10-Q 1 d516543d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2013

 

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

For the transition period from                      to                     

Commission File No. 333-108715

 

 

Joway Health Industries Group Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Nevada   98-0221494

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

No. 2, Baowang Road, Baodi Economic Development

Zone, Tianjin, PRC 301800

  86-22-22533666
(Address of Principal Executive Offices)   (Issuer’s Telephone Number)

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

 

 

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

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

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

 

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

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

The number of shares outstanding of the Issuer’s Common Stock as of May 15, 2013 was 20,054,000 shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

     3   

Item 1. Financial Statements

     3   

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

     20   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     27   

Item 4. Controls and Procedures

     28   

PART II - OTHER INFORMATION

     29   

Item 1. Legal Proceedings

     29   

Item 1A. Risk Factors

     29   

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

     29   

Item 3. Defaults Upon Senior Securities

     29   

Item 4. Mine Safety Disclosures

     29   

Item 5. Other Information

     29   

Item 6. Exhibits

     29   

SIGNATURES

     30   

 

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

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

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     Page  

Condensed Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December  31, 2012 (Audited)

     4   

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months Ended March 31, 2013 and 2012 (Unaudited)

     5   

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March  31, 2013 and 2012 (Unaudited)

     6   

Notes to Unaudited Condensed Consolidated Financial Statements

     7-20   

 

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JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     March 31,      December 31,  
     2013      2012  
     (Unaudited)      (Audited)  
ASSETS      

CURRENT ASSETS:

     

Cash

   $ 1,163,608       $ 522,145   

Short-term investment

     —           1,266,604   

Accounts receivable

     —           11,594   

Other receivables

     215,845         46,727   

Inventories

     1,334,097         1,254,705   

Advances to suppliers

     232,673         276,953   

Prepaid taxes

     326,567         211,760   

Prepaid expense

     28,655         42,898   
  

 

 

    

 

 

 

Total current assets

     3,301,445         3,633,386   
  

 

 

    

 

 

 

PROPERTY, PLANT AND EQUIPMENT, net

     6,228,830         6,316,360   
  

 

 

    

 

 

 

OTHER ASSETS:

     

Long-term investment

     238,793         237,488   

Intangible assets, net

     653,833         656,211   

Long-term prepaid expenses

     191,004         192,825   
  

 

 

    

 

 

 

Total other assets

     1,083,630         1,086,524   
  

 

 

    

 

 

 

Total assets

   $ 10,613,905       $ 11,036,270   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

CURRENT LIABILITIES:

     

Accounts payable

   $ 50,437       $ 39,948   

Advances from customers

     23,761         20,265   

Other payables

     67,077         69,080   

Due to related parties

     113,911         121,515   
  

 

 

    

 

 

 

Total current liabilities

     255,186         250,808   
  

 

 

    

 

 

 

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; 20,036,000 and 20,036,000 shares issued and outstanding at March 31, 2013 and December 31, 2012

     20,036         20,036   

Additional paid-in-capital

     7,361,143         7,361,143   

Statutory reserves

     354,052         354,052   

Retained earnings

     1,602,843         2,089,151   

Accumulated other comprehensive income

     1,020,645         961,080   
  

 

 

    

 

 

 

Total stockholders’ equity

     10,358,719         10,785,462   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 10,613,905       $ 11,036,270   
  

 

 

    

 

 

 

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

 

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JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

 

     Three months ended March 31,  
     2013     2012  
     (Unaudited)     (Unaudited)  

REVENUES

   $ 177,894      $ 790,632   

COST OF REVENUES

     55,255        195,381   
  

 

 

   

 

 

 

GROSS PROFIT

     122,639        595,251   

Selling expenses

     87,437        172,511   

General and administrative expenses

     523,670        421,787   
  

 

 

   

 

 

 

OPERATING EXPENSES

     611,107        594,298   
  

 

 

   

 

 

 

(LOSS) INCOME FROM OPERATIONS

     (488,468     953   
  

 

 

   

 

 

 

Interest income

     251        1,318   

Other income

     5,056        8,739   

Other expenses

     (1,769     (48
  

 

 

   

 

 

 

OTHER INCOME, NET

     3,538        10,009   
  

 

 

   

 

 

 

(LOSS) INCOME BEFORE INCOME TAXES

     (484,930     10,962   

INCOME TAXES

     1,378        3,448   
  

 

