10-K/A 1 d235601d10ka.htm FORM 10-K AMENDMENT NO. 1 Form 10-K Amendment No. 1

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K/A

Amendment No. 1

 

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 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 Number)

No. 2, Baowang Road, Baodi Economic Development Zone,

Tianjin, PRC 301800

(Address of principal executive office)

Registrant’s telephone number, including area code: +(86)-22-22533666

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  x    No  ¨

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

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 Act).    Yes  ¨    No  x

As of June 30, 2010, the registrant’s common stock was not trading on active markets and therefore had no readily determinable market value.

As of March 31, 2011, there were 20,000,000 shares of the issuer’s common stock, $0.001 par value, issued and outstanding.

 

 

 


EXPLANATORY NOTE

The purpose of this Amended Annual Report on Form 10-K/A is to amend certain Items as listed below (together, the “Amended Items”) of our Annual Report on Form 10-K which was filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2011 (the “Original 10-K”). These amendments are being made to address certain comments received from the Staff of the SEC.

The Amended Items are contained in the following sections: PART I — Item 1—Business; PART II — Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operation, — Item 9A—Controls and Procedures; PART III — Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, — Item 13 Certain Relationships and Related Transactions, and Director Independence; and PART IV — Item 15. Exhibits, Financial Statement Schedules.

Except as stated herein, this Annual Report on Form 10-K/A does not reflect events occurring after the filing of the Original 10-K on March 30, 2011 and no attempt has been made in this Current Report on Form 10-K/A to modify or update other disclosures as presented in the Original 10-K. Accordingly, this Form 10-K/A should be read in conjunction with the Original 10-K and our filings with the SEC subsequent to the filing of the Original 10-K.


Information Regarding Forward-Looking Statements

In addition to historical information, this report contains predictions, estimates and other forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. These risks and other factors include those listed under “Risk Factors” and elsewhere in this report, and some of which we may not know. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in this report in greater detail under the heading “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. You should read this annual report on Form 10-K and the documents that we have filed as exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.


ITEM 1. BUSINESS

The Overview

Through our PRC Operating Entities, Joway Health Industries Group Inc. (the “Company”) is engaged in the manufacture and sale of tourmaline-related healthcare products. We are incorporated in the state of Nevada. Our principal executive offices are located at No. 2. Baowang Road, Baodi Economic Development Zone, Tianjin City, PRC 301800.

Corporate History

Joway Health Industries Group, Inc.

Until October 1, 2010, we were a “shell company,” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. We were originally formed as a Texas corporation on March 21, 2003 to acquire most of the assets and certain liabilities of and succeed to the business of G2 Companies, Inc., (formerly Hartland Investment, Inc.), as an independent recording company and artist management company. The acquisition of G2 Companies, Inc. was consummated on April 1, 2003. On May 13, 2008, through a registered offering, we sold 1,284,574 shares of our common stock raising an aggregate of $128,457, before costs of the Offering. Our common stock began trading on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “GTVI” on September 11, 2009. Prior to the Share Exchange Transaction, we were a development stage music recording, production and artist management company that had limited operations, primarily due to our inability to raise sufficient capital.

On September 28, 2010, Mr. Kepler, our former Chief Executive Officer and majority shareholder, sold to Crystal Globe Limited, a British Virgin Islands company (“Crystal Globe”) 3,300,000 shares of common stock in the Company, which at that time represented 68.97% of the issued and outstanding capital stock of the Company. In connection with the sale, Mr. Kepler resigned as our sole officer and director and appointed Crystal Globe’s nominees, Mr. Jinghe Zhang, as our new President, Chief Executive Officer and sole director and Mr. Yuan Huang as our new Chief Financial Officer, Secretary and Treasurer. As a result, on September 28, 2010, there was a change in control of the Company.

On October 1, 2010, as a result of a transaction with Dynamic Elite (the “Share Exchange”), Dynamic Elite became our wholly-owned subsidiary and we ceased to be a shell company. Dynamic Elite is the holding company of all the equity of Junhe Consulting.

Share Exchange Transaction

On October 1, 2010, we entered into a Share Exchange Agreement with Crystal Globe, the sole shareholder of Dynamic Elite pursuant to which Crystal Globe transferred all of its shares in Dynamic Elite to us in exchange for 15,215,426 shares of our common stock. As a result, Dynamic Elite became our wholly-owned subsidiary and Crystal Globe held a total of 18,515,426 shares (approximately 92.6%) of our issued and outstanding common stock.

The Share Exchange was treated for accounting purposes as a reverse acquisition. Therefore, the Company’s financial statements after the Share Exchange are those of Dynamic Elite and its subsidiaries and controlled companies on a consolidated basis, as if the Share Exchange had been in effect retroactively for all periods presented.

Change of State of Incorporation; Name Change

In December 2010, the Company changed its jurisdiction of incorporation from the State of Texas to the State of Nevada and changed its name to Joway Health Industries Group, Inc. In connection with these changes, the Company adopted new Articles of Incorporation and Bylaws.

Dynamic Elite

Dynamic Elite was founded on June 2, 2010 under the laws of the British Virgin Islands by Crystal Globe and Edwin Liu, the sole shareholder of Crystal Globe at the request of Mr. Zhang Jinghe. Mr. Liu is a friend of Mr. Zhang Jinghe. On September 15, 2010, Dynamic Elite established a wholly-owned subsidiary—Tianjin Junhe Management Consulting Co., Ltd. (“Junhe Consulting”), as a wholly foreign-owned enterprise (WOFE) under the laws of the PRC for the purposes of acquiring Joway Shengshi and engaging in the manufacture and distribution of tourmaline products in China. Under Article 6 of the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, adopted April 12, 1986 at the 4th Sess. of the 6th National People’s Congress and as amended on October 31, 2000 (“PRC WOFE Law”) and Article 7 of the Detailed Rules for the Implementation, any person or entity that intends to establish an

 

1


enterprise in the PRC with foreign capital is required to submit an application for examination and approval to the appropriate department under the State Council. On September 9, 2010, the local Tianjin City government issued a certificate of approval approving the foreign ownership of Junhe Consulting by Dynamic Elite. Mr. Zhang Jinghe was appointed the Executive Director of Junhe Consulting.

PRC Operating Entities

All of our business operations are conducted through our PRC Operating Entities. The chart below sets forth our corporate structure.

Joway Shengshi

On May 17, 2007, Jinghe Zhang, Si Lijun and Song Baogang founded Tianjin Joway Textile Co., Ltd. as a limited liability company under the laws of the PRC. On November 24, 2009, the company changed its name to Tianjin Joway Shengshi Group Co., Ltd. (“Joway Shengshi”). The registered capital of the Joway Shengshi is RMB 50,000,000 and its term of operation will expire on May 16, 2022. Mr. Jinghe Zhang is the Executive Director and General Manager of Joway Shengshi. On July 1, 2010, Si Lijun transferred 4% of the equity interest in Joway Shengshi to Jinghe Zhang. As a result, Mr. Zhang owns 99% of the equity interest in Joway Shengshi. Baogang Song owns the remaining 1% of the equity interest of Joway Shengshi. Joway Shengshi owns 100% equity interest in each of Joway Technology, Joway Decoration, and Shengtang Trading.

Joway Technology

Joway Technology was incorporated under the laws of the PRC on March 28, 2007, with a registered capital of RMB 1,100,000. Its term of operation expires on March 27, 2017. It was formed to engage in intelligent engineering design and construction, development and sales of electronics, water filters, and other similar products. Prior to July 25, 2010, Joway Shengshi held 90.91% of Joway Technology. On July 25, 2010 the Joway Shengshi acquired the remaining 9.09% of Joway Technology from Chen Jingyun for RMB100,000 in cash.

Joway Decoration

Joway Decoration was incorporated by Joway Shengshi under the PRC laws on April 22, 2009, with a registered capital of RMB 2,000,000. Its term of operation expires on April 21, 2019. It was formed to engage in the business of intelligent electric heating project design and construction, development and sales of electronics technology and water filters, and the manufacture and sales of wood products. Prior to July 9, 2010, the Joway Group owned 90% of Joway Decoration. On July 9, 2010, the Joway Shengshi entered into a share acquisition agreement with Chen Jingyun to acquire the remaining 10% of the shares of Joway Decoration for RMB 200,000 in cash.

Shengtang Trading

Shengtang Trading was incorporated by Joway Shengshi under the PRC laws on September 18, 2009, with a registered capital of RMB 2,000,000. Its term of operation expires on September 17, 2029. It was formed to engage in the business of the import and export of merchandise and technology; knitwear, biochemistry (excluding toxic chemicals and drugs), and wholesale and retail sale of hardware. Prior to July 28, 2010, the Joway Shengshi owned 95% of Shengtang. On July 28, 2010, the Joway Shengshi entered into a share acquisition agreement with Wang Aiying to acquire the remaining 5% of the shares of Shengtang for RMB100,000 in cash.

Jingyun Chen is currently a General Manager of Joway Technology and Joway Decoration. Aiying Wang currently is an employee of Joway Shengshi but does not hold any management position.

VIE Agreements

On September 16, 2010, prior to the Share Exchange, our subsidiary, Junhe Consulting, and Tianjin Joway Shengshi Group Co., Ltd. (“Joway Shengshi”), a PRC company, entered into a series of agreements known as variable interest agreements (the “VIE Agreements”) pursuant to which Joway Shengshi became Junhe Consulting’s contractually controlled affiliate.

In connection with the Share Exchange and as consideration for entering into the VIE Agreements, Jinghe Zhang and Baogang Song, the shareholders of Joway Shengshi, entered into a Call Option Agreement with the sole shareholder of Crystal Globe, 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.

 

2


Under PRC law the acquisition of Joway Shengshi by Junhe Consulting must be structured as a cash transaction with the purchase price based on the appraised value of the equity interest or assets to be sold. Neither Junhe Consulting nor Dynamic Elite had sufficient cash to pay the appraised value of the equity interest or assets of the Joway Shengshi. Alternatively, the shareholders of Joway Shengshi entered into a series of contractual agreements (the “VIE Agreements”) which enabled Dynamic Elite to gain control of Joway Shengshi and consolidate into its financial statements the results, assets and liabilities of Joway Shengshi and its subsidiaries without triggering the regulatory requirements of PRC law. Under PRC law the VIE Agreements are considered commercial transactions among legal entities and individuals, and do not trigger the PRC requirements that apply to acquisitions, although the pledge by the Joway Shengshi’s equity holders of all their equity in Joway Shengshi to Junhe Consulting pursuant to the Equity Pledge Agreement (the “Equity Pledge”) must be registered with the appropriate governmental agency. The Equity Pledge was registered with local administration department for industry and commerce pursuant to the Section 1 of Article 226 of PRC Property Law passed by National People’s Congress on March 16, 2007.

Through Junhe Consulting, we effectively and substantially control Joway Shengshi and its three wholly owned subsidiaries Joway Technology, Shengtang Trading and Joway Decoration.

The VIE Agreements include:

 

   

a Consulting Services Agreement through which Junhe Consulting has the right to advise, consult, manage and operate Joway Shengshi and collect and own all of the net profits of Joway Shengshi;

 

   

an Operating Agreement through which 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;

 

   

a Proxy Agreement under which the two shareholders of Joway Shengshi have vested their collective voting control over Joway Shengshi to Junhe Consulting and may only transfer their respective equity interests in Joway Shengshi to Junhe Consulting or its designee(s);

 

   

an Option Agreement under which the shareholders of Joway Shengshi have granted to Junhe Consulting the irrevocable right and option to acquire all of their equity interests in Joway Shengshi with a consideration equal to the capital paid in by the shareholders in the amount of 50 million RMB (approximately USD $7.52 million). As executive director of Junhe Consulting, Mr. Zhang Jinghe has the power to exercise the option in his sole discretion, and

 

   

an Equity Pledge Agreement under which 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.

Terms of the VIE Agreements

Consulting Agreement

Under the Consulting Agreement, Joway Shengshi retained Junhe Consulting to (i) provide general advice and assistance relating to the management and operation of Joway Shengshi’s business; (ii) provide general advice and assistance with respect to employment and staffing issues, including recruiting and training of management personnel, administrative personnel and other staff, establishing an efficient payroll management system, and relocation assistance; (iii) provide business development advice and assistance; and (iv) such other advice and assistance as may be agreed upon by the parties. In return, Joway Shengshi agreed to pay Junhe Consulting quarterly a consulting fee in an amount equal to all of Joway Shengshi’s net income for that quarter within fifteen (15) days after receipt of Joway Shengshi’s quarterly financial statements. Joway Shengshi shall cause the owners of Joway Shengshi to pledge their equity interests in Joway Shengshi to Junhe Consulting to secure the payment of the foregoing consulting fee.

Joway Shengshi is subject to a number of covenants typical for this type of transaction, including the obligation to provide monthly, quarterly and annual reports, and other information requested by Junhe Consulting. In addition, Joway Shengshi is subject to a number of negative covenants, including the agreement that it will not (i) issue, purchase or redeem any equity or debt, or equity or debt securities, (ii) create, incur, assume or suffer to exist any liens upon any of its property or assets (except certain enumerated liens), (iii) wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or sale of all or substantially all of its assets; (iv) declare or pay any dividends, (v) incur, assume or suffer to exist any indebtedness, (other than certain enumerated exceptions); (vi) lend money or credit or make advances to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any other Person, except receivables in the ordinary course of business; (vii) enter into any transaction or series of related transactions, whether or not in the ordinary course of business, with any of its affiliates or related parties, other than on

 

3


terms and conditions substantially as favorable to Joway Shengshi as would be obtainable in a comparable arm’s-length transaction; (viii) make any expenditure for fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which are capitalized in accordance with generally accepted accounting principles in the PRC and capitalized lease obligations) during any quarterly period which exceeds the aggregate the amount contained in the budget; (ix) amend or modify or change its Articles of Association or business license, or any agreement entered into by it, with respect to its capital stock, or enter into any new agreement with respect to its capital stock; or (x) engage (directly or indirectly) in any business other than those types of business prescribed within the business scope of its business license.

The Consulting Agreement may be terminated by Junhe Consulting for any reason at any time. In addition, the Consulting Agreement may be terminated by Junhe Consulting by written notice in the event of a material breach by Joway Shengshi which, in the case of breach of a non-financial obligation, has not been remedied within fourteen (14) days following the receipt of such written notice. Either party may terminate the Consulting Agreement by written notice to the other party if (i) the other party becomes bankrupt or insolvent or is the subject of proceedings or arrangements for liquidation or dissolution or ceases to carry on business or becomes unable to pay its debts as they become due; (ii) if the operations of Junhe Consulting are terminated; or (iii) if circumstances arise which materially and adversely affect the performance or the objectives of the Consulting Agreement.

Operating Agreement

Under the Operating Agreement, Junhe Consulting agreed to guarantee Joway Shengshi’s performance of contracts, agreements or transactions with third parties in consideration for the pledge by Joway Shengshi to Junhe Consulting of all of Joway Shengshi’s assets. In addition, Joway Shengshi and its shareholders agreed that Joway Shengshi would not, without the prior written consent of Junhe Consulting, enter into any transactions which may materially affect the assets, obligations, rights or the operations of Joway Shengshi (excluding transactions entered into in the ordinary course of business and the lien obtained by relevant counter parties due to such agreements), including transactions involving (i) the borrowing of money or assumption of any debt; (ii) the sale or purchase from any third party any asset or right, including, but not limited to, any intellectual property rights; (iii) the provision of any guarantees to any third parties using its assets or intellectual property rights; or (iv) the assignment of any business agreements to any third party. Joway Shengshi and its shareholders also agreed to appoint to the Joway Shengshi’s board of directors, and Joway Shengshi’s General Manager, Chief Financial Officer, and other senior officers those persons recommended or selected by Junhe Consulting.

