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     March 31,
2011
(Unaudited)
     December 31,
2010

(Audited)
 
ASSETS      

CURRENT ASSETS:

     

Cash

   $ 5,459,718       $ 5,281,420   

Accounts receivable, net

     9,513         9,638   

Other receivables

     36,786         81,162   

Inventories

     587,808         711,704   

Advances to suppliers

     181,318         143,609   

Prepaid expense

     17,355         33,884   
                 

Total current assets

     6,292,498         6,261,417   

PROPERTY, PLANT AND EQUIPMENT, net

     6,081,520         5,519,711   

OTHER ASSETS:

     

Intangible assets, net

     615,352         615,607   

Long-term prepaid expenses

     205,942         207,621   
                 

Total other assets

     821,294         823,228   
                 

Total assets

   $ 13,195,312       $ 12,604,356   
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

CURRENT LIABILITIES:

     

Accounts payable

   $ 326,294       $ 305,416   

Advances from customers

     —           1,422   

Taxes payable

     382,298         519,726   

Salary payable

     47,359         —     

Other payables

     20,624         50,810   

Due to related parties

     694,452         852,134   
                 

Total current liabilities

     1,471,027         1,729,508   

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; 20,000,000 shares issued and outstanding

     20,000         20,000   

Additional paid-in-capital

     7,316,179         7,316,179   

Statutory reserves

     336,604         336,604   

Retained earnings

     3,550,218         2,772,488   

Accumulated other comprehensive income

     501,284         429,577   
                 

Total stockholders’ equity

     11,724,285         10,874,848   
                 

Total liabilities and stockholders’ equity

   $ 13,195,312       $ 12,604,356   
                 

The accompanying notes are an integral part of these financial statements

 

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JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

 

     Three months ended March 31,  
     2011     2010  
     (Unaudited)     (Unaudited)  

REVENUES

   $ 1,699,038      $ 915,751   

COST OF REVENUES

     355,406        246,195   
                

GROSS PROFIT

     1,343,632        669,556   

Selling expenses

     144,309        121,526   

General and administrative expenses

     561,435        231,940   
                

OPERATING EXPENSES

     705,744        353,466   
                

INCOME FROM OPERATIONS

     637,888        316,090   
                

Interest income

     1,616        564   

Other income

     361,268        348   

Other expenses

     (666     (7,786
                

OTHER INCOME (EXPENSE), NET

     362,218        (6,874
                

INCOME BEFORE INCOME TAXES

     1,000,106        309,216   

INCOME TAXES

     222,376        75,095   
                

NET INCOME

     777,730        234,121   

OTHER COMPREHENSIVE INCOME

    

Foreign currency translation adjustments

     71,707        1,263   
                

COMPREHENSIVE INCOME

   $ 849,437      $ 235,384   
                

NET INCOME PER COMMON SHARE, BASIC AND DILUTED

   $ 0.04      $ 0.01   
                

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED

     20,000,000        18,515,426   
                

The accompanying notes are an integral part of these financial statements

 

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JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Three months ended March 31,  
     2011     2010  
     (Unaudited)     (Unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 777,730      $ 234,121   

Adjustments to reconcile net income to net cash provided by (used in) operating activities

    

Depreciation

     98,799        56,332   

Amortization

     4,437        3,173   

Changes in operating assets and liabilities:

    

Accounts receivable, trade

     125        57,542   

Other receivables

     44,376        (225

Due from related parties

     —          (11,594

Inventories

     123,896        (186,763

Advances to suppliers

     (37,709     (35,882

Prepaid expense

     16,529        —     

Accounts payable

     20,878        (81,300

Advances from customers

     (1,422     (229,034

Other payable

     (4,168     4,002   

Salary and welfare payable

     8,892        24,512   

Tax payable

     (124,979     105,798   

Accrued expenses

     —          19,108   
                

Net cash provided by (used in) operating activities

     927,384        (40,210
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property, plant and equipment

     (658,929     (104,053

Purchase of intangible assets

     —          (3,628
                

Net cash used in investing activities

     (658,929     (107,681
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Due to related parties

     (157,682     22,917   
                

Net cash provided by (used in) financing activities

     (157,682     22,917   
                

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     67,525        151   
                

NET INCREASE (DECREASE) IN CASH

     178,298        (124,823

CASH, beginning of period

     5,281,420        935,719   
                

CASH, end of period

   $ 5,459,718      $ 810,896   
                

SUPPLEMENTAL DISCLOSURES:

    

Income taxes paid

   $ 218,380      $ 29,405   

Interest paid

   $ —        $ —     

The accompanying notes are an integral part of these financial statements

 

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JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

    

 

Common Stock

     Additional
paid-in capital
    Statutory
reserves
     Retained
earnings
(deficit)
    Accumulated
other

comprehensive
income
    Total equity  
     Number
of shares
     Common
stock
             

BALANCE, January 1, 2009

     18,515,426       $ 18,515       $ 769,812      $ 1,600       $ (156,571   $ 98,429      $ 731,785   