 

   

 

 

 

NET (LOSS) INCOME

     (486,308     7,514   

OTHER COMPREHENSIVE INCOME:

    

Foreign currency translation adjustment

     59,565        76,462   
  

 

 

   

 

 

 

COMPREHENSIVE (LOSS) INCOME

   $ (426,743   $ 83,976   
  

 

 

   

 

 

 

NET (LOSS) INCOME PER COMMON SHARE, BASIC AND DILUTED

   $ (0.02   $ 0.00   
  

 

 

   

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED

     20,036,000        20,027,297   
  

 

 

   

 

 

 

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

 

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JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Three months ended March 31,  
     2013     2012  
     (Unaudited)     (Unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net (loss) income

   $ (486,308   $ 7,514   

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

    

Depreciation

     130,400        131,474   

Amortization

     6,426        4,716   

Stock-based compensation

     —          18,000   

Changes in operating assets and liabilities:

    

Accounts receivable, trade

     11,594        26,722   

Other receivables

     (169,118     (82,226

Inventories

     (79,392     (247,127

Advances to suppliers

     44,280        (59,310

Prepaid expense

     14,243        (47,524

Accounts payable

     10,489        137,465   

Advances from customers

     3,496        6,962   

Other payable

     (674     (390

Salary and welfare payable

     (1,329     10,587   

Taxes payable

     (114,807     30,400   
  

 

 

   

 

 

 

Net cash (used in) operating activities

     (630,700     (62,737
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property plant and equipment

     —          (127,728

Redemption of investment

     1,266,604        —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     1,266,604        (127,728
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Repayment of due to related parties

     (7,604     (21,643
  

 

 

   

 

 

 

Net cash (used in) financing activities

     (7,604     (21,643
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     13,163        70,643   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH

     641,463        (141,465

CASH, beginning of period

     522,145        3,372,189   
  

 

 

   

 

 

 

CASH, end of period

   $ 1,163,608      $ 3,230,724   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES:

    

Income taxes paid

   $ 1,796      $ 7,171   

Interest paid

   $ —        $ —     

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

 

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JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION

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

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

Dynamic Elite International Limited (referred to herein as “Dynamic Elite”) was incorporated under the laws of the British Virgin Islands on June 2, 2010 as a limited liability company (a BVI company). Dynamic Elite engages in manufacturing and distributing tourmaline products in China. Its wholly owned subsidiary, Tianjin Junhe Management Consulting Co., Ltd. was incorporated on September 15, 2010 in Tianjin, People’s Republic of China (“PRC”). Other than the equity interest in Junhe Consulting, Dynamic Elite does not own any assets or conduct any operations.

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

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

Shenyang Joway Electronic Technology Co., Ltd. (referred to herein as “Joway Technology”) was originally named Liaoning Joway Technology Engineering Co., Ltd. which was incorporated on March 28, 2007 in PRC. The name was changed on June 22, 2011. It engages in the distribution of Tourmaline Activated Water Machines and Tourmaline Wellness Houses. Prior to July 25, 2010, Joway Shengshi owned 90.91% of Joway Technology. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, another stockholder of Joway Technology on July 25, 2010 to acquire the remaining 9.09% of the share of Joway Technology. As a result of the share acquisition, Joway Technology became a wholly-owned subsidiary of Joway Shengshi.

Tianjin Joway Decoration Engineering Co., Ltd. (referred to herein as “Joway Decoration”) was incorporated on April 22, 2009 in PRC. It engages in the distribution of Tourmaline Activated Water Machines, Tourmaline Wellness House for family use and Tourmaline Wellness House materials. Prior to July 9, 2010, Joway Shengshi owned 90% of Joway Decoration. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, another stockholder of Joway Decoration on July 9, 2010 to acquire the remaining 10% of the shares of Joway Decoration. As a result of the share acquisition, Joway Decoration became a wholly-owned subsidiary of Joway Shengshi. Jingyun Chen is currently the General Manager of Joway Decoration.

 

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Tianjin Oriental Shengtang Import & Export Trading Co., Ltd (referred to herein as “Shengtang Trading”) was incorporated on September 18, 2009 in the PRC. It engages in purchasing raw materials which it sells to other companies of the group. Prior to July 28, 2010, Joway Shengshi owned 95% of Shengtang Trading. Joway Shengshi entered into a share acquisition agreement with Wang Aiying, another stockholder of Shengtang Trading on July 28, 2010 to acquire the remaining 5% of the shares of Shengtang Trading. As a result of the share acquisition, Shengtang Trading became a wholly-owned subsidiary of Joway Shengshi.