Voting Rights Proxy Agreement

Under the Proxy Agreement, the Shareholders irrevocably granted to Junhe Consulting, for the maximum period of time permitted by law, all of their voting rights as shareholders of Joway Shengshi. In addition, the Shareholders agreed not to transfer their equity interest in Joway Shengshi to any third party (other than Junhe Consulting or a designee of Junhe Consulting). The Proxy Agreement may not be terminated without the unanimous consent of all Parties, except Junhe Consulting, which may terminate the Proxy Agreement with or without cause on thirty (30) days prior written notice.

Option Agreement

Under the Option Agreement, the Shareholders irrevocably granted to Junhe Consulting or its designee an exclusive option to purchase at any time, to the extent permitted under PRC Law, all or a portion of the Shareholders’ Equity Interest in Joway Shengshi for a price equal to the capital paid in by the Shareholders on a pro rata basis in accordance with the percentage of the Shareholders’ Equity Interest acquired, subject to applicable PRC laws and regulations.

Equity Pledge Agreement

Under the Equity Pledge Agreement, the Shareholders pledged all of their right, title and interest in their equity interests in Joway Shengshi to Junhe Consulting to guarantee Joway Shengshi’s performance of its obligations under the Consulting Services Agreement. The pledge expires two (2) years after the satisfaction by Joway Shengshi of all of its obligations under the Consulting Services Agreement. During the term of the Equity Pledge Agreement, Junhe Consulting is entitled to vote, control, sell, or dispose of the Pledged Collateral in the event the Company does not perform its obligations under the Consulting Services Agreement. In addition, Junhe Consulting is entitled to collect any and all dividends declared or paid in connection with the Pledged Collateral.

Through these contractual arrangements, we have the ability to substantially influence the daily operations and financial affairs of Joway Shengshi and to receive, through our subsidiaries, all of its profits. As a result, we are considered the primary beneficiary of Joway Shengshi and its operations, and Joway Shengshi and its subsidiaries are deemed to be our variable interest entities. Accordingly, we are able to consolidate into our financial statements the results, assets and liabilities of Joway Shengshi and its subsidiaries.

 

4


Call Option Agreement

As part of the reorganization of the Joway Shengshi, Mr. Liu and the shareholders of Joway Shengshi entered into a Call Option Agreement, pursuant to which the shareholders of the Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an aggregate price equal of $20,000 over the next three years. In addition, the Option Agreement also provides that Mr. Liu shall not dispose any of the shares of Crystal Globe without consent of Mr. Zhang and Mr. Song. Upon the consummation of the Share Exchange Transaction, Crystal Globe became the principal shareholder of G2 Ventures, Inc. and Mr. Zhang and Mr. Song became indirect beneficial owners of the shares in G2 Ventures held by Crystal Globe pursuant to this Call Option Agreement.

Business Description

We are, through our PRC Operating Entities, engaged in the manufacture and sales of tourmaline-related healthcare products. As of the date of this report, we have 119 employees. Our principal executive offices are located at No. 2. Baowang Road, Baodi Economic Development Zone, Tianjin, PRC 301800.

Introduction to Tourmaline

Tourmaline is a crystal silicate mineral compounded with elements such as aluminum, iron, magnesium, sodium, lithium, or potassium. Tourmaline is classified as a semi-precious stone and the gem comes in a wide variety of colors. (Source: http://en.wikipedia.org/wiki/Tourmaline)

Tourmaline has the ability to become its own source of electric charge, as it is both pyroelectric, as well as piezoelectric. When it is put under pressure or when it is dramatically heated or cooled, tourmaline creates an electrical charge capable of emitting far infrared rays (“FIR”) and negative ions. (Source: http://www.globalhealingcenter.com/tourmaline.html)

FIRs are invisible waves of energy capable of penetrating deep into the human body. Negative ions are atoms that have a negative electric charge. FIRs and negative ions are perceived to have certain health benefits. (Source: http://www.globalhealingcenter.com/tourmaline.html).

Because it is a permanent source of FIRs and negative ions, tourmaline is perceived to have certain health benefits (Source: Niwa Institute for Immunology, Japan. Int J. Biometeorol 1993 Sep; 37(3) 133-8). In view of its perceived health benefits, tourmaline has been used to manufacture a wide range of healthcare products, including apparel, bedding, water purifiers, sauna rooms, and personal care products.

While tourmaline has perceived health benefits, the actual benefits of tourmaline to human health are unknown. The full efficacy of tourmaline to human health requires further significant clinical study. We are not aware of any formal clinical studies which have validated the health benefits of tourmaline.

We purchase liquid tourmaline from domestic companies which, in turn, import it from South Korea. Liquid tourmaline is readily available and its price has remained relatively stable. We have not experienced any shortage in tourmaline but as a precaution, we closely monitor its price and have several back-up suppliers.

China’s Tourmaline Health-Related Products Market

The use of tourmaline in health-related products in China began in 2001. Although more and more companies are producing tourmaline health-related products every year, the market for these products in China is still in its infancy and highly fragmented. (Source: 2010-2012 China’s tourmaline market and investment prospects research report, Institute of China Uniway Economics, August, 2010).

Currently, there are numerous kinds of tourmaline health-related products on the market, including tourmaline clothes, tourmaline mattresses, tourmaline water machines, etc. In China, users of tourmaline health-related products are typically middle-aged and elderly people and demand for tourmaline health-related products is still relatively low compared to the size of the Chinese population.

We believe that the main challenge for the tourmaline health-related product companies is market development rather than competition. With rising living standards, increasing disposable income, higher health consciousness and the greater awareness of the health benefits of tourmaline, we believe that the tourmaline health products market will grow rapidly in the next few years.

 

5


Manufacturing Process

We have two manufacturing processes.

One manufacturing process consists of applying or infusing raw textiles with liquid or granular tourmaline and then producing products from these tourmaline-infused textiles. This process is used to produce Male and Female Underpants, Tourmaline Scarves and Tourmaline Pillowcases.

Our second manufacturing process consists of applying or infusing already finished products with liquid or granular tourmaline. We purchase finished products, such as clothing, bedding, and mattresses and then, using one or more of the techniques described below, coat and/or infuse the products with liquid or granular tourmaline.

We coat or infuse liquid or granular tourmaline into our products using one or more of the following methods:

The Spray Method

We use special high-pressure nozzles to spray liquid tourmaline onto the surface of the product. Through this process, the tourmaline particles attach onto the surface of the product. We then use a high-temperature ironing machine to embed the tourmaline particles into the fibers of the product. This method is used in the manufacture of large pieces of textile products, such as mattresses.

The Dip Method

We completely immerse fabrics into liquid tourmaline and then stir the fabrics in the liquid tourmaline to ensure the tourmaline particles attach to the surface of the fabrics. Finally, we embed the tourmaline particles into the fibers by applying heat with our special high-temperature ironing machine. This method is used in the manufacture of smaller products, such as underwear, scarves, and shirts.

The Filling Method

We fill the products with tourmaline particles. This method is used to make activated water machines and other water treatment products.

The three methods mentioned above are key to our manufacturing process. We protect our manufacturing methods via confidentiality agreements entered into between us and our employees. Pursuant to the confidentiality agreement, the employee is prohibited from unlawfully revealing and using our confidential technology during his term of employment and ten years after the termination of employment. We also plan to submit a patent application for the dip method in the PRC.

Our Products and Services

We primarily manufacture the following three series of tourmaline-related healthcare products:

 

1. Healthcare Knit Goods Series

For the fiscal years ended December 31, 2009 and 2010, our healthcare knit goods series of products accounted for approximately 55.4% and 51.7% of our annual sales revenue, respectively. This series of products is comprised of tourmaline treated mattresses, bed linen, underwear, and shirts. We use either the spray or dip method to embed tourmaline particles into the fabric of this series of products.

Set forth below is a list of healthcare knit goods products, the trademarks or marks under which they are marketed and the manufacturing method employed:

 

No.    Products    Trademark/Mark    Manufacturing
Method
1    Golden Mattress       Spray Method
2    Tourmaline Mattress       Spray Method
3    Tourmaline Undergarment       Dip Method
4    Tourmaline Bed Linens       Spray Method
5    Tourmaline Male Shirts       Dip Method

 

6


2. Daily Healthcare and Personal Care Series

For the fiscal years ended December 31, 2009 and 2010, our daily healthcare and personal care series of products accounted for approximately 16% and 17.1% of our annual sales revenue, respectively. This series is comprised of tourmaline-treated wrist protectors, knee protectors, scarves, and shampoo and soap products. We use all three production methods to embed tourmaline particles into these products. We believe these tourmaline-treated daily healthcare products and personal care products produce FIRs and negative ions which have perceived health benefits.

Set forth below is a list of our products in the daily healthcare and personal care series, the trademarks or marks under which they are marketed and the manufacturing method employed:

 

No.    Products    Trademark/Mark   

Manufacture

Method

1    Tourmaline Wrist Protector       Spray Method
2    Tourmaline Knee Protector       Spray Method
3    Tourmaline Scarves       Dip Method
4    Tourmaline Shampoo       Filling Method
5    Tourmaline Soap       Filling Method
6    Tourmaline Socks       Dip Method

 

3. Wellness House and Activated Water Machine

For the years ended December 31, 2009 and 2010, our wellness house and activated water machine series of products accounted for approximately 28.5% and 31.2% of our annual sales revenue, respectively. This series of products is comprised mainly of tourmaline wellness houses, tourmaline wellness house materials, tourmaline activated water machines and drinking mugs. Our tourmaline wellness house resembles a regular sauna room in which users experience heat sessions. However, the inner layer of our wellness house is coated with tourmaline, which emits FIRs and negative ions when heated. We supply two types of wellness houses: one for family use, which is designed to be installed in the corner of a room and can seat one to eight people depending on its size; the other is customized and constructed on site for commercial bathrooms or spas according to their specifications.

Below is a list of different models of our Wellness House for family use:

 

Model    Trademark/Mark    Material    Dimension    Capacity   

Manufacturing

Method

Classic Mini

Wellness House

      Hemlock    1.0mX1.0mX1.9m    1-2 persons    Spray Method

Classic Twin Wellness

House I

      Hemlock    1.2mX1.05MX1.9m    2-3 persons    Spray Method

Classic Twin Wellness

House II

      Snow Pine    1.2mX1.05mX1.9m    2-3 persons    Spray Method

Elegant Multi-Person

Wellness House

      Hemlock    1.5mX0.53mX1.37mX1.9m    4-5 persons    Spray Method

Classic Multi-Person

Wellness House

      Hemlock    1.75mX1.6mX1.9m    6-7 persons    Spray Method

We infuse tourmaline particles into the filters of our tourmaline water machines and water mugs. Tourmaline is perceived to have certain health benefits.

 

7


Below is a list of our water treatment products:

 

No.    Products    Trademark/Mark    Manufacturing
Method
1    Tourmaline Water Machine       Filling Method
2    Tourmaline Water Mug       Filling Method

Return policy

It is the Company’s normal commercial practice that we only allow for the return of goods that do not conform to the customer’s order due to some occasional error in packaging or shipment. The return should be requested within seven days of purchase. Customers may also request a free repair of defective products within 15 days of purchase. For products purchased more than 15 days previously, we charge a service fee of 110% of the cost of repaired or replaced parts.

Services: Wellness House Maintenance

Our wellness house products generally carry a one-year warranty. When the warranty expires, we provide our customers the option to engage us to service and maintain their wellness houses for a fee equal to 200% of the cost of the repaired or replaced parts.

There has been very little demand for our wellness house maintenance services.

Manufacturing Facilities

Our manufacturing facilities are located in Baodi District, Tianjin City, PRC, and occupy an area of approximately 2,500 square meters. We have 20 employees engaged in manufacturing as of the date of this report. We have our own design team comprising four designers who are responsible for designing new styles for our products every quarter. They are also responsible for product packaging design.

Customers and Suppliers

Customers

Below is a list of our top ten customers for the years 2009 and 2010, respectively.

 

          Top Ten Customers in 2009              
No.    Name                  Products Sold       
         

Amount

(RMB)

    

Amount

(US$)

         

Percentage

of Sales

 

1

  

Shandong Jingbo Holdings Development Co., Ltd.

     523,223         77,058      

Wellness House materials

     2.5%   

2

  

Beijing No. 9 Urban Construction Engineering Company Limited

     397,087         58,481      

Wellness House materials

     1.9%   

3

  

Baocong Yang Joining Franchise Store

     380,788         56,080      

Tourmaline mattress and underwear

     1.8%   

4

  

Jinbao Liu Joining Franchise Store

     369,461         54,412      

Tourmaline mattress, pillowcases and soap

     1.7%   

5

  

Xiuchun Jia Joining Franchise Store

     357,615         52,668      

Tourmaline mattress, mugs and scarves

     1.7%   

6

  

Fengqi Wu

     349,628         51,492      

Tourmaline Wellness House

     1.6%   

7

  

Zhuoguan Joining Franchise Store

     330,795         48,718      

Tourmaline mattress, pillowcases and soap

     1.6%   

8

  

ZhengyiQiao Joining Franchise Store

     290,334         42,759      

Tourmaline mattress, pillowcases and soap

     1.4%   

9

  

Ning Fang Joining Franchise Store

     289,004         42,563      

Tourmaline mattress, pillowcases and soap

     1.4%   

10

  

Liang Ping Joining Franchise Store

     288,362         42,469      

Tourmaline mattress, pillowcases and soap

     1.4%   

Total

        3,576,308         526,700            16.8%   

 

8


          Top Ten Customers in 2010              
No.    Name           Products Sold       
         

Amount

(RMB)

    

Amount

(US$)

         

Percentage

of Sales

 

1

  

Dejun Wang Franchise Store

     1,383,605         204,109      

Tourmaline Water Machine, Wellness Room

     2.7%   

2

  

Tong Li Franchise Store

     1,281,138         188,993      

Tourmaline Scarves, Wellness Room

     2.5%   

3

  

Jianhua Zhang Franchise Store

     1,240,607         183,014      

Tourmaline Mattress, Wellness Room

     2.4%   

4

  

Meihua Zheng Franchise Store

     1,055,667         155,732      

Tourmaline Mattress

     2.1%   

5

  

Defeng Cai Franchise Store

     1,014,877         149,714      

Tourmaline Mattress, Wellness Room

     2.0%   

6

  

Min Yu Franchise Store

     863,715         127,415      

Tourmaline Mattress, Wellness Room

     1.7%   

7

  

Xiuxue Xu Franchise Store

     815,355         120,281      

Tourmaline Mattress, Tourmaline Cup

     1.6%   

8

  

Xinru Fan Franchise Store

     806,217         118,933      

Tourmaline Mattress, Tourmaline Socks

     1.6%   

9

  

Ning Fang Franchise Store

     791,531         116,767      

Tourmaline Mattress, Tourmaline Water Machine

     1.6%   

10

  

Hong Bai Franchise Store

     782,999         115,508      

Tourmaline Mattress, Tourmaline Soap

     1.5%   

Total

        10,035,711         1,480,466            19.71%   

Our main customers are franchisees that are authorized to sell our products exclusively. None of our customers accounted for more than 10% of our annual sales revenue in 2009 and 2010.