Net Income

     —           —           —          —           650,535        —          650,535   

Appropriation to statutory reserves

     —           —           —          48,188         (48,188     —          —     

Capital contribution

     —           —           6,876,914        —           —          —          6,876,914   

Capital distribution

     —           —           (392,287     —           —          —          (392,287

Foreign currency translation loss

     —           —           —          —           —          (3,157     (3,157
                                                           

BALANCE, December 31, 2009

     18,515,426       $ 18,515       $ 7,254,439      $ 49,788       $ 445,776      $ 95,272      $ 7,863,790   

Net Income

     —           —           —          —           2,613,528        —          2,613,528   

Appropriation to statutory reserves

     —           —           —          286,816         (286,816     —          —     

Capital distribution

     —           —           (46,775     —           —          —          (46,775

Stock-based compensation to employees

     —           —           110,000        —           —          —          110,000   

Share exchange

     1,484,574         1,485         (1,485     —           —          —          —     

Foreign currency translation gain

     —           —           —          —           —          334,305        334,305   
                                                           

BALANCE, December 31, 2010

     20,000,000         20,000         7,316,179        336,604         2,772,488        429,577        10,874,848   

Net Income

     —           —           —          —           777,730        —          777,730   

Foreign currency translation gain

     —           —           —          —           —          71,707        71,707   
                                                           

BALANCE, March 31, 2011 (Unaudited)

     20,000,000       $ 20,000       $ 7,316,179      $ 336,604       $ 3,550,218      $ 501,284      $ 11,724,285   
                                                           

The accompanying notes are an integral part of these financial statements

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION

The consolidated financial statements include the financial statements of Joway Health Industries Group Inc. (referred to herein as “Joway Health”), its subsidiary, and variable interest entities (“VIEs”) where Joway Health is deemed the primary beneficiary. Joway Health, its subsidiary 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 “Exchange Agreement”) 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 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. Liaoning Joway Technology Engineering Co., Ltd., Tianjin Joway Decoration Engineering Co., Ltd. and Tianjin Oriental Shengtang Trading Import & Export Trading Co., Ltd are subsidiaries of Joway Shengshi.

Liaoning Joway Technology Engineering Co., Ltd. (referred to herein as “Joway Technology”) was incorporated on March 28, 2007 in PRC. It engages in the distribution of Tourmaline Activated Water Machines and the construction of Tourmaline Wellness Houses. Prior to July 25, 2010, 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

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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.

 

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 20,000   

87.04% owned by Crystal Globe Limited

12.96% 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
tourmaline products

Liaoning Joway Technology Engineering Co., Ltd.

   March 28, 2007, PRC    USD 142,072.97    100% owned by Tianjin Joway Shengshi Group Co., Ltd    Distribution of
Tourmaline Activated
Water Machine and
construction of
Tourmaline Wellness
House

Tianjin Joway Decoration Engineering Co., Ltd.

   April 22, 2009, PRC    USD 292,367.74    100% owned by Tianjin Joway Shengshi Group Co., Ltd    Distribution of
Tourmaline Activated
Water Machine,
Tourmaline Wellness
House for family use
and Tourmaline
Wellness House
materials

Tianjin Oriental Shengtang Import & Export Trading Co., Ltd.

   September 18, 2009,
PRC
   USD 292,463.75    100% owned by Tianjin Joway Shengshi Group Co., Ltd    Distribution of
tourmaline products

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 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 will become the indirect beneficial owners of the shares of the Company held by Crystal Globe.

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The Company’s functional currency is the Chinese Renminbi (“RMB”); however the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”). All significant inter-company transactions and balances have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary to make the financial statements not misleading.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and the footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. The accompanying consolidated financial statements should be read in conjunction with the Company’s form 10-K for the fiscal year ended December 31, 2010 which was filed on April 14, 2011.

Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. Actual results could differ from those estimates.

Basis of Consolidation

The accompanying consolidated financial statements include the Company and its wholly owned 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”, Joway Shengshi, as a VIE of Junhe Consulting, has been consolidated in the Company’s financial statements. Joway Shengshi’s sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s net income includes all of Joway Shengshi’s net income.

Based on the various Contractual Agreements, the Company is able to exercise control over the VIEs, and to obtain in full the economic benefits. Accordingly, the non–controlling interests have no economic interest in the VIEs.

Foreign Currency Translation

The accompanying consolidated financial statements are presented in USD. The functional currency of the Company is RMB. The consolidated financial statements are translated into United States dollars from RMB at 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.

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     For the periods ended
March 31,
     For the year ended
December 31,
 
     2011      2010      2010  

Period ended RMB: USD Exchange rate

     6.5701         6.8361         6.6118   

Average RMB: USD Exchange rate

     6.5894         6.83603         6.77875   

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

For the periods ended March 31, 2011 and 2010 foreign currency translation adjustments of $71,707 and negative $1,263, respectively, have been reported as comprehensive (loss) or income in the consolidated financial statements.