The following table lists the Company and its subsidiaries:

 

Name

 

Domicile and

Date of

Incorporation

 

Paid in

Capital

 

Percentage of

Effective

Ownership

 

Principal Activities

Joway Health Industries Group Inc.

 

March 21, 2003,

Nevada

  USD 20,036  

86.8% owned by Crystal Globe Limited

13.2%owned by other institutional and individual investors

 

Investment

Holding

Dynamic Elite International Limited

 

June 2, 2010,

British Virgin Islands

  USD 10,000   100% owned by Joway Health Industries Group Inc.  

Investment

Holding

Tianjin Junhe Management Consulting Co., Ltd.

  September 15, 2010, PRC   USD 20,000   100% owned by Dynamic Elite International Limited   Advisory

Tianjin Joway Shengshi Group Co., Ltd.

  May 17, 2007, PRC   USD 7,216,140.72   99% owned by Jinghe Zhang, and 1% owned by Baogang Song  

Production and

distribution of Healthcare Knit Goods and Daily Healthcare and Personal Care products

Shenyang Joway Electronic Technology Co., Ltd.

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

Tianjin Joway Decoration Engineering Co., Ltd.

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

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

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

 

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

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

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

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

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

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

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

In connection with the Share Exchange and as consideration for entering into the VIE Agreements the shareholders of Joway Shengshi, entered into a Call Option Agreement with the sole shareholder of Crystal Globe (the controlling shareholder of Dynamic Elite), pursuant to which the shareholders of Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an aggregate price equal to $20,000 over the next three years. The Call Option vests as to 34% of the shares of Crystal Globe on April 2, 2011 and as to 33% on April 2 of 2012 and 2013. As a result, the shareholders of Joway Shengshi 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 unaudited condensed 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 unaudited condensed consolidated financial statements have been translated and presented in United States Dollars (“USD”). All significant inter-company transactions and balances have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary to make the financial statements not misleading.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and the footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s form 10-K for the fiscal year ended December 31, 2012 which was filed on April 1, 2013.

 

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Use of Estimates

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

Basis of Consolidation

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

Pursuant to Accounting Standards Codification Topic 810, “Consolidation”, Joway Shengshi, as a VIE of Junhe Consulting, has been consolidated in the Company’s financial statements. Joway Shengshi’s sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s net income includes all of Joway Shengshi’s net income.

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

Foreign Currency Translation

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

 

     For the three months  ended
March 31,
     For the year ended
December  31,
 
     2013      2012      2012  

Period ended RMB: USD Exchange rate

     6.2816         6.3247         6.3161   

Average RMB: USD Exchange rate

     6.28582         6.32012         6.31984   

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 three months ended March 31, 2013 and 2012 foreign currency translation adjustments of $59,565 and $76,462, respectively, have been reported as comprehensive income in the unaudited condensed consolidated financial statements.

 

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Other Comprehensive Income

Other comprehensive income is defined as the change in equity during the period from transactions and other events, excluding the changes resulting from investments by owners and distributions to owners, and is not included in the computation of income tax expense or benefit. Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.

Concentrations of Credit Risk

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

Fair Value of Financial Instruments

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

   

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

 

   

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

 

   

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

The carrying amounts reported in the balance sheets for cash, accounts receivable, other receivable, accounts payable, other payable, and amounts due from related parties generally approximate their fair market values based on the short-term maturity of these instruments. ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

Cash and Cash Equivalents

For financial reporting purposes, the Company considers all highly liquid financial instruments with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at any point during the period of the financial statements presented. Balances at financial institutions or state-owned banks within the PRC are not covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

Accounts Receivable

Accounts receivable are carried at net realizable value. The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of the accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As of March 31, 2013 and December 31, 2012, respectively, the Company had no allowance for doubtful accounts.

 

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Inventories

Inventories are stated at the lower of cost, as determined by the specific identification method on contract level (for each individual contract, inventories cost flow are determined by weighted-average method), or the net realizable value, which is determined on selling prices less any further costs expected to be incurred for completion and disposal. The Company regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether a valuation allowance is required. As of March 31, 2013 and December 31, 2012, 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 $232,673 and $276,953 as of March 31, 2013 and December 31, 2012, respectively.