Suppliers

Below is a list of our top ten suppliers in 2009 and 2010, respectively.

 

          Top Ten Suppliers in 2009              
No.    Name                  Product Purchased       
          Amount
(RMB)
     Amount
(US$)
          Percentage
of Purchase
 

1

  

Tianjin Daxing Import & Export Trade Co., Ltd.

     2,278,539         335,573      

Cloth, cotton, fabrics and underwear

     18.2%   

2

  

Shenyang Joway Industrial Development Co., Ltd.

     2,227,718         328,088      

Cloth, cotton, underpants and hats

     17.8%   

3

  

HainingFutianrun Silk Co., Ltd.

     604,125         88,973      

Cloth and Cotton,

     4.8%   

4

  

Hangzhou Chufan Textile Co., Ltd.

     603,752         88,918      

Cloth, cotton and mattress

     4.8%   

5

  

Beijing Quanfu Wood Products Co., Ltd.

     598,560         88,153      

Wellness House materials

     4.8%   

6

  

Shenyang Hongguangyuan Wood Co., Ltd.

     413,318         60,871      

Wellness House materials

     3.3%   

7

  

Shenzhen Maskcare Biological Technology Co., Ltd.

     354,265         52,174      

Soap, shampoo and shower gel

     2.8%   

8

  

Tianjin Tielingjiacai Wood Co., Ltd.

     347,849         51,230      

Wellness House

     2.8%   

9

  

Beijing Chenjiehao Paint Debug Ltd.

     331,250         48,785      

Wellness House materials

     2.6%   

10

  

Tianjin Sunflower Packaging and Printing Co., Ltd.

     238,035         35,057      

Packaging materials and product manuals

     1.9%   

Total

        7,997,411         1,177,822            63.8%   

 

9


          Top Ten Suppliers in 2010              
No.    Name                  Product Purchased       
          Amount
(RMB)
     Amount
(US$)
          Percentage
of Purchase
 

1

  

Anhui Saunaking Co., Ltd.

     3,432,310         506,334      

Wellness Room

     26.9%   

2

  

Hangzhou Siluhua Home Textile Co., Ltd.

     2,027,537         299,102      

Tourmaline Mattress

     15.9%   

3

  

Penglai Huakang Healthcare Product Co., Ltd.

     1,109,477         163,670      

Xin-Nao-Ling Fish Oil Soft Gel and Zhi-Li-Bao Fish Oil Soft Gel

     8.7%   

4

  

Hangzhou Shengce Clothing Co., Ltd.

     842,515         124,288      

Tourmaline Mattress

     6.6%   

5

  

Hangzhou Chufan Textile Co., Ltd.

     645,744         95,260      

Tourmaline Mattress

     5.1%   

6

  

Shenzhen Yaobang Commodity Co., Ltd.

     615,176         90,751      

Sanitary Napkin

     4.8%   

7

  

Tianjin Zhengxinglong Packaging Co., Ltd.

     367,680         54,240      

Tourmaline House Materials

     2.9%   

8

  

Shaoxing Jingbaolai Textile Co., Ltd.

     331,487         48,901      

Fabrics

     2.6%   

9

  

Kangzhou Rikang Purification Equipment Co., Ltd.

     330,750         48,792      

Tourmaline Water Machine Materials

     2.6%   

10

  

Tianjin Tielingjiacai Wood Co., Ltd.

     306,720         45,247      

Wellness Room

     2.4%   

Total

        10,009,396         1,476,585            78.5%   

Supplier: Shenyang Joway Industrial Development Co., Ltd. (“Shenyang Joway”)

As shown in the table above, in 2010, we had two suppliers that accounted for 26.9% and 15.9%, respectively of our annual raw materials purchases and in 2009 we had two major suppliers that accounted for 18.2% and 17.8%, respectively of our annual raw materials purchases. We do not have long term contracts with any of our suppliers since the raw materials we use are readily available on the market at generally stable prices.

Shenyang Joway was formed in 2005 in Shenyang, China by Mr. Jinghe Zhang and three other individuals. Mr. Zhang holds more than 50% of the equity in Shenyang Joway. Shenyang Joway was in the business of marketing and distributing clothing and related products to other companies. In 2008 and 2009 Joway Group entered into a number of sales contracts with Shengyang Joway, pursuant to which the Joway Group purchased inventory and equipment from Shengyang Joway. In 2009 Mr. Zhang decided to shut down the operations of Shenyang Joway in order to focus his attention on the Joway Group’s business and on December 20, 2009, Joway Group entered into a final sales contract with Shengyang Joway pursuant to which the Joway Group purchased inventory in the amount of $137,395 from Shengyang Joway. In addition, from 2007 through 2009, Shenyang Joway advanced the Joway Group an aggregate of $694,458. The advances were noninterest bearing and had no specified repayment terms. As of June 30, 2010, the total unpaid principal balance due Shenyang Joway for advances was $138,093. Shenyang Joway also licensed the trademarks “Xi” and “Joway” to the Joway Group pursuant to a royalty-free license.

Shenyang Joway has ceased operations, although it still exists as a legal entity, and the Joway Group was able to find new suppliers with no material adverse impact to the Company.

Franchise Stores

Approximately 92% and 72% of our annual sales in 2010 and 2009, respectively, were made to our franchisees.

As of the date of this Report, there are approximately 244 franchise stores across the PRC that are authorized to sell our products exclusively. Set forth below is a geographical breakdown of the franchise stores:

 

Region    Number of
Franchise
Stores
 

Northeastern China (Liaoning, Jilin, Heilongjiang)

     65   

Northern China (Beijing, Tianjin, Hebei, Shanxi, Inner Mongolia)

     49   

Eastern China (Shanghai, Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi)

     42   

Southern China (Guangdong, Hainan, Guangxi)

     35   

Central China (Henan, Hubei, Hunan)

     27   

Southwestern China (Chongqing, Sichuan, Guizhou, Yunnan, Tibet)

     26   

Total

     244   

 

10


We use multiple criteria to select our franchise stores, including reviewing each potential franchisee’s financial conditions, sales network, sales personnel, and faculties. Generally the potential franchise store submits an application to become our franchise store; we will review the overall conditions of the applicant and authorize the applicant to sell our products if the applicant meets the minimum working capital requirement of RMB 40,000 and has the requisite business facilities.

We typically enter into a standard franchising agreement with the applicant. Pursuant to the agreement, the franchisee is authorized to sell our products exclusively at a predetermined retail price. In exchange, we provide them with products at a discounted price, geographical exclusivity, and marketing, training and technological support. The franchisee is also required to adhere to certain standards of product merchandising, promotion and presentment. No initial franchise fees are required from the franchisee, nor does the franchisee need to pay any continuing royalties. The agreement is generally for a term of three years and is renewable at the mutual agreement of both parties.

Marketing and Sales

Our primary marketing strategies are directed towards both our franchisees and end users, and the marketing efforts of our franchisees are directed towards end users. The Company assists franchisees on monthly product introduction seminars, which are open to both our franchisees and to the general public. We also host an annual conference, which is open to both our franchisees and to the general public. For example, in 2009, we hosted an annual conference by sponsoring a national television program in China, for which we invited our franchisees and customers to attend. In 2009, because the annual conference was broadcast over CCTV, we charged an entrance fee to the general public for admission. However, in 2010, we held our annual conference in Korea and did not charge entrance fees. The Company’s selling expenses in 2009 set forth on its Consolidated Statement of Operations are net expenses after taking into account revenue from these ticket sales.

The franchise stores are responsible for the cost of organizing the monthly product introduction seminars and meetings and we are responsible for the travel expenses of our employees who attend these meetings and seminars to explain and promote our various product lines. There are on average 15 such seminars and meetings each month nationwide. Generally, we choose the venue for the product seminars and meetings based on market prospects, sales volume and the extent of meeting preparation. During the year ended December 31, 2010, we held product seminars and meetings in approximately 105 cities in the PRC.

Generally, we are responsible for the cost of annual conferences. In 2010 and 2009, we incurred costs related to annual conferences of $305,454 (RMB 2,070,594) and $1,043,551 (RMB 7,096,147), respectively.

Below is a breakdown of our marketing expenses in the fiscal years 2009 and 2010.

 

     2009      2010  
Expenses    RMB      US$      RMB      US$  

Promotion

     7,065,744         1,032,871         2,070,594         305,454   

Printing

     268,809         39,294         150,671         22,227   

Travelling

     353,190         51,629         510,931         75,372   

Training

     137,146         20,048         100,000         14,752   

Salaries

     272,740         39,869         893,419         131,797   

Total

     8,097,629         1,183,711         3,725,615         549,602   

For the fiscal year 2011, we have a marketing and sales budget of $716,143 (RMB 4,735,000), of which, $302,489 (RMB2,000,000) is budgeted for our 2011 annual conference, $247,285 (RMB 1,635,000) for sales personnel, and the remainder for travel, training and other expenses of our sales and marketing department.

Seasonality

Because our products are for daily use, seasonal variations do not have meaningful impact on the market demand for our products.

 

11


Competition

Competitive Environment

China’s tourmaline health products market is highly segmented and is still in its infancy.

However, given the highly segmented nature of the market, we are unable to locate any information on the size of the tourmaline healthcare-related market in China. Currently, Japanese and Korean companies are leaders in tourmaline technology. However, they have not yet developed a sizeable market share for their products in the PRC (Source: 2010-2012 China’s tourmaline market and investment prospects research report, Institute of China Uniway Economics, August 2010). Therefore, we believe that there is a great opportunity for us to create demand and market share and establish ourselves as a leader in the tourmaline-related healthcare products field.

Our Competitors

Our major competitors in the PRC are as follows:

 

   

Heilongjiang Xingfuren Technology Development Co., Ltd. operates in PRC. They mainly focus on producing far-infrared health products and tourmaline health products.

 

   

Harbin Jiuguang Daily Health Products Co., Ltd. operates in PRC. They mainly focus on the manufacture of tourmaline sauna rooms and tourmaline health products.

 

   

Ihanya Nano Technology Co., Ltd. operates in Changsha, Hunan province, PRC. They mainly focus on manufacturing tourmaline sauna rooms and tourmaline health products.

 

   

Harbin Handu Tourmaline Nano Technology Development Co., Ltd. operates in PRC. They mainly focus on manufacturing tourmaline sauna rooms and tourmaline health products.

 

   

Harbin Wanshou Nano Science and Technology Co., Ltd. operates in the PRC. They mainly focus on new Nano technology research and development, and the manufacture of tourmaline health products and tourmaline sauna rooms.

Our Competitive Advantages

We believe that by leveraging the following strengths, we can effectively compete and enhance our market position:

 

   

Brand Advantage: We are one of the first companies to manufacture, distribute and sell tourmaline health-related products in the PRC and we believe that our brand (“Joway”) is the most established and well-known brand (“Joway”) in the market.

 

   

Technology Advantage: We possess several patents for tourmaline health-related products. We also invest a significant amount of time and expense in new product research and development.

 

   

Sales Channels Advantage: We have approximately 244 franchise stores in most of the big cities in the PRC and we continue to expand our franchise network. We believe our extensive franchisee network will assure that our sales continue to grow.

Business Strategy

We believe the market for tourmaline health-related products in the PRC will grow rapidly. In order to benefit from the market opportunities, we plan to implement the following strategies:

 

   

We will focus on expanding our sales and franchise network in the PRC. In addition, we plan to develop our sales network outside of the PRC, including India, Indonesia, Russia, Ukraine, Eastern Europe, Africa, South America and other foreign markets.

 

   

We will continue to expand our product offerings and seek to optimize our product portfolio to include more products with higher profit margins. For example, we believe that tourmaline daily health-related products, water treatment products, tourmaline home accessories and tourmaline environmentally friendly paint have more profit potential and we plant on investing more research and development dollars into developing these products.

 

   

We intend to improve our operations, exploit our competitive strengths, and look for ways to expand our business, including through the acquisition of other existing businesses.

 

12


Research and Development

As of December 31, 2010, we had eight employees engaged in research and development activities. Our research and development focus is on developing new products in the daily health-related, water treatment, and home accessories line, including tourmaline wool blankets, tourmaline laundry balls, tourmaline washing powder and tourmaline foot spa basins.

During the 2009 and 2010, we spent $8,626 (RMB 59,010) and $99,996 (RMB 677,849), respectively, on research and development activities. The following is a breakdown of our research and development expenses for 2009 and 2010 as well as our R&D budget for 2011.

 

     2009      2010      2011 (Budget)  
Item    RMB      US$      RMB      US$      RMB      US$  

Equipment

     11,865         1,734         14,997         2,212         100,000         15,124   

Samples

     12,110         1,770         2,133         315         60,000         9,075   

Travel Expense

     4,235         619         4,579         676         30,000         4,537   

Salary

     30,800         4,502         155,000         22,866         307,000         46,432   

Inspection Fee

     0         0         1,140         168         10,000         1,512   

R&D fee (with Zhong’ao)

     0         0         500,000         73,760         0         0   

Total

     59,010         8,625         677,849         99,996         507,000         76,680   

Intellectual Property

PRC Trademark Protection

In the PRC, the Trademark Office administers the system of trademark law (Trademark Review and Adjudication Board and the courts administer the appeal function). The two principal pieces of legislation forming the trademark system are the Trademark Law and the Unfair Competition Law. The Trademark Law of the PRC stipulates that goods mark, service mark, collective mark and certification mark can be registered in the PRC and the holder of the marks can obtain exclusive trademark rights. Trademarks should be visible marks, including words, device, letters, digits, 3-D marks and combinations of colors, and combinations of any of the aforementioned. Sound or smell is not registrable yet in the PRC.

A trademark applicant must file an application with the PRC Trademark Office. Normally, the Trademark Office renders a decision within 18 months after it receives all supporting documents. If the Trademark Office approves the application, the mark will be published in the PRC Trademark Gazette. After the mark is published, there will be a three-month opposition period. If nobody files opposition within that period, the application will mature into registration. The Trademark Office will then issue the certificate and the Trademark Gazette will publish the mark again as a registered mark.

The term of trademark protection is ten years from the date the registration is granted. The registrant may renew the trademark for an additional ten year term within six months before the expiration date of the mark’s present term. Where no such application could be filed within the stated period, a grace period of six months may be allowed. If the registrant does not file for renewal within the grace period, the registered trademark will be canceled. Currently, the applicant does not need to prove the use of the trademark prior to renewal.

However, registration of a mark may be blocked by an unregistered famous mark in the PRC in accordance with the PRC’s Trademark Law and obligations under the Paris Convention and the 1995 United States-China Intellectual Property Protection Agreement (“IP Action Plan”), provided that the owner of the famous mark can prove that the mark was well-known in the PRC before the filing date of the similar mark. Owners of unregistered famous mark may also bring oppositions or cancellations for previously registered marks, based on Articles 13, 30 and 41 of the Trademark Law.

Without authorization from the trademark owner, no one may use a mark identical or similar to the registered mark on identical or similar goods as the registered mark. Infringers will be subject to administrative, civil or criminal punishment. The damages awarded to the trademark owner will be calculated upon the illegal profits of the infringer and actual losses to the rights owner. In the event that the damages from infringement are difficult to calculate, the statutory maximum compensation will be RMB 500,000 (about US $61,000), which may be a real deterrent in some cases. In addition, the trademark owner may apply to a competent court for preliminary injunction against ongoing or threatened trademark infringement before a lawsuit is initiated.