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 and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

Fair Value of Financial Instruments

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 (formerly Statement of Financial Accounting Standard (“SFAS”) No. 157 Fair Value Measurements) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

   

Level 1—defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;

 

   

Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

 

   

Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 carried at net realizable value. The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of the accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As of March 31, 2011 and December 31, 2010, respectively, the Company had no allowance for doubtful accounts.

Inventories

Inventories are stated at the lower of cost, as determined by the specific identification method on contract level (for each individual contract, inventories cost flow are determined by weighted-average method), or the net realizable value, which is determined on selling prices less any further costs expected to be incurred for completion and disposal. The Company regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether valuation allowance is required. As of March 31, 2011 and December 31, 2010, respectively, the Company has no reserves for inventories.

Advances to suppliers

Advances to suppliers represent the cash paid in advance for inventory items or construction in progress. The advance payments are meant to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $181,318 and $143,609 as of March 31, 2011 and December 31, 2010, respectively.

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

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 carried at net realizable value. The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of the accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As of March 31, 2011 and December 31, 2010, respectively, the Company had no allowance for doubtful accounts.

Inventories

Inventories are stated at the lower of cost, as determined by the specific identification method on contract level (for each individual contract, inventories cost flow are determined by weighted-average method), or the net realizable value, which is determined on selling prices less any further costs expected to be incurred for completion and disposal. The Company regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether valuation allowance is required. As of March 31, 2011 and December 31, 2010, respectively, the Company has no reserves for inventories.

Advances to suppliers

Advances to suppliers represent the cash paid in advance for inventory items or construction in progress. The advance payments are meant to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $181,318 and $143,609 as of March 31, 2011 and December 31, 2010, respectively.

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 (formerly SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets). The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. The Company did not record any impairment loss for the three months ended March 31, 2011 and 2010.

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 complete 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 $12,036 and $9,048 for the three months ended March 31, 2011 and 2010, respectively.

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Income Taxes

The Company is governed by the Income Tax Law and associated legislations of the PRC. The Company accounts for income taxes in accordance with FASB ASC 740 “Income Taxes” (formerly SFAS No. 109 Accounting for Income Taxes), which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets is dependent upon future earnings, if any, of which the timing and amount are uncertain.

According to ASC 740, the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition.

Subsequent Events

The Company evaluates subsequent events for purposes of recognition or disclosure through the date that the financial statements are issued.

Recently Issued Accounting Pronouncements

In April 2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force, or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of these amendments had no material impact on the Company’s consolidated financial statements.

In April 2010, the FASB issued ASU 2010-17, “Revenue Recognition—Milestone Method “, which updates the guidance currently included under topic 605, Revenue Recognition. ASU 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. ASU 2010-17 is effective for milestones achieved in fiscal years, and interim periods within those years, beginning after June 15, 2010 and should be applied prospectively. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310)—Receivables, or ASU 2010- 20. ASU 2010-20 enhances the disclosure requirements about the credit quality and related allowance for credit losses of financing receivables. The Company is currently evaluating the impact of the adoption of ASU 2010-20 on its financial statements.

NOTE 3 – ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

 

     March 31,      December 31,  
     2011      2010  

Accounts receivable

   $ 9,513       $ 9,638   

Less: Allowance for bad debt

     —           —     
                 

Accounts receivable

   $ 9,513       $ 9,638   
                 

NOTE 4 – INVENTORIES

Inventories consisted of the following:

 

     March 31,      December 31,  
     2011      2010  

Raw materials

   $ 112,777       $ 100,706   

Packages

     5,509         11,406   

Finished goods

     448,847         557,251   

Goods shipped in transit

     —           21,891   

Low value consumables

     20,675         20,450   
                 

Total

   $ 587,808       $ 711,704   
                 

Goods shipped in transit represent goods on the way from the suppliers to the Company. Low value consumables represent low priced and easily worn articles and are amortized on equal-split amortization method. Pursuant to this method, half value of the low value consumable should be amortized once used and the remaining half value should be amortized when disposed.

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

     March 31,     December 31,  
     2011     2010  

Building

   $ 5,279,073      $ 5,245,777   

Operating Equipment

     315,105        313,118   

Office furniture and equipment

     210,395        206,821   

Vehicles

     872,639        250,888   
                

Total

     6,677,212        6,016,604   

Less: accumulated depreciation

     (595,692     (496,893
                

Property, plant and equipment, net

   $ 6,081,520      $ 5,519,711   
                

Depreciation expense for the three months ended March 31, 2011 and 2010 amounted to $98,799 and $56,332, respectively.

NOTE 6 – INTANGIBLE ASSETS

Intangible assets consisted of the following:

 

     March 31,     December 31,  
     2011     2010  

Land use rights

   $ 628,310      $ 624,347   

Other intangible assets

     34,728        34,509   
                

Total

     663,038        658,856   

Less : accumulated amortization

     (47,686     (43,249
                

Intangible assets, net

   $ 615,352      $ 615,607   
                

Amortization expense of intangible assets for the three months ended March 31, 2011 and 2010 was $4,437 and $3,173, respectively.

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

 

Estimated amortization expense for

the year ending December 31,

   Amount  

2011

   $ 16,039   

2012

   $ 16,039   

2013

   $ 16,039   

2014

   $ 16,039   

2015

   $ 16,039   

Thereafter

   $ 535,412   

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 7 – RELATED PARTY TRANSACTIONS

Due to related parties consists of the following:

 

     March 31,      December 31,  
     2011      2010  

Shenyang Joway Industrial Development Co., Ltd.

   $ 607,473       $ 613,721   

Jinghe Zhang

     83,882         235,336   

Jingyun Chen

     3,097         3,077   
                 

Total

   $ 694,452       $ 852,134   
                 

From 2007 through March 31, 2011, the Company was advanced $791,701 by Shenyang Joway Industrial Development Co., Ltd (“Shenyang Joway”), which is controlled by Jinghe Zhang, the largest stockholder and CEO of the Company. The advances were non-interest bearing and had no specified repayment terms. The Company repaid $6,247 of these advances during the three months of 2011.

On December 1, 2009, the Company entered into a license agreement with Jinghe Zhang. Pursuant to the license agreement, the Company is authorized to use for free the trademark “Joway” for a term of nine years and five patents from December 1, 2009 till the expiration dates of the patents.

On May 10, 2007, Joway Shengshi entered into a cash advance agreement with Jinghe Zhang. Pursuant to the agreement, Jinghe Zhang agrees to lend money as daily operation capital to Joway Shengshi. The advances are interest free and unsecured. The agreement is valid throughout Joway Shengshi’s term of operation. During the period beginning May 17, 2007 (inception of Shengshi Group) through March 31, 2011, Joway Shengshi received cash operating advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang and $4,553,515 has been paid off by Shengshi Group. As of March 31, 2011, the total unpaid principal balance due Jinghe Zhang for advances was $83,882.

On May 10, 2007, Joway Technology entered into a loan agreement with Jinghe Zhang. Pursuant to the loan agreement, Jinghe Zhang agrees to lend money as daily operation capital to Joway Technology. The loan is interest free and unsecured. The loan agreement is valid throughout Joway Technology’s term of operation. During the period beginning March 28, 2007 (inception of Joway Technology) through December 31, 2010, Joway Technology received cash operating advances in the aggregate principal amount of $22,031 from Jinghe Zhang and $22,031 has been paid off by Joway Technology. As of March 31, 2011, the total unpaid principal balance due Jinghe Zhang for advances was $0.

Jingyun Chen is General Manager of Joway Technology and Joway Decoration. In November, 2010, the Company received $3,097 of insurance refund on behalf of Jingyun Chen.

The amount due from related parties are non-interest bearing and have no specified repayment terms.

NOTE 8 – INCOME TAXES

The Company operates mainly in the People’s Republic of China and is governed by the Income Tax Law of the People’s Republic of China. Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) is generally at a statutory rate of 25% beginning January 2008, on income as reported in their statutory financial statements after appropriate tax adjustments.

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

     For the three months
ended March 31,
 
     2011     2010  

Tax computed at China statutory rates

     25     25

Effect of reduced rate on Joway Decoration (1)

     (3 %)      (1 %) 

Effective rate

     22     24

 

(1) Pursuant to Measures for Verification Collection of Enterprise Income Tax issued by PRC State Administration of Taxation, Joway Decoration is subject to taxable income at a verified rate of 5% of revenue (4% for 2010) as a wholesale and retail enterprise.

As of March 31, 2011 and 2010, the Company had no deferred tax assets or liabilities.

NOTE 9 – STATUTORY RESERVES

Pursuant to the laws and regulations of the PRC, annual income of the subsidiaries of the Company are required to be partly allocated to the statutory reserves funds after the payment of the PRC income taxes. The allocation to the statutory reserves funds should be at least 10% of income after tax until the reserve reaches 50% of the entities’ registered capital or members’ equity. The reserve funds are not transferable to the Company in the form of cash dividends, loans or advances. Thus the reserve funds are not available for distribution except in liquidation. As of March 31, 2011, the Company had allocated $336,604 to statutory reserves.

NOTE 10 – OTHER INCOME

Other income mainly consists of subsidy income from Tianjin Baodi District Management Committee and short-term investment income.

Joway Shengshi and Joway Decoration are located in Tianjin Baodi District. Pursuant to a series of investment encouragement policies issued by Tianjin Baodi government, in January 2011 Joway Shengshi and Joway Decoration were awarded by Tianjin Baodi District Management Committee a total of RMB 2,307,012.68 (~ US $350,110) for the contribution of tax revenue for the years 2009 and 2010 in Tianjin Baodi District.