 

13


Company Trademarks

We regard our trademarks, trade secrets, patents and similar intellectual property as critical factors to our success. We rely on patent, trademark and trade secret law, as well as confidentiality and license agreements with certain of our employees, customers and others to protect our proprietary rights.

The trademarks we currently use include the “Xi” trademarks and the “Joway” trademark, which are owned by Shenyang Joway Industrial Development Co., Ltd. (“Shenyang Joway”) and our President, Chief Executive Officer and director, Jinghe Zhang, respectively. We are licensed to use the “Xi” trademarks pursuant to a license agreement with Shenyang Joway dated December 1, 2009 for a term of nine years. We are also permitted to use the “Joway” trademark pursuant to a license agreement with Jinghe Zhang dated December 1, 2009 for a term of ten years. The agreements are renewable at the end of their respective terms. We do not have to pay any license fees to Shenyang Joway and Jinghe Zhang for the use of the trademarks.

We have also submitted applications for twelve trademarks which are under review by the Trademark Office of State Administration of Industry and Commerce of the PRC.

Set forth below is a detailed description of the trademarks we use and the trademarks under application.

 

Mark   

Registration

/Application No.

   Class    Effective Date       

Expiration

Date

       Owner/Applicant
   6104256   

Class 3: Cosmetics and Cleaning Preparations.

Bleaching preparations and other substances for laundry use; cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.

   March 21, 2010      March 20, 2020      Shenyang Joway Industrial Development Co., Ltd.
   6104253   

Class 11: Environmental control apparatus.

Apparatus for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply and sanitary purposes.

   February 14, 2010      February 13, 2020      Shenyang Joway Industrial Development Co., Ltd.
   4794111   

Class 24: Fabrics.

Textiles and textile goods, not included in other classes; bed and table covers.

   February 21, 2009      February 20, 2019      Jinghe Zhang
   8467175   

Class 30: Staple foods.

Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces (condiments); spices; ice.

   Registration Application Accepted on July 9, 2010      Tianjin Joway Shengshi Group Co., Ltd.
   8236587   

Class 5: Pharmaceuticals.

Pharmaceutical, veterinary and sanitary preparations; dietetic substances adapted for medical use, food for babies; plasters, materials for dressings; material for stopping teeth, dental wax; disinfectants; preparations for destroying vermin; fungicides, herbicides.

  

Registration

Application Accepted

on April 23, 2010

    

 

14


   8236524   

Class 24: Fabrics.

Textiles and textile goods, not included in other classes; bed and table covers.

  

Registration

Application Accepted

on April 23, 2010

    
   8029074    Class 11: Environmental control apparatus.             
      Apparatus for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply and sanitary purposes.             
   8029052    Class 5: Pharmaceuticals.   

Registration Application Accepted

on January 27, 2010

    
      Pharmaceutical, veterinary and sanitary preparations; dietetic substances adapted for medical use, food for babies; plasters, materials for dressings; material for stopping teeth, dental wax; disinfectants; preparations for destroying vermin; fungicides, herbicides.        
   8029009    CLASS 2: Paints             
      Paints, varnishes, lacquers; preservatives against rust and against deterioration of wood; colorants; mordants; raw natural resins; metals in foil and powder form for painters, decorators, printers and artists.             
   8236733    Class 30: Staple foods.   

Registration

Application Accepted

on April 23, 2010

    
      Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces (condiments); spices; ice.        

 

15


   8236706    Class 25: Clothing.             
      Clothing, footwear, headgear.             
   8236538    Class 24: Fabrics.             
      Textiles and textile goods, not included in other classes; bed and table covers.             
   8236684    Class 11: Environmental control apparatus.             
      Apparatus for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply and sanitary purposes.             
   8236608    Class 5: Pharmaceuticals.             
      Pharmaceutical, veterinary and sanitary preparations; dietetic substances adapted for medical use, food for babies; plasters, materials for dressings; material for stopping teeth, dental wax; disinfectants; preparations for destroying vermin; fungicides, herbicides.             
   8236641    Class 3: Cosmetics and Cleaning Preparations.             
      Bleaching preparations and other substances for laundry use; cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.             

Currently, the patents the Company is using are owned by our Chief Executive Officer, Mr. Jinghe Zhang. Pursuant to a license agreement with our President, Chief Executive Officer and director, Jinghe Zhang, we are permitted to use the following five patents for free from December 1, 2009 to the expiration date of each patent.

 

16


No.   Product   Type   Patent No.   Application Date   Effective Date   Term   Owner
&Inventor

1

 

Water Purifier

  Utility

Model

  ZL200720014571.6   September 17,
2007
  October 29, 2008   Ten years   Jinghe Zhang

2

 

Tourmaline Undergarment

  Utility

Model

  ZL200720015434.4   October 22,
2007
  July 16, 2008   Ten years   Jinghe Zhang

3

 

Tourmaline Mattress

  Utility

Model

  ZL200720015435.9   October 22,
2007
  December 24, 2008   Ten years   Jinghe Zhang

4

 

Tourmaline Wellness House

  Utility

Model

  ZL200720014570.1   September 17,
2007
  July 16, 2008   Ten years   Jinghe Zhang

5

 

Drinking Water Purifier

  Design   ZL200730011189.5   September 17,
2007
  April 1, 2009   Ten years   Jinghe Zhang

Insurance

We maintain product liability insurance policies covering our water machine for claims resulting from personal injury or damage to property caused by our water machine. We also maintain limited insurance coverage for our vehicles. The total insurance coverage for our water machine is RMB 1,000,000 ($147,275) from November 11, 2009 to October 28, 2010 and we have paid RMB 12,375 ($1,820) in insurance premiums for the coverage. In addition, we do not carry property insurance, and we do not have any business interruption insurance due to the limited coverage of any business interruption insurance in the PRC.

Employees

As of the date of this report, the Company, including its subsidiaries, has a total of 119 full time employees.

Joway Shengshi

As of the date of this report Joway Shengshi has 101 full-time employees based in Tianjin City, PRC. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.

Below is a breakdown of Joway Shengshi’s employees:

 

    

Number of

Employees

 

Departments

  

Management

     14   

Sales

     14   

Distribution

     18   

Production

     16   

Research and development

     8   

Franchising

     21   

Finance

     6   

Project

     4   

Joway Technology

As of the date of this Report, Joway Technology has eight full-time employees based in Tianjin City, PRC. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.

Joway Decoration

As of the date of this Report, Joway Decoration has six full-time employees based in Tianjin City, PRC. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.

 

17


Shengtang Trading

As of the date of this Report, Shengtang Trading has four full-time employees based in Tianjin, PRC. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.

We are required to contribute a portion of our employees’ total salaries to the PRC government’s social insurance funds, including pension insurance, medical insurance, unemployment insurance, work-related injury insurance, and maternity insurance, in accordance with relevant regulations. We have purchased work injury insurance and medical insurance for all our employees.

Effective January 1, 2008, the PRC introduced a new labor contract law that enhances rights for the nation’s workers, including open-ended work contracts and severance pay. The legislation requires employers to provide written contracts to their workers, restricts the use of temporary laborers and makes it harder to lay off employees. It also requires that employees with fixed-term contracts be entitled to an indefinite-term contract after a fixed-term contract is renewed twice. Although the new labor contract law will increase our labor costs, we do not anticipate there will be any significantly effects on our overall profitability in the near future since such amount was historically not material to our operating cost. Management anticipates this may be a step toward improving candidate retention for skilled workers.

Government Regulations and Compliance with Applicable Laws

Below is a list of agencies which may have a jurisdiction over our business:

 

Agency    Functions
State Food and Drug Administration (“SFDA”)(1)    Supervise the entire process from research and development, manufacturing, and distribution to utilization of drugs; supervise and coordinate the safety management of food, health food and cosmetics and organize investigations of serious accidents.
National Development and Reform Commission (“NDRC”)    Make strategic and mid- to long-term plans for the PRC healthcare industry; regulate drug prices; manage disaster relief funds and carry out healthcare development projects sponsored by the government.
Ministry of Commerce (“MOFCOM”)    Formulate regulations and policies on foreign trade, foreign direct investments, consumer protection, and market competition; negotiate bilateral and multilateral trade agreements.
Ministry of Science and Technology (“MST”)    Lay out science and technology development plans and policies; draft relevant regulations and rules and guarantee implementation of regulations and rules
General Administration of Quality Supervision, Inspection and Quarantine (“AQSIQ”)    Manage national quality, metrology, entry-exit commodity inspection, entry-exit health quarantine, entry-exit animal and plant quarantine, import-export food safety, certification, accreditation, and standardization, as well as enforce administrative laws
State Administration of Taxation (“SAT”)    Draft tax regulations and implementation rules and propose tax policies.
State Administration of Foreign Exchange (“SAFE”)    Make regulations and policies governing foreign exchange market activities and manage state foreign exchange reserves.

 

(1) The PRC State Food and Drug Administration is responsible for (i) regulating the research and development, manufacturing, distribution and utilization of drugs; (ii) supervising and coordinating the safety management of food, health food and cosmetics; and (iii) investigating serious accidents with respect to the foregoing. The products we manufacture are not regulated by the SFDA as they are not drugs, diet supplements or food consumed by humans. There are no existing laws or regulations in China governing the manufacture and sale of tourmaline health care products such as those sold by the Company nor are there any inspection requirements applicable to our products.

 

18


We act as a distributor for two products—Xin-Nao-Ling Fish Oil Soft Gel and Zhi-Li-Bao Fish Oil Soft Gel, which are subject to SFDA regulation. These two products are manufactured by Penglai Huakang Healthcare Industries, Ltd. which has obtained the necessary manufacturing licenses and certifications from the SFDA.

Environmental Regulations

The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution. To date, the Company’s costs to comply with applicable environmental laws have been minimal.

According to Article 32 of the PRC Environmental Protection Law, a project that may cause pollution to the environment cannot be undertaken until an environmental impact statement has been approved by the applicable department of environmental protection administration.

In March 2008, Joway Shengshi submitted an environmental impact statement with respect to the manufacturing of 300,000 sets of knitwear annually to the Tianjin Baodi Environmental Protection Bureau. The environmental impact statement assesses the pollution that the manufacturing is likely to produce and its impact on the environment. In addition, the report stipulates the preventive and curative measures the company will undertake. Tianjin Baodi Environmental Protection Bureau approved the environmental impact statement on March 12, 2008 and on April 22, 2009, the Tianjin Baodi Environmental Protection Bureau approved the manufacture of 300,000 sets of knitwear annually.

The Company’s production process does not produce industrial waste water or waste gas emissions of a type that is regulated by current PRC laws and regulations. The Company’s other emissions, including noise, waste water, solid waste and atmospheric pollutants meet regulatory standards. According to the Letter regarding Environment Protection of Tianjin Joway Shengshi Group Co, Ltd. issued by Tianjin Baodi Environmental Protection Bureau dated August 3, 2010, Joway Shengshi complies with applicable environmental protection laws and regulations and its discharge of pollutants meets with the standards of the state and Tianjin City.

In addition, Joway Shengshi obtained ISO 140001 International Environmental Management System Certification on January 15, 2009. ISO 140001 was first published as a standard in 1996 and specifies the requirements for an organization’s environmental management system. It applies to those environmental aspects over which an organization has control and where it can be expected to have an influence. Joway Shengshi passed each annual inspection of the ISO 140001. Such Certification covers the production and service of tourmaline health-related products such as underwear, bras, eyeshades, scarves, hats, kneepads, waist-protectors, socks, bedding and daily commodities.

We have not been named as a defendant in any legal proceedings alleging violation of environmental laws and have no reasonable basis to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect on our business, financial condition or results of operations due to any non-compliance with environmental laws.

To date, the Company has not incurred any significant costs in connection with complying with PRC national or local environmental laws.

Approvals, Licenses and Certificates

We require a number of approvals, licenses and certificates in order to operate our business. Our principal approvals, licenses and certificates are set forth below.

Junhe Consulting

 

   

Business License (No.120000400116845) issued by Tianjin City Administration of Industry and Commerce, valid from September 15, 2010 to September 14, 2040.

 

   

Tax Registration Certificate (No. 120224559490178) issued by State Administration of Taxation and local administration of taxation in 2010.

 

   

Organization Code Certificate (Code: 55949017-8) issued by Tianjin Bureau of Quality and Technical Supervision, valid from September 16, 2010 to September 15, 2014.

 

19


Joway Shengshi

Business License (No.120224000028519) issued by Tianjin City Administration of Industry and Commerce, valid from May 17, 2007 to May 16, 2022.

 

   

Social Insurance Register (No. 66033653) issued by Baodi Branch of Tianjin City Social Security Fund Management Centre, valid from September 2008 to August 2016.

 

   

Tax Registration Certificate (No. 120224660336538) issued by State Administration of Taxation and local administration of taxation in 2010.

 

   

Organization Code Certificate (Code: 66033653-8) issued by Tianjin Bureau of Quality and Technical Supervision, valid from November 30, 2009 to November 29, 2013.

Joway Technology

 

   

Business License (No.210100000007455 (1-1)) issued by Shenyang City Administration of Industry and Commerce, valid from March 28, 2007 to March 27, 2017.

 

   

Tax Registration Certificate (No. 210114798469376) issued by State Administration of Taxation and local administration of taxation in 2008.

 

   

Organization Code Certificate (Code: 79846937-6) issued by Shenyang Bureau of Quality and Technical Supervision, valid from August 21, 2007 to August 21, 2011.

 

   

Social Insurance Register (No. 210114955931) issued by Ministry of Human Resources and Social Security of Liaoning Province.

Joway Decoration

 

   

Business License (No.120224000040629) issued by Baodi Branch City Administration of Industry and Commerce, valid from April 22, 2009 to April 21, 2019.

 

   

Tax Registration Certificate (No. 120224687710841) issued by State Administration of Taxation and local administration of taxation in 2010.

 

   

Organization Code Certificate (Code: 68771084-1) issued by Tianjin Bureau of Quality and Technical Supervision, valid from April 22, 2009 to April 21, 2013.

 

   

Social Insurance Register (No. 68771084) issued by Baodi Branch of Tianjin City Social Security Fund Management Centre, valid from August 2010 to July 2018.

Shengtang Trading

 

   

Business License (No.120104000125590) issued by Nankai Branch of Tianjin City Administration of Industry and Commerce, valid from September 18, 2009 to September 17, 2029.

 

   

Tax Registration Certificate (No. 120104694072753) issued by State Administration of Taxation and local administration of taxation in 2009.

 

   

Organization Code Certificate (Code: 69407275-3) issued by Tianjin Bureau of Quality and Technical Supervision, valid from September 22, 2009 to September 21, 2013.

 

   

Social Insurance Register (No. 69407275) issued by Nankai Branch of Tianjin City Social Security Fund Management Centre, valid from February 2010 to January 2018.

 

20


Item 7. 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. As of December 31, 2010, we had 244 franchisees compared to 175 as of December 31, 2009. During 2011 and beyond, we intend to continue to develop our network of franchisees.

 

21


Important Factors Affecting our Results of Operations and Existing Trends

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 2010. The average price of textiles that we purchased decreased in fiscal year 2010 as compared to fiscal year 2009, while the average sales prices of our products remained stable, which caused our gross margins to increase in fiscal year 2010 as compared to fiscal year 2009. We expect the price of textiles to remain stable in 2011. 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 2010 increase by 10.5% compared with that in 2009. 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.

Costs of being a public company

Prior to the Share Exchange, we were a privately-held company. We expect that compliance with our obligations as a U.S. public company will require significant management time and significantly increase our general and administrative expenses, including insurance, legal and financial compliance costs.

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.

Description of Selected Income Statement Items

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

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

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Sales and marketing expenses consist primarily of employee remuneration and traveling expenses of market department, transportation expenses and advertising expenses. General and administrative

 

22


expenses consist primarily of employee remuneration of administrative departments, 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 year ended December 31,  
     2010      2009  

REVENUES

   $ 7,512,719       $ 3,109,059   

COST OF REVENUES

     1,885,667         1,164,683   
  

 

 

    

 

 

 

GROSS PROFIT

     5,627,052         1,944,376   

OPERATING EXPENSES

     2,507,823         1,133,249   
  

 

 

    

 

 

 

INCOME FROM OPERATIONS

     3,119,229         811,127   

OTHER (EXPENSE) INCOME, NET

     2,263         (19,344
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     3,121,492         791,783   

INCOME TAXES

     507,964         141,248   
  

 

 

    

 

 

 

NET INCOME

   $ 2,613,528       $ 650,535   
  

 

 

    

 

 

 

Business Segments

In 2010 and 2009, 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 year ended December 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

   $ 3,887,284        51.7   $ 1,282,027        17.1   $ 2,343,408        31.2   $ 7,512,719   

COST OF REVENUES

     764,470        40.5     318,655        16.9     802,542        42.6     1,885,667   
  

 

 

     

 

 

     

 

 

     

 

 

 

GROSS PROFIT

     3,122,814        55.5     963,372        17.1     1,540,866        27.4     5,627,052   

GROSS MARGIN

     80.3       75.1       65.8       74.9

OPERATING EXPENSES

     1,680,965        67.0     554,382        22.1     272,476        10.9     2,507,823   
  

 

 

     

 

 

     

 

 

     

 

 

 

INCOME FROM OPERATIONS

   $ 1,441,849        46.2   $ 408,990        13.1   $ 1,268,390        40.7   $ 3,119,229   
  

 

 

     

 

 

     

 

 

     

 

 

 

For the year ended December 31, 2009

 

23


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

REVENUES

   $ 1,723,846        55.4   $ 498,341        16.0   $ 886,872        28.5   $ 3,109,059   

COST OF REVENUES

     428,004        36.7     122,891        10.6     613,788        52.7     1,164,683   
  

 

 

     

 

 

     

 

 

     

 

 

 

GROSS PROFIT

     1,295,842        66.6     375,450        19.3     273,084        14.0     1,944,376   

GROSS MARGIN

     75.2       75.3       30.8       62.5

OPERATING EXPENSES

     709,485        62.6     205,102        18.1     218,662        19.3     1,133,249   
  

 

 

     

 

 

     

 

 

     

 

 

 

INCOME FROM OPERATIONS

   $ 586,357        72.3   $ 170,348        21.0   $ 54,422        6.7   $ 811,127   
  

 

 

     

 

 

     

 

 

     

 

 

 

Year Ended December 31, 2010 Compared to December 31, 2009

Revenue. For the year ended December 31, 2010, revenue was $7,512,719 compared to $3,109,059 for the year ended December 31, 2009, an increase of $4,403,660, or 141.6%. This increase was mainly attributable to our development of our network of franchisees which increased sales.

Revenue from healthcare knit goods segment increased by $2,163,438, or 125.5% to $3,887,284 for the year ended December 31, 2010 from $1,723,846 for the year ended December 31, 2009. This is primarily due to an increase in sales of our mattress products of $1.6 million, which is our best-selling product category. In addition, in 2010 we introduced 12 new products of knit goods to meet customer’s demand.

Revenue from daily healthcare and personal care products increased by $783,686, or 157.3% to $1,282,027 for the year ended December 31, 2010 from $498,341 for the year ended December 31, 2009. In 2010, we introduced 10 new products of daily healthcare and personal care products, which increased sales by $0.4 million.

Revenue from wellness houses and activated water machines increased by $1,456,536, or 164.2% to $2,343,408 for the year ended December 31, 2010 from $886,872 for the year ended December 31, 2009. This increase was mainly due to the introduction of 9 new products of wellness rooms for family use, which increased sales by $1 million.

Cost of Goods Sold. For the year ended December 31, 2010, cost of goods sold was $1,885,667 compared to $1,164,683 for the year ended December 31, 2009, an increase of $720,984, or 61.9%. This increase was mainly due to the increase in sales.

Cost of goods sold for healthcare knit goods segment increased to $764,470 for the year ended December 31, 2010 from $428,004 for the year ended December 31, 2009. This increase was mainly due to the increase in sales of Mattress products.

Cost of goods sold for the daily healthcare and personal care segment increased to $318,655 for the year ended December 31, 2010 from $122,891 for the year ended December 31, 2009. This increase was primarily due to the cost of Xin-Nao-Ling Fish Oil Soft Gel and Zhi-Li-Bao Fish Oil Soft Gel, which we introduced in 2010 and provided about $0.13 million of cost in 2010.

Cost of goods sold for wellness house and activated water machine segment increased to $802,542 for the year ended December 31, 2010 from $613,788 for the year ended December 31, 2009. This increase was mainly due to the increase in cost of the newly added wellness room in 2010.

Gross profit. Our gross profit increased by $3,682,676 or 189.4% to $5,627,052 for the year ended December 31, 2010, compared to $1,944,376 for the year ended December 31, 2009. This increase was mainly due to the increase in sales. In addition, the healthcare knit goods segment, wellness house, and activated water machine segments were the main contributors. Our gross margin increased from 62.5% for the year ended December 31, 2009 to 74.9% for the year ended December 31, 2010. This increase was mainly attributed to the wellness house and activated water machine segments.

 

24


Gross profit for the healthcare knit goods segment increased by $1,826,972 or 141.0% to $3,122,814 for the year ended December 31, 2010 compared to $1,295,842 for the year ended December 31, 2009. 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 75.2% for the year ended December 31, 2009 to 80.3% for the year ended December 31, 2010. This increase was attributed to the higher gross margin of new healthcare knit goods in 2010.

Gross profit of daily healthcare and personal care segment increased by $587,922 or 156.6% to $963,372 for the year ended December 31, 2010, compared to $375,450 for the year ended December 31, 2009. This increase was primarily attributed to the newly added daily healthcare and personal care products. Gross margin of daily healthcare and personal care segment decreased from 75.3% for the year ended December 31, 2009 to 75.1% for the year ended December 31, 2010. This decrease was mainly due to the lower gross margin of Xin-Nao-Ling Fish Oil Soft Gel and Zhi-Li-Bao Fish Oil Soft Gel, which are new products in 2010 and have a gross margin of approximately 20%. These two products are diet supplement products for our developing diet supplement market in 2010.

Gross profit of the wellness house and activated water machine segments increased by $1,267,782 or 464.2% to $1,540,866 for the year ended December 31, 2010, compared to $273,084 for the year ended December 31, 2009. This increase was mainly attributed to an increase in sales of our wellness room for family use. The gross margin of our wellness house and activated water machine segments increased from 30.8% for the year ended December 31, 2009 to 65.8% for the year ended December 31, 2010. This significant increase was mainly attributed to increased sales of our new wellness room for family use, which has a higher gross margin as well as increased sales of our activated 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 $1,374,574, or 121.3%, from $1,133,249 for the year ended December 31, 2009 to $2,507,823 for the year ended December 31, 2010. This increase was mainly due to the increase of our marketing expenses, stock compensation to our Senior Officer, depreciation and costs of being a public company. Operating expenses for healthcare knit goods segment increased by $971,480 or 136.9% to $1,680,965 for the year ended December 31, 2010 from $709,485 for the year ended December 31, 2009. Operating expenses for daily healthcare and personal care segment increased by $349,280 or 170.3% to $554,382 for the year ended December 31, 2010 from $205,102 for the year ended December 31, 2009. Operating expenses for wellness house and activated water machine segment increased by $53,814 or 24.6% to $272,476 for the year ended December 31, 2010 from $218,662 for the year ended December 31, 2009.

Income from operations. As a result of the foregoing, our income from operations was $3,119,229 for the year ended December 31, 2010, compared to a loss from operations of $811,127 for the year ended December 31, 2009, an increase of $2,308,102. This increase was mainly attributed to our wellness house and activated water machine segment, which contributed $1,213,968 of income from operations.

Income taxes. Our income tax expenses increased from $141,248 for the year ended December 31, 2009 to $507,964 for the year ended December 31, 2010. The increase was primarily due to the increase of income.

Net income. For the year ended December 31, 2010, our net income was $2,613,528 compared to $650,535 for the year ended December 31, 2009. This increase was primarily brought by 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.

 

25


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

 

     Year ended December 31,  
     2010     2009  

Sales to franchise customers

   $ 6,899,223      $ 2,238,586   

Sales to non-franchise customers

     613,496        870,473   
  

 

 

   

 

 

 

Total sales

   $ 7,512,719      $ 3,109,059   
  

 

 

   

 

 

 

Change in franchise outlets:

    

Number of franchise outlets open at beginning of period

     175        —     

Number of franchise outlets opened during the period

     93        182   

Number of franchise outlets closed during the period

     (24     (7
  

 

 

   

 

 

 

Number of franchise outlets open at the end of the period

     244        175   
  

 

 

   

 

 

 

Liquidity and Capital Resources

Our cash at the beginning of the year ended December 31, 2010 was $935,719 and increased to $5,281,420 by the end of the year, an increase of $4,345,701. We had net working capital of $4,531,909 at December 31, 2010, an increase of $2,655,920 from $1,875,989 at December 31, 2009.

Our cash is held in large, reputable financial institutions as follows:

 

     December 31, 2010      December 31, 2009  

Cash in hand

   $ 12,196       $ 201,513   

Cash in Industrial and Commercial Bank of China

     4,748,092         728,616   

Cash in Agricultural Bank of China

     3,365         5,590   

Cash in Standard Chartered Hong Kong

     1,000         —     

Cash in China Merchant Bank

     516,767         —     
  

 

 

    

 

 

 

Total

   $ 5,281,420       $ 935,719   
  

 

 

    

 

 

 

Our cash flow information summary is as follows:

 

     For the year ended December 31,  
     2010     2009  

Net cash provided by (used in):

    

Operating activities

   $ 3,449,885      $ 629,579   

Investing activities

     1,055,410        (2,665,012

Financing activities

   $ (493,899   $ 2,845,472   

Net Cash Provided By Operating Activities

Net cash provided by operating activities was $3,449,885 for the year ended December 31, 2010 compared to $629,579 provided by operating activities for the year ended December 31, 2009. This increase was primarily due to an increase in net income of $1,962,993.

 

26


We used cash to increase inventory in the amount of $117,899 for the year ended December 31, 2010. $477,268 of cash was used to reduce advances from customers. This was primarily offset by cash provided from net income of $ 2,613,528, an increase in tax payable of $574,938, a reduction of other receivable of $308,550 and an add-back of $331,074 of depreciation for non-cash expense.

We used cash to increase inventory of $378,063 for the year ended December 31, 2009. More specifically, $0.3 million was used in increase of finished goods for the expansion business of healthcare knit goods segment and daily healthcare and personal care segment. We also used cash to increase in other receivables of $368,528. This was primarily offset by cash provided from net income of $2,723,528, increases in accounts payable of $141,683 and advance from customers of $163,780, a reduction in advances to suppliers of $158,465 and an add-back of $158,248 of depreciation for non-cash expense.

Net Cash Provided By (Used In) Investing Activities

Net cash provided by investing activities was $1,055,410 for the year ended December 31, 2010, compared to $2,665,012 used in investing activities for the year ended December 31, 2009. In 2009, the Company directed Changlong Si, our treasurer, to purchase a CITIC trust fund in the amount of $1.5 million on behalf of the Company. This financial product, which is available for purchase by individuals only, had an interest rate of approximately 2.72%, which was higher than the standard bank interest rate. The amount invested was $1.5 million (RMB 10 million) and matured on August 25, 2010. At maturity the investment funds, which included the original $1.5 million plus $0.06 million (RMB 408,000) in interest, were returned to the Company. This is a one-time transaction and will not occur in the future. In addition, in 2009 we used $1,052,106 in connection with the construction of our factories and administrative offices in Baodi, Tianjin and for other production and office equipment compared to $359,859 used in 2010. The construction of our factories and administrative offices was completed in March 2010.

Net Cash Provided By (Used In) Financing Activities

Net cash provided used in financing activities was $493,899 for the year ended December 31, 2010, compared to $2,845,472 provided by financing activities for the year ended December 31, 2009. This change was mainly due to $6.6 million of cash advances received from Jinghe Zhang in 2009, pursuant to the loan agreements described below, offset by the repayment of $3 million of these advances 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 December 31, 2010, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang of which $4,402,061 has been repaid. As of December 31, 2010, the total unpaid principal balance due Jinghe Zhang for advances made to Joway Shengshi was $235,336. During the period beginning March 28, 2007 (inception of Joway Technology) through December 31, 2010, Joway Technology received cash advances in the aggregate principal amount of $22,031 from Jinghe Zhang all of which has been repaid. As of December 31, 2010, 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.

 

27


PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

     December 31,  
     2010     2009  

Building

   $ 5,245,777      $ 2,514,807   

Operating Equipment

     313,118        298,543   

Office furniture and equipment

     206,821        170,192   

Vehicles

     250,888        165,900   

Leasehold improvements

     —          211,644   
  

 

 

   

 

 

 

Total

     6,016,604        3,361,086   

Less: accumulated depreciation

     (496,893     (169,906
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 5,519,711      $ 3,191,180   
  

 

 

   

 

 

 

Depreciation expense for the years ended December 31, 2010 and 2009 amounted to $331,074 and $158,248, respectively.

In March, 2010, the Company completed construction on five buildings in its manufacturing and logistics center, and $2.6 million was converted from Construction in Progress to property, plant and equipment.

In 2009, the Company leased a floor of offices in the Nankai District of Tianjin as its headquarters for five years beginning in November 2009. The Company paid $211,644 to decorate these offices, which was treated as leasehold improvements in 2009. In October 2010, the Company terminated its lease of these offices and moved its headquarters to Baodi Economic Development Zone of Tianjin. The decoration expense was adjusted to long-term expenses.

CONSTRUCTION IN PROGRESS

During 2007, the Company began to construct manufacturing and logistics facilities and administrative offices in Baodi, Tianjin, PRC, to consist of a total of nine buildings. Four buildings were completed and occupied during 2009, and the remaining five buildings were completed and occupied in March 2010. As of December 31, 2010 and 2009, construction in progress of this project was $0 and $2,215,567, 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. For the years ended December 31, 2010 and 2009, the Company had allocated $286,816 and $48,188, respectively.

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.

 

28


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.

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.