NOTE 11 – SEGMENTS

For the years of 2011 and 2010, the Company operated in three reportable business segments - (1) Healthcare Knitgoods Series, (2) Daily Healthcare and Personal Care Series and (3) Wellness House and Activated Water Machine Series. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. Information with respect to these reportable business segments is as follows:

For the three months ended March 31, 2011

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Sales      COGS      Gross profit      Income from
operations
     Depreciation
and
amortization
     Assets  

Healthcare Knitgoods Series

   $ 1,105,617       $ 202,519       $ 903,098       $ 393,117       $ 67,178       $ 152,261   

Daily Healthcare and Personal Care Series

     315,785         68,393         247,392         101,730         19,188         202,003   

Wellness House Activated Water Machine Series

     277,636         84,494         193,142         143,041         16,870         304,370   
                                                     

Segment Totals

   $ 1,699,038       $ 355,406       $ 1,343,632         637,888       $ 103,236         658,634   
                                         

Other Income (Expense), net

              362,218         

Income Tax

              222,376         
                       

Unallocated Assets

                    12,536,678   
                       

Net Income

            $ 777,730         
                       

Total Assets

                  $ 13,195,312   
                       

For the three months ended March 31, 2010

 

     Sales      COGS      Gross profit      Income from
operations
    Depreciation
and
amortization
     Assets  

Healthcare Knitgoods Series

   $ 566,024       $ 115,903       $ 450,121       $ 218,098      $ 36,780       $ 359,484   

Daily Healthcare and Personal Care Series

     158,043         22,523         135,520         70,734        10,270         173,739   

Wellness House Activated Water Machine Series

     191,684         107,769         83,915         27,258        12,455         265,732   
                                                    

Segment Totals

   $ 915,751       $ 246,195       $ 669,556         316,090      $ 59,505         798,955   
                                        

Other Income (Expense), net

              (6,874     

Income Tax

              75,095        
                      

Unallocated Assets

                   9,117,898   
                      

Net Income

            $ 234,121        
                      

Total Assets

                 $ 9,916,853   
                      

NOTE 12 – FRANCHISE REVENUES

The Company enters into franchise agreements to develop retail outlets for the Company’s products. The agreements provide that franchisees are authorized to 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.

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

     For the three months ended March 31,  
     2011      2010  

Sales to franchise customers

   $ 1,612,988       $ 793,903   

Sales to non-franchise customers

     86,050         121,848   
                 

Total sales

   $ 1,699,038       $ 915,751   
                 

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion should be read in conjunction with our consolidated financial statements and notes to those consolidated financial statements, included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk factors” and elsewhere in this prospectus.

FORWARD-LOOKING STATEMENTS:

Certain statements made in this report may constitute “forward-looking statements on our current expectations and projections about 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 200 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.

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.

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.

Description of Selected Income Statement Items

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

 

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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. We expect administrative expenses to continue to increase as we incur expenses related to costs of compliance with securities laws and other regulations, including increased audit and legal fees and investor relations expenses.

Other (expense) income. Our other (expense) income consists primarily of interest income, subsidy income and other revenue from sales of obsolete equipment.

Income taxes. According to the revised Enterprise Income Tax Law effective as of January 1, 2008, our income tax rate is 25%.

Results of Operations

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

 

     For the three months ended March 31,  
     2011      2010  

REVENUES

   $ 1,699,038       $ 915,751   

COST OF REVENUES

     355,406         246,195   
                 

GROSS PROFIT

     1,343,632         669,556   

OPERATING EXPENSES

     705,744         353,466   
                 

INCOME FROM OPERATIONS

     637,888         316,090   

OTHER (EXPENSE) INCOME, NET

     362,218         (6,874
                 

INCOME BEFORE INCOME TAXES

     1,000,106         309,216   

INCOME TAXES

     222,376         75,095   
                 

NET INCOME

   $ 777,730       $ 234,121   
                 

Business Segments

In 2011 and 2010, the Company operated in three reportable business segments - (1) Healthcare Knitgoods, (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 March 31, 2011

 

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     Healthcare
Knitgoods
Series
    % of
Total
    Daily
Healthcare
and
Personal
Care Series
    % of
Total
    Wellness House
and Activated
Water Machine
Series
    % of
Total
    Total  

REVENUES

   $ 1,105,617        65.1   $ 315,785        18.6   $ 277,636        16.3   $ 1,699,038   

COST OF REVENUES

     202,519        57.0     68,393        19.2     84,494        23.8     355,406   
                                      

GROSS PROFIT

     903,098        67.2     247,392        18.4     193,142        14.4     1,343,632   

GROSS MARGIN

     81.7 %        78.3 %        69.6 %        79.1 % 

OPERATING EXPENSES

     509,981        72.3     145,662        20.6     50,101        7.1     705,744   
                                      

INCOME FROM OPERATIONS

   $ 393,117        61.6   $ 101,730        15.9   $ 143,041        22.4   $ 637,888   
                                      

For the three months ended March 31, 2010

 

     Healthcare
Knitgoods
Series
    % of
Total
    Daily
Healthcare
and
Personal
Care Series
    % of
Total
    Wellness House
and Activated
Water Machine
Series
    % of
Total
    Total  

REVENUES

   $ 566,024        61.8   $ 158,043        17.3   $ 191,684        20.9   $ 915,751   

COST OF REVENUES

     115,903        47.1     22,523        9.1     107,769        43.8     246,195   
                                      

GROSS PROFIT

     450,121        67.2     135,520        20.2     83,915        12.5     669,556   

GROSS MARGIN

     79.5 %        85.7 %        43.8 %        73.1 % 

OPERATING EXPENSES

     232,023        65.6     64,786        18.3     56,657        16.0     353,466   
                                      

INCOME FROM OPERATIONS

   $ 218,098        69.0   $ 70,734        22.4   $ 27,258        8.6   $ 316,090   
                                      

Period Ended March 31, 2011 Compared to March 31, 2010

Revenue. For the period ended March 31, 2011, revenue was $1,699,038 compared to $915,751 for the three months ended March 31, 2010, an increase of $783,287 or 85.5%. This increase was mainly attributable to the increase in revenue from healthcare knit goods segment.