 

29


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 January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements”, which amends FASB ASC 820, “Fair Value Measures and Disclosures.” FASB ASU 2010-06 require companies to make new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value hierarchies and information on purchases, sales, issuance and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. This ASU is effective prospectively for financial statements issued for fiscal years and interim periods beginning after December 15, 2009. The adoption of this topic will not have a material impact on our consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, “Amendments to Certain Recognition and Disclosure Requirements”, which amends FASB ASC 855, “Subsequent Events”. The update provides that SEC filers, as defined in ASU 2010-09, are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The update also requires SEC filers to evaluate subsequent events through the date the financial statements are issued rather than the date the financial statements are available to be issued. We adopted ASU 2010-09 upon issuance. The adoption of this topic has no material impact on our consolidated financial statements.

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 this topic has 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. We are currently evaluating the potential impact, if any, of the new accounting guidance on its 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.

 

30


In December 2010, the FASB issued ASU 2010-28”, “Intangibles—Goodwill and Other (Topic 350)”. ASU 2010-28 amends ASC Topic 350. ASU 2010-28 clarifies the requirement to test for impairment of goodwill. ASC Topic 350 requires that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative an entity must assume that it is more likely than not that a goodwill impairment exists, perform an additional test to determine whether goodwill has been impaired and calculate the amount of that impairment. The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. Early adoption is not permitted. The adoption of this topic is not expected to have a material effect on our consolidated financial statements.

 

31


Item 9A. Controls and Procedures

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 Annual Report. Our disclosure controls and procedures 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 forms, and that such information is accumulated and communicated to our management including our CEO and CFO, to allow timely decisions regarding required disclosures. In addition, in evaluating the effectiveness of our disclosure controls and procedures, we have considered the fact that our books and records are maintained and prepared in PRC GAAP and the employees who have primary responsibilities of preparing and supervising the preparation of the financial statements under U.S. GAAP do not have extensive knowledge of and professional experience with U.S. GAAP and SEC rules and regulations.

Based on their evaluation, our CEO and CFO have concluded that, as of December 31, 2010, our disclosure controls and procedures were effective.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published consolidated financial statements. Internal control over financial reporting is promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Therefore, even effective internal control over financial reporting can only provide reasonable assurance with respect to the financial statement preparation and presentation.

Our management has conducted, with the participation of our CEO and CFO, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of December 31, 2010. Management’s assessment of internal control over financial reporting was conducted using the criteria in Internal Control over Financial Reporting—Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Tread way Commission. In addition, in evaluating the effectiveness of our internal controls over financial reporting, we have considered the fact that our books and records are maintained and prepared in PRC GAAP and the employees who have primary responsibilities of preparing and supervising the preparation of the financial statements under U.S. GAAP do not have extensive knowledge of and professional experience with U.S. GAAP and SEC rules and regulations. Based on such evaluation, management concluded that our internal control over financial reporting as of December 31, 2010 was effective.

Changes in Internal Control Over Financial Reporting

On October 1, 2010, we consummated a share exchange (i) Crystal Globe Limited, a company formed under the laws of the British Virgin Islands (“Crystal Globe”), the sole shareholder of Dynamic Elite International Limited, a limited liability company formed under the laws of the British Virgin Islands (“Dynamic Elite”) and (ii) Dynamic Elite to acquire all the issued and outstanding capital stock of Dynamic Elite in exchange for the issuance to Crystal Globe of 15,215,426 restricted shares of our common stock (the “Reverse Merger”). Following the consummation of the Share Exchange, the accounting and finance personnel of the Company’s subsidiaries in China became the finance and accounting personnel of the Company. Management in China engaged experienced accounting consultants who assisted the Company’s internal accounting and finance personnel in the preparation of the Company’s annual and quarterly financial reports. In addition, we have recently hired an officer with auditing and financial background who will follow internal accounting and compliance with Sarbanes-Oxley Act of 2002. Periodically, management will assess the need for additional accounting resources as the business develops.

 

32


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL

OWNERS AND MANAGEMENT

The following table sets forth information regarding beneficial ownership of our common stock as of March 31, 2011 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise indicated, the address of each listed stockholder is c/o Joway Health, Inc., No. 2 Baowang Road, Baodi Economic Development Zone, Tianjin City, PRC 300180.

 

Name and Address    Number of
Shares
Common Stock
Beneficially
Owned(1)
    

Percentage

Ownership
of
Shares of
Common
Stock

 

Owner of More than 5% of Class

     

Crystal Globe Limited (2)

P.O. Box 957, Offshore Incorporations Centre, Road TownTortola, British Virgin Islands

     17,408,000         87.04   

Directors and Executive Officers

     

Jinghe Zhang(3)(5)

     —           —     

Yuan Huang(3)

     30,000         *   

Jingyun Chen

     32,000         *   

Yanli Feng

     24,000         *   

Socorro Quintero(4)

     —           —     

Shepherd G. Pryor IV(4)

     —           —     

All directors and executive officers (6 persons)

     17,494,000         87.47

 

* Under 1% of the issued and outstanding shares as of March 31, 2011.
(1) In determining beneficial ownership of our common stock as of a given date, the number of shares shown includes shares of common stock which may be acquired on exercise of warrants or options or conversion of convertible securities within 60 days of that date. In determining the percent of common stock owned by a person or entity on March 31, 2011, (a) the numerator is the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of warrants or options and conversion of convertible securities, and (b) the denominator is the sum of (i) the total shares of common stock outstanding on March 31, 2011 (20,000,000), and (ii) the total number of shares that the beneficial owner may acquire upon conversion of the preferred and on exercise of the warrants and options, subject to limitations on conversion and exercise. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares.
(2) On October 1, 2010, G2 Ventures, Dynamic Elite and Crystal Globe entered into and consummated a Share Exchange Agreement. As a result, Crystal Globe holds a total of 18,515,426 shares of Joway Group. As the executive director of Crystal Globe, Mr. Zhang has voting and dispositive control over the shares held by Crystal Globe. Further, in connection with the Reverse Merger and as consideration for entering into the VIE Agreements, Mr. Lionel Evan Liu, the sole shareholder of Crystal Globe, entered into a Call Option Agreement with Mr. Zhang Jinghe and Mr. Baogang Song, pursuant to which Mr. Zhang Jinghe has the right to purchase up to 99% of the shares of Crystal Globe at an aggregate price equal of $20,000 over the next three years (2011-2013). Consequently, Mr. Zhang will become the indirect beneficial owner of 99% of the shares of the Company held by Crystal Globe over the next three years.
(3) Jinghe Zhang was appointed our new President, Chief Executive Officer and director, and Yuan Huang was appointed our new Chief Financial Officer, Secretary and Treasurer effective as of September 28, 2010.
(4) Socorro Quintero and Shepherd G. Pryor IV were appointed as directors of the Company on March 15, 2011.
(5) Includes 17,408,000 shares held by Crystal Globe Ltd. Mr. Zhang is the executive director of Crystal Globe and as such has voting and dispositive control over the shares held by Crystal Globe. In addition, Mr. Zhang has entered into a Call Option Agreement with Mr. Liu, the sole shareholder of Crystal Globe, pursuant to which Mr. Zhang has the right to purchase up to 99% of the shares of Crystal Globe (“the Option”); thirty-four percent (34%) of the Option vests on April 2, 2011, and 33% of the Option vests on April 2, 2012 and April 2, 2013, respectively.

Item 13. Certain Relationships, Related Transactions, and Director Independence.

Except for the ownership of our securities, and except as set forth below, none of the directors, executive officers, holders of more than five percent of our outstanding common stock, or any member of the immediate family of any such person have, to our knowledge, had a material interest, direct or indirect, in any transaction or proposed transaction which may materially affect our company.

VIE Agreements

On September 16, 2010, Dynamic Elite through its wholly-owned subsidiary Junhe Consulting entered into a series of agreements with the Joway Shengshi and its shareholders (the “VIE Agreements”). On September 16, 2010, the date of the VIE Agreements, Zhang Jinghe was the controlling shareholder of the Joway Shengshi and the executive director of Junhe Consulting. As a result, the Joway Shengshi and Junhe Consulting were under the common control of Zhang Jinghe who signed the following agreements on behalf of both parties:

 

   

a Consulting Services Agreement;

 

   

an Operating Agreement;

 

33


   

a Voting Rights Proxy Agreement;

 

   

an Option Agreement; and

 

   

an Equity Pledge Agreement.

Consulting Agreement

Under the Consulting Agreement, Joway Shengshi retained Junhe Consulting to (i) provide general advice and assistance relating to the management and operation of Joway Shengshi’s business; (ii) provide general advice and assistance with respect to employment and staffing issues, including recruiting and training of management personnel, administrative personnel and other staff, establishing an efficient payroll management system, and relocation assistance; (iii) provide business development advice and assistance; and (iv) such other advice and assistance as may be agreed upon by the parties. In return, Joway Shengshi agreed to pay Junhe Consulting quarterly a consulting fee in an amount equal to all of Joway Shengshi’s net income for that quarter within fifteen (15) days after receipt of Joway Shengshi’s quarterly financial statements. Joway Shengshi shall cause the owners of Joway Shengshi to pledge their equity interests in Joway Shengshi to Junhe Consulting to secure the payment of the foregoing consulting fee.

Joway Shengshi is subject to a number of covenants typical for this type of transaction, including the obligation to provide monthly, quarterly and annual reports, and other information requested by Junhe Consulting. In addition, Joway Shengshi is subject to a number of negative covenants, including the agreement that it will not (i) issue, purchase or redeem any equity or debt, or equity or debt securities, (ii) create, incur, assume or suffer to exist any liens upon any of its property or assets (except certain enumerated liens), (iii) wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or sale of all or substantially all of its assets; (iv) declare or pay any dividends, (v) incur, assume or suffer to exist any indebtedness, (other than certain enumerated exceptions); (vi) lend money or credit or make advances to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any other Person, except receivables in the ordinary course of business; (vii) enter into any transaction or series of related transactions, whether or not in the ordinary course of business, with any of its affiliates or related parties, other than on terms and conditions substantially as favorable to Joway Shengshi as would be obtainable in a comparable arm’s-length transaction; (viii) make any expenditure for fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which are capitalized in accordance with generally accepted accounting principles in the PRC and capitalized lease obligations) during any quarterly period which exceeds the aggregate the amount contained in the budget; (ix) amend or modify or change its Articles of Association or business license, or any agreement entered into by it, with respect to its capital stock, or enter into any new agreement with respect to its capital stock; or (x) engage (directly or indirectly) in any business other than those types of business prescribed within the business scope of its business license.

The Consulting Agreement may be terminated by Junhe Consulting for any reason at any time. In addition, the Consulting Agreement may be terminated by Junhe Consulting by written notice in the event of a material breach by Joway Shengshi which, in the case of breach of a non-financial obligation, has not been remedied within fourteen (14) days following the receipt of such written notice. Either party may terminate the Consulting Agreement by written notice to the other party if (i) the other party becomes bankrupt or insolvent or is the subject of proceedings or arrangements for liquidation or dissolution or ceases to carry on business or becomes unable to pay its debts as they become due; (ii) if the operations of Junhe Consulting are terminated; or (iii) if circumstances arise which materially and adversely affect the performance or the objectives of the Consulting Agreement.

Operating Agreement

Under the Operating Agreement, Junhe Consulting agreed to guarantee Joway Shengshi’s performance of contracts, agreements or transactions with third parties in consideration for the pledge by Joway Shengshi to Junhe Consulting of all of Joway Shengshi’s assets. In addition, Joway Shengshi and its shareholders agreed that Joway Shengshi would not, without the prior written consent of Junhe Consulting, enter into any transactions which may materially affect the assets, obligations, rights or the operations of Joway Shengshi (excluding transactions entered into in the ordinary course of business and the lien obtained by relevant counter parties due to such agreements), including transactions involving (i) the borrowing of money or assumption of any debt; (ii) the sale or purchase from any third party any asset or right, including, but not limited to, any intellectual property rights; (iii) the provision of any guarantees to any third parties using its assets or intellectual property rights; or (iv) the assignment of any business agreements to any third party. Joway Shengshi and its shareholders also agreed to appoint to the Joway Shengshi’s board of directors, and Joway Shengshi’s General Manager, Chief Financial Officer, and other senior officers those persons recommended or selected by Junhe Consulting.

Voting Rights Proxy Agreement

Under the Proxy Agreement, the Shareholders irrevocably granted to Junhe Consulting, for the maximum period of time permitted by law, all of their voting rights as shareholders of Joway Shengshi. In addition, the Shareholders agreed not to transfer their equity interest in Joway Shengshi to any third party (other than Junhe Consulting or a designee of Junhe Consulting). The Proxy Agreement may not be terminated without the unanimous consent of all Parties, except Junhe Consulting, which may terminate the Proxy Agreement with or without cause on thirty (30) days prior written notice.

 

34


Option Agreement

Under the Option Agreement, the Shareholders irrevocably granted to Junhe Consulting or its designee an exclusive option to purchase at any time, to the extent permitted under PRC Law, all or a portion of the Shareholders’ Equity Interest in Joway Shengshi for a price equal to the capital paid in by the Shareholders on a pro rata basis in accordance with the percentage of the Shareholders’ Equity Interest acquired, subject to applicable PRC laws and regulations.

Equity Pledge Agreement

Under the Equity Pledge Agreement, the Shareholders pledged all of their right, title and interest in their equity interests in Joway Shengshi to Junhe Consulting to guarantee Joway Shengshi’s performance of its obligations under the Consulting Services Agreement. The pledge expires two (2) years after the satisfaction by Joway Shengshi of all of its obligations under the Consulting Services Agreement. During the term of the Equity Pledge Agreement, Junhe Consulting is entitled to vote, control, sell, or dispose of the Pledged Collateral in the event the Company does not perform its obligations under the Consulting Services Agreement. In addition, Junhe Consulting is entitled to collect any and all dividends declared or paid in connection with the Pledged Collateral.

Through these contractual arrangements, we have the ability to substantially influence the daily operations and financial affairs of Joway Shengshi and to receive, through our subsidiaries, all of its profits. As a result, we are considered the primary beneficiary of Joway Shengshi and its operations, and Joway Shengshi and its subsidiaries are deemed to be our variable interest entities. Accordingly, we are able to consolidate into our financial statements the results, assets and liabilities of Joway Shengshi and its subsidiaries.

Call Option Agreement

As part of the reorganization of the Joway Shengshi, Mr. Liu and the shareholders of the Joway Shengshi entered into a Call Option Agreement, pursuant to which the shareholders of the Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an aggregate price equal of $20,000 over the next three years. In addition, the Option Agreement also provides that Mr. Liu shall not dispose any of the shares of Crystal Globe without consent of Mr. Zhang and Mr. Song. Upon the consummation of the Share Exchange Transaction, Crystal Globe became the principal shareholder of G2 Ventures, Inc. and Mr. Zhang and Mr. Song became indirect beneficial owners of the shares in G2 Ventures held by Crystal Globe pursuant to this Call Option Agreement.

Transactions with Shenyang Joway

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

 

   

On January 15, 2009, Joway Shengshi entered into a sales contract with Shenyang Joway, pursuant to which Joway Shengshi agreed to purchase inventory of $27,560 from Shenyang Joway.

 

   

On February 15, 2009, Joway Shengshi entered into an Equipment Sales Contract with Shenyang Joway. Pursuant to the agreement, Joway Shengshi agreed to purchase certain operating and office equipment in the amount of $158,832 from Shenyang Joway.

 

   

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

 

   

On December 20, 2009, Joway Shengshi entered into a sales contract with Shenyang Joway. Pursuant to the sales contract, Joway Shengshi agreed to purchase inventory of $137,395 from Shenyang Joway.

 

   

On May 7, 2007, the Company’s subsidiary Tianjin Joway Shengshi Group Co., Ltd. (“Joway Shengshi”) (formerly known as Tianjin Joway Textile Co., Ltd) entered into an agreement with Shenyang Joway pursuant to which Joway Shengshi and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. On May 10, 2007, the Company’s subsidiary Shenyang Joway Electronic Technology Co., Ltd. (“Joway Technology”) (formerly known as Liaoning Joway Technology Engineering Co., Ltd.) and Shenyang Joway entered into an agreement pursuant to which Joway Technology and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. Through December 31, 2010, Shenyang Joway advanced an aggregate of $791,701 to Joway Shengshi and Joway Technology. Through December 31, 2008, Joway Technology advanced $58,568 to Shenyang Joway, which was paid off by Shenyang Joway to Joway Technology in 2009. During fiscal 2010, the Company repaid $80,737 of these advances. As of December 31, 2010, the total unpaid principal balance due Shenyang Joway for advances was $613,721. Shenyang Joway ceased operations at the end of 2009.

Transactions with Jinghe Zhang

 

   

On December 1, 2009, the Company, through its subsidiary Joway Shengshi, entered into a royalty-free license agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the license agreement, we are authorized to use the trademark “Joway” for a term of nine years and five patents from December 1, 2009 till the expiration dates of the patents.

 

   

On May 10, 2007, Joway Shengshi entered into a cash advance agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the agreement, Jinghe Zhang agreed to advance operating capital to Joway Shengshi. The advances are interest free, unsecured, and have no specified repayment terms. The agreement is valid throughout Joway Shengshi’s term of operation. During the period beginning May 17, 2007 (inception of Joway Shengshi) through December 31, 2009, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang of which $4,402,061 has been repaid. In 2010, Joway Shengshi was advanced $0 by Jinghe Zhang. As of December 31, 2010, the total unpaid principal balance due Jinghe Zhang for advances was $235,336.

 

35


   

On May 10, 2007, Joway Technology entered into a cash advance agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the agreement, Jinghe Zhang agreed to advance operating capital to Joway Technology. The advances are interest free, unsecured, and have no specified repayment terms. The agreement is valid throughout Joway Technology’s term of operation. During the period beginning March 28, 2007 (inception of Joway Technology) through December 31, 2010, Joway Technology received cash advances in the aggregate principal amount of $22,031 from Jinghe Zhang all of which has been repaid. As of December 31, 2010, the total unpaid principal balance due Jinghe Zhang for advances was $0.

Other Related Party Transactions

On February 20, 2009, Joway Shengshi entered into an entrust agreement with its cashier (treasurer) Changlong Si. Pursuant to the entrust agreement, Changlong Si was to receive RMB 10 million (approximately $1,465,620) from Joway Shengshi to be used to purchase a CITIC (China International Trust and Investment Company) trust investment product on behalf of Joway Shengshi under his own name. No compensation was paid to Mr. Changlong Si in connection with the CITIC investment. The Company purchased this investment product under the name of an individual instead of the Company itself because this investment product is available for purchase by individuals only and has a higher interest rate than the standard bank interest rate. The total amount of RMB10 million was invested from February 25, 2009 to August 25, 2010. The CITIC trust investment matured in August 2010 and the Company, through Joway Shengshi, received the cash proceeds consisting of principal of 10 million RMB and interest of 408,000 RMB in August 2010. Therefore, this investment is no longer in existence.

Other Related Transactions among Chinese Operating Entities

 

   

On December 1, 2009, the Company, through its subsidiary Joway Shengshi, entered into a royalty-free license agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the license agreement, we are authorized to use the trademark “Joway” for a term of nine years and five patents from December 1, 2009 till the expiration dates of the patents.

 

   

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

 

   

On May 10, 2007, Joway Shengshi entered into a cash advance agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the agreement, Jinghe Zhang agreed to advance operating capital to Joway Shengshi. The advances are interest free, unsecured and have no specified repayment terms. The agreement is valid throughout Joway Shengshi’s term of operation. During the period beginning May 17, 2007 (inception of Joway Shengshi) through December 31, 2010, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang of which $4,402,061 has been repaid. As of December 31, 2010, the total unpaid principal balance due Jinghe Zhang for advances was $235,336.

 

   

On May 10, 2007, Joway Technology entered into a cash advance agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the agreement, Jinghe Zhang agreed to advance operating capital to Joway Technology. The advances are interest free, unsecured and have no specified repayment terms. The agreement is valid throughout Joway Technology’s term of operation. During the period beginning March 28, 2007 (inception of Joway Technology) through December 31, 2010, Joway Technology received cash advances in the aggregate principal amount of $22,031 from Jinghe Zhang all of which has been repaid. As of December 31, 2010, the total unpaid principal balance due Jinghe Zhang for advances was $0.

 

   

On January 15, 2009, Joway Shengshi entered into a sales contract with Shengyang Joway, which is controlled by Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the sales contract, Joway Shengshi agrees to purchase inventory of $27,560 from Shengyang Joway.

 

   

On February 15, 2009, Joway Shengshi entered into an Equipment Sales Contract with Shengyang Joway. Pursuant to the agreement, Joway Shengshi agreed to purchase certain operating and office equipment in the amount of $158,832 from Shengyang Joway.

 

   

On December 20, 2009, Joway Shengshi entered into a sales contract with Shengyang Joway. Pursuant to the sales contract, Joway Shengshi agreed to purchase inventory of $137,395 from Shengyang Joway.

 

   

From 2007 through 2010, the Company was advanced $791,701 by Shenyang Joway. The advances were non-interest bearing and had no specified repayment terms. The Company repaid $80,737 of these advances during the period January 1, 2010 through December 31, 2010. As of December 31, 2010, the total unpaid principal balance due Shenyang Joway for advances was $613,721.

Related Transactions Prior to Reverse-Merger

During the period beginning September 26, 2002 (inception of G2 Companies, Inc.) through December 31, 2009, the Company received cash advances in the aggregate principal amount of $141,218 (which includes operating advances assumed from G2 Companies, Inc.) from Mr. Gust Kepler, our former sole officer, director and employee. The advances were non-interest bearing, unsecured and repayable upon demand as funds were available. During the period from September 26, 2002 (inception of G2 Companies, Inc.) through December 31, 2002, $17,796 of the advances was contributed as additional paid in capital, and $8,500 was repaid. As of December 31, 2009, the total unpaid principal balance due Mr. Kepler for advances was $114,922. Mr. Kepler forgave the balance on September 20, 2010 in connection with the Share Exchange.

Except as disclosed above, no executive officer, director or any member of these individuals’ immediate families, any corporation or organization with whom any of these individuals is an affiliate or any trust or estate in which any of these individuals serve as a trustee or in a similar capacity or has a substantial beneficial interest in is or has been indebted to us at any time since the beginning of our last fiscal year.

Procedures for Approval of Related Party Transactions

Our Audit Committee is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.

Item 15. Exhibits, Financial Statement Schedules.

Reference is made to Items 9.01(a) and 9.01(b) above and the exhibits referred to therein, which are incorporated herein by reference.

All agreements with suppliers that accounted for more than 10% of our revenues are filed as exhibits in the following.

 

36


Exhibit

Number

   Description

  3.1

   Articles of Incorporation*

  3.2

   Bylaws*

  3.3

   Specimen of Common Stock Certificate*

10.1

   Share Exchange Agreement, dated October 1, 2010, by and among G2 Ventures, Crystal Globe and Dynamic Elite***

10.2

   Consulting Services Agreement, dated September 16, 2010, by and between Junhe Consulting and Joway Shengshi***

10.3

   Operating Agreement, dated September 16, 2010, by and between Junhe Consulting and Joway Shengshi***

10.4

   Option Agreement, dated September 16, 2010, by and between Junhe Consulting and Joway Shengshi***

10.5

   Proxy Agreement, dated September 16, 2010, by and between Junhe Consulting and Joway Shengshi***

10.6

   Equity Pledge Agreement, dated September 16, 2010, by and between Junhe Consulting and Joway Shengshi***

10.7

   Cash Advance Agreement, dated May 10, 2007, by and between Jinghe Zhang and Joway Technology***

10.8

   Cash Advance Agreement, dated May 10, 2007, by and between Jinghe Zhang and Joway Shengshi***

10.9

   Property Lease Agreement, dated June 25, 2009, by and between Joway Shengshi and Aiying Wang***

10.10

   Property Lease Agreement, dated June 25, 2009, by and between Joway Shengshi and Guifen Feng***

10.11

   Supply Agreement, dated October 1, 2008, by and between Tianjin Daxing Import & Export Trade Co., Ltd. and Joway Technology***

10.12

   Supply Agreement, dated October 9, 2008, by and between Tianjin Daxing Import & Export Trade Co., Ltd. and Joway Shengshi***

10.13

   Supply Agreements, by and between Shenyang Joway and Joway Shengshi***

10.14

   Trademark & Patent License Agreement, dated December 1, 2009, by and between Joway Shengshi and Jinghe Zhang***

10.15

   Trademark License Agreement, dated December 1, 2009, by and between Joway Shengshi and Shenyang Joway***

10.16

   Employment Agreement, dated September 28, 2010, by and between G2 Ventures and Jinghe Zhang***

10.17

   Employment Agreement, dated September 28, 2010, by and between G2 Ventures and Yuan Huang***

10.18

   Entrust Agreement, dated February 20, 2009, by and between Joway Shengshi and Changlong Si***

10.19

   Entrust Agreement, dated June 2, 2010, by and between Lionel Evan Liu and Jinghe Zhang****

10.20

   Standard Form of Franchise Agreement****

10.21

   Loan Agreement, dated May 7, 2007, by and between Shenyang Joway Industry Development Co., Ltd. and Tianjin Joway Textile Co., Ltd.

10.22

   Loan Agreement, dated May 10, 2007, by and between Shenyang Joway Industry Development Co., Ltd. and Liaoning Joway Technology Engineering Co., Ltd.

14.1

   Code of Ethics**

21.1

   List of Subsidiaries****

31.1

   Rule 13a-14a/15d-14(a) Certification by the Chief Executive Officer

31.2

   Rule 13a-14a/15d-14(a) Certification by the Chief Financial Officer

32.1

   Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

37


32.2    Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

* Incorporated by reference to the exhibits to our registration statement on Form SB-2 filed with the SEC on September 11, 2003.
** Incorporated by reference to the exhibits to our annual report on Form 10-K filed with the SEC on March 1, 2010.
*** Incorporated by reference to the exhibits to our current report on Form 8-K filed with the SEC on October 16, 2010.
**** Incorporated by reference to the exhibits to our annual report on Form 10-K filed with the SEC on April 14, 2011.

 

38


Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: Nov. 8, 2011

 

JOWAY HEALTH INDUSTRIES GROUP, INC.
By:  

/S/    JINGHE ZHANG        

  Jinghe Zhang
 

President and Chief Executive Officer

(Principal Executive Officer)

By:

 

/S/    YUAN HUANG        

  Yuan Huang
 

Chief Financial Officer

(Principal Financial and Accounting Officer)

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the registrant and in the capacities and on the dates indicated.

 

/S/    JINGHE ZHANG        

Jinghe Zhang

  

President

Chief Executive Officer and

Chairman\(Principal Executive Officer)

  Date: Nov. 8, 2011

/S/    YUAN HUANG        

Yuan Huang

  

Chief Financial Officer

(Principal Financial and Accounting Officer)

  Date: Nov. 8, 2011

/S/    SOCORRO QUINTERO        

Socorro Quintero

   Director   Date: Nov. 8, 2011

/S/    SHEPHERD G. PRYOR IV        

Shepherd G. Pryor IV

   Director   Date: Nov. 8, 2011


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

     F-1   

Consolidated Financial Statements:

  

Consolidated Balance Sheets December 31, 2010 and 2009

     F-2   

Consolidated Statements of Operations and Comprehensive Income For the Years Ended December  31, 2010 and 2009

     F-3   

Consolidated Statement of Changes in Stockholders’ Equity For the Years Ended December  31, 2010 and 2009

     F-4   

Consolidated Statements of Cash Flows For the Years Ended December 31, 2010 and 2009

     F-5   

Notes to Consolidated Financial Statements

     F-6   


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Directors

Joway Health Industries Group Inc.

We have audited the accompanying consolidated balance sheets of Joway Health Industries Group Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Joway Health Industries Group Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

/s/ Sherb & Co. LLP

New York, New York

March 25, 2011

 

F-1


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     As of December 31,  
     2010      2009  
ASSETS      

CURRENT ASSETS:

     

Cash

   $ 5,281,420       $ 935,719   

Accounts receivable, net

     9,638         57,532   

Other receivables

     81,162         389,712   

Due from related parties

     —           1,462,587   

Inventories

     711,704         593,805   

Advances to suppliers

     143,609         192,733   

Prepaid expense

     33,884         118,123   

Total current assets

     6,261,417         3,750,211   

PROPERTY, PLANT AND EQUIPMENT, net

     5,519,711         3,191,180   

OTHER ASSETS:

     

Construction in progress

     —           2,215,567   

Intangible assets, net

     615,607         581,054   

Long-term prepaid expenses

     207,621         —     

Total other assets

     823,228         2,796,621   

Total assets

   $ 12,604,356       $ 9,738,012   
LIABILITIES AND STOCK HOLDERS’ EQUITY      

CURRENT LIABILITIES:

     

Accounts payable

   $ 305,416       $ 141,683   

Advances from customers

     1,422         361,993   

Taxes payable

     519,726         55,091   

Other payables

     50,810         16,197   

Due to related parties

     852,134         1,299,258   

Total current liabilities

     1,729,508         1,874,222   

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 and 18,515,426 shares issued and outstanding at December 31, 2010 and 2009, respectively

     20,000         18,515   

Additional paid-in-capital

     7,316,179         7,254,439   

Statutory reserves

     336,604         49,788   

Retained earnings

     2,772,488         445,776   

Accumulated other comprehensive income

     429,577         95,272   

Total stockholders’ equity

     10,874,848         7,863,790   

Total liabilities and stockholders’ equity

   $ 12,604,356       $ 9,738,012   
     —           —     

The accompanying notes are an integral part of these financial statements

 

F-2


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

 

     For the year ended December 31,  
     2010     2009  

REVENUES

   $ 7,512,719      $ 3,109,059   

COST OF REVENUES

     1,885,667        1,164,683   

GROSS PROFIT

     5,627,052        1,944,376   

Selling expenses

     752,551        165,994   

General and administrative expenses

     1,755,272        967,255   

OPERATING EXPENSES

     2,507,823        1,133,249   

INCOME FROM OPERATIONS

     3,119,229        811,127   

Interest income

     4,242        1,952   

Other income

     65,486        2,902   

Other expenses

     (67,465     (24,198

OTHER (EXPENSE) INCOME, NET

     2,263        (19,344

INCOME BEFORE INCOME TAXES

     3,121,492        791,783   

INCOME TAXES

     507,964        141,248   

NET INCOME

     2,613,528        650,535   

OTHER COMPREHENSIVE INCOME (LOSS):

    

Foreign currency translation adjustments

     334,305        (3,157

COMPREHENSIVE INCOME

   $ 2,947,833      $ 647,378   

NET INCOME PER COMMON SHARE, BASIC AND DILUTED

     0.14      $ 0.04   

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED

    
     18,886,570        18,515,426   

The accompanying notes are an integral part of these financial statements

 

F-3


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   

The accompanying notes are an integral part of these financial statements

 

F-4


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the year ended December 31,  
     2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 2,613,528      $ 650,535   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     331,074        158,248   

Amortization

     15,336        12,812   

Loss on sale of assets

     2,651        —     

Share-based compensation

     110,000        —     

Changes in operating assets and liabilities:

    

Accounts receivable, trade

     47,894        (38,943

Other receivables

     308,550        (368,528

Due from related parties

     —          65,152   

Inventories

     (117,899     (378,063

Advances to suppliers

     49,124        158,465   

Prepaid Expense

     (33,884     106,489   

Accounts payable

     (16,592     141,683   

Advances from customers

     (477,268     163,780   

Other payable

     20,152        (4,573

Salary and welfare payable

     35,018        (2,874

Tax payable

     574,938        (47,334

Accrued expenses

     (12,737     12,730   

Net cash provided by operating activities

     3,449,885        629,579   

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property plant and equipment

     (359,859     (1,052,106

Proceeds from sale of equipment

     2,571        —     

Investment in trust

     1,462,587        (1,607,980

Purchase of intangible assets

     (49,889     (4,926

Net cash provided by (used in) investing activities

     1,055,410        (2,665,012

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Capital Contribution

     —          6,876,914   

Capital distribution

     (46,775     (392,287

Due to related parties

     (447,124     (3,639,155

Net cash provided by (used in) financing activities

     (493,899     2,845,472   

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     334,305        27,641   

NET INCREASE IN CASH

     4,345,701        837,680   

CASH, beginning of year

     935,719        98,039   

CASH, end of year

   $ 5,281,420      $ 935,719   

SUPPLEMENTAL DISCLOSURES:

    

Income taxes paid

   $ 396,679      $ 94,981   

Interest paid

   $ —        $ —     

The accompanying notes are an integral part of these financial statements

 

F-5


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO 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 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 conducts 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 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.