Revenue from healthcare knit goods segment increased by $539,593, or 95.3% to $1,105,617 for the three months ended March 31, 2011 from $566,024 for the three months ended March 31, 2010. This was primarily due to an increase in sales of our mattress products of $0.5 million, which is our best-selling product category.

Revenue from daily healthcare and personal care products increased by $157,742 or 99.8% to $315,785 for the three months ended March 31, 2011 from $158,043 for the three months ended March 31, 2010. This was primarily due to an increase in sales of Tourmaline Scarves.

Revenue from wellness houses and activated water machines increased by $85,952, or 44.8% to $277,636 for the three months ended March 31, 2011 from $191,684 for the three months ended March 31, 2010. This increase was mainly due to an increase in sales of Tourmaline Water Machine.

Cost of Goods Sold. For the three months ended March 31, 2011, cost of goods sold was $355,406 compared to $246,195 for the three months ended March 31, 2010, an increase of $109,211, or 44.4%. This increase was mainly due to the increase in sales.

Cost of goods sold for healthcare knit goods segment increased to $202,519 for the three months ended March 31, 2011 from $115,903 for the three months ended March 31, 2010, an increase of $86,616 or 74.7%. This increase was mainly due to the increase in cost of Mattress products and Tourmaline Shaping Pants, a new product in 2011.

Cost of goods sold for the daily healthcare and personal care segment increased to $68,393 for the three months ended March 31, 2011 from $22,523 for the three months ended March 31, 2010, an increase of $45,870 or 203.7%.

 

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This increase was primarily due to the cost of Tourmaline Scarves with new model, Xin-Nao-Ling Fish Oil Soft Gel and Tourmaline Sanitary Towel.

Cost of goods sold for our wellness house and activated water machine segment decreased to $84,494 for the three months ended March 31, 2011 from $107,769 for the three months ended March 31, 2010, a decrease of $23,275 or 21.6%. This decrease was mainly due to the decrease in cost of Wellness House.

Gross profit. Our gross profit increased by $674,076 or 100.7% to $1,343,632 for the three months ended March 31, 2011, compared to $669,556 for the three months ended March 31, 2010. This increase was mainly due to the increase in gross profit for healthcare knit goods segment. In addition, our gross margin increased from 73.1% for the three months ended March 31, 2010 to 79.1% for the three months ended March 31, 2011. This increase was mainly attributed to the wellness house and activated water machine segments.

Gross profit for the healthcare knit goods segment increased by $452,977 or 100.6% to $903,098 for the three months ended March 31, 2011 compared to $450,121 for the three months ended March 31, 2010. This increase was mainly attributable to increased sales of our mattress products, which have higher gross margins. The gross margins of healthcare knit goods segment increased from 79.5% for the three months ended March 31, 2010 to 81.7% for the three months ended March 31, 2011. This increase was mainly due to new healthcare knit goods with higher gross margin.

Gross profit of daily healthcare and personal care segment increased by $111,872 or 82.6% to $247,392 for the three months ended March 31, 2011, compared to $135,520 for the three months ended March 31, 2010. This increase was primarily due to our new Tourmaline Scarves. Gross margin of daily healthcare and personal care segment decreased from 85.7% for the three months ended March 31, 2010 to 78.3% for the three months ended March 31, 2011. From April 2010, we started developing our diet supplement market and promoted two new products, Xin-Nao-Ling Fish Oil Soft Gel and Zhi-Li-Bao Fish Oil Soft Gel, which have a lower gross margin of approximately 20% and contributed to the decrease in gross profit margin for our daily healthcare and personal care segment.

Gross profit of the wellness house and activated water machine segments increased by $109,227 or 130.2% to $193,142 for the three months ended March 31, 2011, compared to $83,915 for the three months ended March 31, 2010. This increase was mainly attributed to an increase in sales of Tourmaline Water Machines. The gross margin of our wellness house and activated water machine segments increased from 43.8% for the three months ended March 31, 2010 to 69.6% for the three months ended March 31, 2011. This increase was mainly attributed to increased sales of Tourmaline Water Machines as a result of a decrease in the purchase price.