 

F-6


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

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.

 

F-7


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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, Dynamic Elite through its wholly-owned subsidiary Junhe Consulting consolidates Joway Shengshi’s results of operation, assets and liabilities in its financial statements. Hereafter, Dynamic Elite, Junhe Consulting, Joway Shengshi and its subsidiaries are collectively referred to as the “Company” unless specific reference is made to an individual entity.

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.

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.

Use of Estimates

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

Basis of Consolidation

The accompanying consolidated financial statements include the Company and its wholly owned subsidiary and controlled VIEs. All significant inter-company accounts and transactions have been eliminated in the consolidation.

Pursuant to Accounting Standards Codification Topic 810, “Consolidation”, Joway Shengshi, as a VIE of Junhe Consulting, have 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.

 

F-8


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Foreign Currency Translation

The accompanying consolidated financial statements are presented in USD. The functional currency of the Company is RMB. The consolidated financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Equity accounts are translated at their historical exchange rates when the equity transactions occurred. The resulting transaction adjustments are recorded as a component of stockholders’ equity. Gains and losses from foreign currency transactions are included in net income.

 

     December 31,  
     2010      2009  

Year ended RMB: USD Exchange rate

     6.6118         6.8372   

Average yearly RMB: USD Exchange rate

     6.77875         6.84088   

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

For the years ended December 31, 2010 and 2009 foreign currency translation adjustments of $334,305 and negative $3,157, 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 year from transactions and other events, excluding the changes resulting from investments by owners and distributions to owners, and is not included in the computation of income tax expense or benefit. Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.

Concentrations of Credit Risk

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

Fair Value of Financial Instruments

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

 

   

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

 

   

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

 

   

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

The carrying amounts reported in the balance sheets for cash, accounts receivable, other receivable, accounts payable, other payable, and amounts due from related parties generally approximate their fair market values based on the short-term maturity of these instruments. ASC 825-10 “ Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value

 

F-9


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(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 December 31, 2010 and December 31, 2009, 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 December 31, 2010 and December 31, 2009, 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 $143,609 and $192,733 as of December 31, 2010 and 2009, 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.

 

F-10


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Construction in progress

Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the related assets are completed and are ready for their intended use.

Intangible assets

Intangible assets mainly consist of land use rights. All land located in the PRC is owned by the government and cannot be sold to any individual or company. The land use rights granted to the Company are being amortized using the straight-line method over the lease term of 50 years. Other intangible assets are software programs that are amortized over their estimated useful life of 10 years.

Impairment of Long-Lived Assets

Long-lived assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in FASB ASC 360 (formerly SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets). The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. The Company did not record any impairment loss for the years ended December 31, 2010 and 2009.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured.

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 $46,855 and $19,573 for the years ended December 31, 2010 and 2009, respectively.

Income Taxes

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

 

F-11


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements”, which amends FASB ASC 820, “Fair Value Measures and Disclosures.” FASB ASU 2010-06 require companies to make new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value hierarchies and information on purchases, sales, issuance and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. This ASU is effective prospectively for financial statements issued for fiscal years and interim periods beginning after December 15, 2009. The adoption of this topic will not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, “Amendments to Certain Recognition and Disclosure Requirements”, which amends FASB ASC 855, “Subsequent Events”. The update provides that SEC filers, as defined in ASU 2010-09, are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The update also requires SEC filers to evaluate subsequent events through the date the financial statements are issued rather than the date the financial statements are available to be issued. The Company adopted ASU 2010-09 upon issuance. The adoption of this topic has no material impact on the Company’s consolidated financial statements.

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 this topic has 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. Early adoption is permitted. The Company is currently evaluating the potential impact, if any, of the new accounting guidance on its 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. The Company is currently evaluating the impact of the adoption of ASU 2010-20 on its financial statements.

 

F-12


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In December 2010, the FASB issued ASU 2010-28”, “Intangibles—Goodwill and Other (Topic 350)”. ASU 2010-28 amends ASC Topic 350. ASU 2010-28 clarifies the requirement to test for impairment of goodwill. ASC Topic 350 requires that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative an entity must assume that it is more likely than not that a goodwill impairment exists, perform an additional test to determine whether goodwill has been impaired and calculate the amount of that impairment. The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. Early adoption is not permitted. The adoption of this topic is not expected to have a material effect on the Company’s consolidated financial statements.

NOTE 3 – ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

 

     December 31,  
     2010      2009  

Accounts receivable

   $ 9,638       $ 57,532   

Less: Allowance for bad debt

     —           —     

Accounts receivable

   $ 9,638       $ 57,532   

NOTE 4 – OTHER RECEIVABLES

Other receivables are primarily comprised of payments made by the Company under a cooperative technology development contract with Tianjin Zhong’ao Biology Technology Co., Ltd. (“Zhong’ao”). The Company entered into this contract in 2009. Pursuant to this contract, Zhong’ao was to develop a tourmaline solution suitable for human consumption. The contract provided that Zhong’ao would provide research and development services on the product for a period of five years commencing in January 2009 and ending in December 2014, The fee for these services was to be RMB 3,000,000 (approximately $441,176). The Company prepaid RMB 2,600,000 (approximately $382,352) during 2009, and the remaining balance of RMB 400,000 was to be paid by December 31, 2014.

Due to technical problems encountered by Zhong’ao, the Company and Zhong’ao agreed to terminated the cooperative technology development contract on October 15, 2010. Pursuant to the termination agreement, the Company agreed to bear RMB 500,000 (approximately $73,529) of expenses for this cooperative R & D project and Zhong’ao agreed to return RMB 2,100,000 (approximately $308,823) of prepaid fees to the Company before October 30, 2010. On October 29, 2010, the Company received RMB 2,100,000 from Zhong’ao.

NOTE 5 – INVENTORIES

Inventories consisted of the following:

 

     December 31,  
     2010      2009  

Raw materials

   $ 100,706       $ 176,042   

Packages

     11,406         13,297   

Finished goods

     557,251         389,573   

Goods shipped in transit

     21,891         —     

Low value consumables

     20,450         14,893   

Total

   $ 711,704       $ 593,805   

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.

 

F-13


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

     December 31,  
     2010     2009  

Building

   $ 5,245,777      $ 2,514,807   

Operating Equipment

     313,118        298,543   

Office furniture and equipment

     206,821        170,192   

Vehicles

     250,888        165,900   

Leasehold improvements

     —          211,644   

Total

     6,016,604        3,361,086   

Less: accumulated depreciation

     (496,893     (169,906

Property, plant and equipment, net

   $ 5,519,711      $ 3,191,180   

Depreciation expense for the years ended December 31, 2010 and 2009 amounted to $331,074 and $158,248, respectively.

In March, 2010, the Company completed construction of five buildings at the Company’s manufacturing and logistics center and $2.6 million was converted from Construction in Progress.

In 2009, the Company leased a floor of offices in the Nankai District of Tianjin as its headquarters for five years beginning in November 2009. The Company paid $211,644 to decorate these offices, which was treated as leasehold improvements in 2009. In October 2010, the Company terminated its lease of these offices and moved its headquarters to Baodi Economic Development Zone of Tianjin. However, the Company continues to occupy the Tianjin offices. The decoration expense is classified as long-term prepaid expenses.

NOTE 7 – CONSTRUCTION IN PROGRESS

During 2007, the Company began to construct manufacturing and logistic facilities as well as administrative offices located in Baodi, Tianjin, PRC, a total of nine buildings. Four buildings were completed and occupied during 2009, and the remaining five buildings were completed and occupied in March 2010. As of December 31, 2010 and 2009, construction in progress of this project was $0 and $2,215,567, respectively.

NOTE 8 – INTANGIBLE ASSETS

Intangible assets consisted of the following:

 

     December 31,  
     2010     2009  

Land use rights

   $ 624,347      $ 603,764   

Other intangible assets

     34,509        5,203   

Total

     658,856        608,967   

Less: accumulated amortization

     (43,249     (27,913

Intangible assets, net

   $ 615,607      $ 581,054   

Amortization expense of intangible assets for the years ended December 31, 2010 and 2009 was $15,336 and $12,812, respectively.

 

F-14


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Estimated amortization expense for the year ending December 31,    Amount  

2011

   $ 15,938   

2012

   $ 15,938   

2013

   $ 15,938   

2014

   $ 15,938   

2015

   $ 15,938   

Thereafter

   $ 535,917   

NOTE 9 – RELATED PARTY TRANSACTIONS

Due from related parties is the fund paid to Changlong Si to purchase a CITIC trust investment on behalf of the Company. Changlong Si is the cashier (treasurer) of the Company. This financial product which is available for purchase by individuals only has a higher interest rate than the standard bank interest rate. The amount invested was $1,465,620 ( RMB 10 million) from February 25, 2009 to August 25, 2010. Both the principal of RMB 10 million and interest on the investment of RMB 408,000 were paid off on August 26, 2010 from Changlong Si.

Due to related parties consists of the following:

 

     December 31,  
     2010      2009  

Shenyang Joway Industrial Development Co., Ltd.

   $ 613,721       $ 694,458   

Jinghe Zhang

     235,336         604,800   

Jingyun Chen

     3,077         —    
  

 

 

    

 

 

 

Total

   $ 852,134       $ 1,299,258   

Shenyang Joway Industrial Development Co., Ltd (“Shenyang Joway”) is controlled by Jinghe Zhang, the largest stockholder and CEO of the Company. The Company purchased inventory and equipment in the amount of $0 and $328,088 from Shenyang Joway in 2010 and 2009 respectively.

From 2007 through 2010, the Company was advanced $791,701 by Shenyang Joway. The advances were non-interest bearing and had no specified repayment terms. The Company repaid $459,122 of these advances during the year of 2010.

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 December 31, 2010, Joway Shengshi received cash operating advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang and $4,023,676 has been paid off by Shengshi Group. As of December 31, 2010, the total unpaid principal balance due Jinghe Zhang for advances was $613,721.

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 December 31, 2010, 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 $3,077 of insurance refund on behalf of Jingyun Chen.

 

F-15


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

NOTE 10 – INCOME TAXES

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

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

 

    

For the year ended

December 31,

 
     2010     2009  

Tax computed at China statutory rates

     25     25

Effect of reduced rate on Joway Decoration (1)

     (9 %)      —     

Benefit of NOL carry forward

     —          (7 %) 

Effective rate

     16     18

 

(1) Joway Decoration is taxed at a reduced rate of 4%.

As of December 31, 2010 and 2009, the Company had no deferred tax assets or liabilities.

NOTE 11 – STATUTORY RESERVES

Pursuant to the laws and regulations of the PRC, annual income of the subsidiaries of the Company are required to be partly allocated to the statutory reserves funds after the payment of the PRC income taxes. The allocation to the statutory reserves funds should be at least 10% of income after tax until the reserve reaches 50% of the entities’ registered capital or members’ equity. The reserve funds are not transferable to the Company in the form of cash dividends, loans or advances. Thus the reserve funds are not available for distribution except in liquidation. For the years ended December 31, 2010 and 2009, the Company had allocated $286,816 and $48,188, respectively.

NOTE 12 – SEGMENTS

For the year of 2010 and 2009, 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 year ended December 31, 2010

 

    Sales     COGS     Gross profit    

Income from

operations

   

Depreciation

and

amortization

    Assets  

Healthcare Knitgoods Series

  $ 3,887,284      $ 764,470      $ 3,122,814      $ 1,441,849      $ 179,242      $ 291,548   

Daily Healthcare and Personal Care Series

    1,282,027        318,655        963,372        408,990        59,114        188,874   

Wellness House Activated Water Machine Series

    2,343,408        802,542        1,540,866        1,268,390        108,054        332,415   

Segment Totals

  $ 7,512,719      $ 1,885,667      $ 5,627,052        3,119,229      $ 346,410        812,837   

Other Income (Expense) – Net

          2,263       

Income Tax

          507,964       

Unallocated Assets

              11,791,519   

Net Income

        $ 2,613,528       

Total Assets

            $ 12,604,356   

 

F-16


JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

For the year ended December 31, 2009

 

    Sales     COGS     Gross profit    

Income from

operations

   

Depreciation

and

amortization

    Assets  

Healthcare Knitgoods Series

  $ 1,723,846      $ 428,004      $ 1,295,842      $ 586,357      $ 94,856      $ 272,284   

Daily Healthcare and Personal Care Series

    498,341        122,891        375,450        170,348        27,400        105,213   

Wellness House Activated Water Machine Series

    886,872        613,788        273,084        54,422        48,804        214,458   

Segment Totals

  $ 3,109,059      $ 1,164,683      $ 1,944,376        811,127      $ 171,060        591,955   

Other Income (Expense) – Net

          (19,344    

Income Tax

          141,248       

Unallocated Assets

              9,146,057   

Net Income

        $ 650,535       

Total Assets

            $ 9,738,012   

NOTE 13 – FRANCHISE REVENUES

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

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

 

     Year ended December 31,  
     2010     2009  

Sales to franchise customers

   $ 6,899,223      $ 2,238,586   

Sales to non-franchise customers

     613,496        870,473   

Total sales

   $ 7,512,719      $ 3,109,059   

Change in franchise outlets:

    

Number of franchise outlets open at beginning of period

     175        —     

Number of franchise outlets opened during the period

     93        182   

Number of franchise outlets closed during the period

     (24     (7

Number of franchise outlets open at the end of the period

     244        175   

 

F-17