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses increased by $352,278, or 99.7%, from $353,466 for the three months ended March 31, 2010 to $705,744 for the three months ended March 31, 2011. This increase was mainly due to the increase of employee salaries, depreciation and audit and attorney fees. Operating expenses for healthcare knit goods segment increased by $277,958 or 119.8% to $509,981 for the three months ended March 31, 2011 from $232,023 for the three months ended March 31, 2010. Operating expenses for daily healthcare and personal care segment increased by $80,876 or 124.8% to $145,662 for the three months ended March 31, 2011 from $64,786 for the three months ended March 31, 2010. Operating expenses for our wellness house and activated water machine segment decreased by $6,556 or 11.6% to $50,101 for the three months ended March 31, 2011 from $56,657 for the three months ended March 31, 2010.

Income from operations. As a result of the foregoing, our income from operations was $637,888 for the three months ended March 31, 2011, compared to $316,090 for the three months ended March 31, 2010, an increase of $321,798. This increase was mainly due to our healthcare knit goods segment and wellness house and activated water machine segment.

Income taxes. Our income tax expenses increased from $75,095 for the three months ended March 31, 2010 to $222,376 for the three months ended March 31, 2011. The increase was primarily due to the increase in income.

 

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Net income. For the three months ended March 31, 2011, our net income was $777,730 compared to $234,121 for the three months ended March 31, 2010. This increase was mainly due to the increase in net income from Joway Shengshi.

Franchising

We enter into franchising agreements to develop retail outlets for our products. The agreements provide that franchisees will sell our products exclusively. In exchange we provide them with geographic exclusivity, discounted product, training and support. The agreements also require franchisees to adhere to certain standards of product merchandising, promotion and presentment. The agreements do not require 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 March 31,  
     2011      2010  

Sales to franchise customers

   $ 1,612,988       $ 793,903   

Sales to non-franchise customers

     86,050         121,848   
                 

Total sales

   $ 1,699,038       $ 915,751   
                 

Liquidity and Capital Resources

Our cash at the beginning of the three months ended March 31, 2011 was $5,281,420 and increased to $5,459,718 by the end of the period, an increase of $178,298. We had net working capital of $4,821,471 at March 31, 2011, an increase of $289,562 from $4,531,909 at December 31, 2010.

Our cash flow information summary is as follows:

 

     For the three months ended March 31,  
     2011     2010  

Net cash provided by (used in) :

    

Operating activities

   $ 927,384      $ (40,210

Investing activities

     (658,929     (107,681

Financing activities

   $ (157,682   $ 22,917   

Net Cash Provided By (Used In) Operating Activities

Net cash provided by operating activities was $927,384 for the three months ended March 31, 2011 compared to $40,210 used in operating activities for the three months ended March 31, 2010. This increase was primarily due to an increase in net income of $543,609.

For the three months ended March 31, 2011, cash was mainly used to pay tax of $124,979, which was primarily offset by cash provided from net income of $777,730, decrease in inventory of $123,896 and an add-back of $98,799 of depreciation for non-cash expense.

For the three months ended March 31, 2010, cash was mainly used to increase inventory of $186,763. We also used cash to decrease in advance from customers of $229,034. This was primarily offset by cash provided from net income of $234,121, increases in tax payable of $105,798.

 

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Net Cash Used In Investing Activities

Net cash used in investing activities was $658,929 for the three months ended March 31, 2011, compared to $107,681 used in investing activities for the three months ended March 31, 2010. For the three months ended March 31, 2011, we used cash to purchase three vehicles in the amount of $0.6 million compared to $0.1 million in vehicle and operating equipment purchases for the three months ended March 31, 2010.

Net Cash Provided By (Used In) Financing Activities

Net cash used in financing activities was $157,682 for the three months ended March 31, 2011, compared to $22,917 provided by financing activities for the three months ended March 31, 2010. For the three months ended March 31, 2011, we paid back $151,455 to Jinghe Zhang.

On May 10, 2007, our operating subsidiaries, Joway Shengshi and Joway Technology entered into cash advance agreements with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to these agreements, Jinghe Zhang agreed to advance operating capital to Joway Shengshi and Joway Technology. These advances are interest free, unsecured and are repayable upon demand. During the period beginning May 17, 2007 (inception of Joway Shengshi) through March 31, 2011, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang of which $4,553,515 has been repaid. As of March 31, 2011, the total unpaid principal balance due Jinghe Zhang for advances made to Joway Shengshi was $83,882. During the period beginning March 28, 2007 (inception of Joway Technology) through March 31, 2011, Joway Technology received cash advances in the aggregate principal amount of $22,031 from Jinghe Zhang all of which has been repaid. As of March 31, 2011, the total unpaid principal balance due Jinghe Zhang for advances was $0.

The Company has sufficient liquidity to meet the Company’s operating cash needs over the next 12 months if Mr. Zhang were to demand immediate repayment of the remaining balance under these loans and no longer wish to provide future loans to the Company or any of its operating units.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

     March 31,     December 31,  
     2011     2010  

Building

   $ 5,279,073      $ 5,245,777   

Operating Equipment

     315,105        313,118   

Office furniture and equipment

     210,395        206,821   

Vehicles

     872,639        250,888   
                

Total

     6,677,212        6,016,604   

Less: accumulated depreciation

     (595,692     (496,893
                

Property, plant and equipment, net

   $ 6,081,520      $ 5,519,711   
                

Depreciation expense for the three months ended March 31, 2011 and 2010 amounted to $98,799 and $56,332, respectively.

STATUTORY RESERVES

Pursuant to the laws and regulations of the PRC, annual income of the Company’s PRC subsidiaries are required to be partly allocated to the statutory reserves funds after the payment of the PRC income taxes. The allocation to the statutory reserves funds should be at least 10% of 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 March 31, 2011, the Company had allocated $336,604 to statutory reserve.

 

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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 subsidiary and controlled VIEs. All significant inter-company accounts and transactions have been eliminated in the consolidation. Pursuant to Accounting Standards Codification Topic 810, “Consolidation”, Joway Shengshi, as a VIE of Junhe Consulting, have been consolidated in our financial statements. Joway Shengshi’s sales are included in our total sales, its income from operations is consolidated with ours, and our net income includes all of Joway Shengshi’s net income. Based on the various VIE Agreements, we are able to exercise control over the VIEs, and to obtain in full the economic benefits. Accordingly, the non–controlling interests have no economic interest in the VIEs.

Revenue Recognition

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 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. 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 c 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 complete 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, currents 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 are determined by weighted-average method), or the net realizable value, which is determined on selling prices less any further costs expected to be incurred for completion and disposal. Management regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether a valuation allowance is required.

 

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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

In April 2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force, or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of these amendments had no material impact on our consolidated financial statements.

In April 2010, the FASB issued ASU 2010-17, “Revenue Recognition—Milestone Method”, which updates the guidance currently included under topic 605, Revenue Recognition. ASU 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. ASU 2010-17 is effective for milestones achieved in fiscal years, and interim periods within those years, beginning after June 15, 2010 and should be applied prospectively. Early adoption is permitted. The adoption of this standard did not have a material impact on our consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310)—Receivables, or ASU 2010- 20. ASU 2010-20 enhances the disclosure requirements about the credit quality and related allowance for credit losses of financing receivables. We are currently evaluating the impact of the adoption of ASU 2010-20 on our financial statements.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Price of Raw Materials

Tourmaline powder and textiles are the most important raw materials used in the production of our products. The price of tourmaline powder remained stable in 2011 and 2010. The average price of textiles that we purchased increased in fiscal year 2011 as compared to fiscal year 2010. We are improving our production process and promoting new products with lower cost to mitigate the impact. Meanwhile, we closely monitor textile prices and have several alternative sources of supply.

Increase in production capacity

In order to capture additional market share for our products and take advantage of increased demand in the PRC, we have expanded our production capacity over the past several years, including the completion of our manufacturing plant in Tianjin and purchase of new equipment. In order to take advantage of anticipated growth in our industry in the PRC, we plan to continue to expand our production capacity in the future, although we do not yet have a specific timeframe for this expansion. Increased capacity has had, and could continue to have, a significant effect on our results of operations, by allowing us to produce and sell more products to generate higher revenues and profits.

Growth of the Chinese economy

We operate our manufacturing facilities in China and derive all of our revenues from sales to customers in China. As such, economic conditions in China affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our raw materials and our other expenses. According to the National Bureau of Statistics, China’s gross domestic product in the first quarter of 2011 increase by 9.7% compared with that in the same period of 2010. Domestic demand for, and consumption of, health-related products increased substantially as a result of this growth. However, any adverse changes in economic conditions or the regulatory environment in China may have a material adverse effect on our future performance.

Foreign currency translation

Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiaries is in RMB. Our results of operations are translated at average exchange rates during the relevant financial reporting periods, assets and liabilities are translated at the unified exchange rate at the end of these periods and equity is translated at historical exchange rates. Adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.

We recognized a foreign currency translation adjustment of $71,707 and $1,263 for the three months ended March 31, 2011 and 2010, respectively. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our Company is only beginning to adopt the necessary financial reporting concepts and practices, including strong corporate governance, internal controls and, computer, financial and other control systems. Most of our accounting and finance staff are not educated and trained in U.S. GAAP and SEC reporting requirements, and we may have difficulty hiring new employees in the PRC with such training. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet SEC reporting requirements. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our disclosure controls and procedures and in our internal controls over financial reporting, which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business.

 

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Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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. In evaluating our disclosure controls and procedures, management has considered the factors set forth above. Based on their evaluation, our CEO and CFO have concluded that, as of March 31, 2011, our disclosure controls and procedures were effective.

Changes in Internal Control of Financial Reporting

During the three months ended March 31, 2011 there were no significant changes in internal controls of the Company, or other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

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

None.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Reserved and Removed.

Item 5. Other Information.

None.

Item 6. Exhibits.

 

Exhibit

No.

 

Date

 

Description

31.1   May 15, 2011   Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and Rule 14d-14(a).*
31.2   May 15, 2011   Certification of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).*
32.1   May 15, 2011   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
32.2   May 15, 2011   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*

 

* Filed herewith.

 

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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: May 15, 2011

 

G2 VENTURES, 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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