Long-term Investments

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

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

Property, Plant, and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation, and include expenditures that substantially increase the useful lives of existing assets.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:

 

Building

   20 years

Operating Equipment

   10 years

Office furniture and equipment

   3 or 5 years

Vehicles

   10 years

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts, and any gain or loss is included in the consolidated statements of operations. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Significant renewals and betterment to buildings and equipment are capitalized. Leasehold improvements are depreciated over the lesser of the useful life or the life of the lease.

Intangible assets

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

 

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Impairment of Long-Lived Assets

Long-lived assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in FASB ASC 360. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. The Company did not record any impairment loss for the three months ended March 31, 2013 and 2012.

Revenue Recognition

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

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

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

Shipping costs

Shipping costs are included in selling expenses and totaled $4,569 and $8,178 for the three months ended March 31, 2013 and 2012, respectively.

Income Taxes

The Company is governed by the Income Tax Law and associated legislations of the PRC. The Company accounts for income taxes in accordance with FASB ASC 740 “Income Taxes”, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets is dependent upon future earnings, if any, of which the timing and amount are uncertain.

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

 

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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 December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which is codified in ASC Topic 210, Balance Sheet. This pronouncement contains new disclosure requirements about a company’s right of setoff and related arrangements associated with its financial and derivative instruments. ASU 2011-11 will be effective retrospectively for annual and interim periods beginning on or after January 1, 2013. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company does not anticipate that the adoption of this standard will have a material effect on the Company’s unaudited condensed consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments are effective prospectively for annual reporting periods beginning after December 15, 2012, with early adoption permitted. The Company does not anticipate that the adoption of this standard will have a material effect on the Company’s unaudited condensed consolidated financial statements.

NOTE 3 – ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

 

     March 31,      December 31,  
     2013      2012  

Accounts receivable

   $ —         $ 11,594   

Less: Allowance for bad debt

     —           —     
  

 

 

    

 

 

 

Accounts receivable

   $ —         $ 11,594   
  

 

 

    

 

 

 

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

 

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NOTE 4 – INVENTORIES

Inventories consisted of the following:

 

     March 31,      December 31,  
     2013      2012  

Raw materials

   $ 295,589       $ 287,560   

Packages

     7,189         6,850   

Finished goods

     991,582         920,829   

Low value consumables

     39,737         39,466   
  

 

 

    

 

 

 

Total

   $ 1,334,097       $ 1,254,705   
  

 

 

    

 

 

 

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.

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

     March 31,     December 31,  
     2013     2012  

Building

   $ 6,007,972      $ 5,974,918   

Operating Equipment

     379,710        377,636   

Office furniture and equipment

     333,269        331,449   

Vehicles

     1,084,137        1,078,215   
  

 

 

   

 

 

 

Total

     7,805,088        7,762,218   

Less: accumulated depreciation

     (1,576,258     (1,445,858
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 6,228,830      $ 6,316,360   
  

 

 

   

 

 

 

Depreciation expense for the three months ended March 31, 2013 and 2012 amounted to $130,400 and $131,474, respectively.

NOTE 6 – INTANGIBLE ASSETS

Intangible assets consisted of the following:

 

     March 31,     December 31,  
     2013     2012  

Land use rights

   $ 657,167      $ 653,578   

Other intangible assets

     84,081        83,622   
  

 

 

   

 

 

 

Total

     741,248        737,200   

Less: accumulated amortization

     (87,415     (80,989
  

 

 

   

 

 

 

Intangible assets, net

   $ 653,833      $ 656,211   
  

 

 

   

 

 

 

Amortization expense of intangible assets for the three months ended March 31, 2013 and 2012 was $6,426 and $4,716, respectively.

 

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

 

Estimated amortization expense for       

the year ending December 31,

   Amount  

2013

   $ 25,704   

2014

   $ 25,704   

2015

   $ 25,704   

2016

   $ 25,704   

2017

   $ 25,704   

Thereafter

   $ 527,691   

NOTE 7 – RELATED PARTY TRANSACTIONS

Payables due to related parties consist of the following:

 

     March 31,      December 31,  
     2013      2012  

Shenyang Joway Industrial Development Co., Ltd.

   $ 63,919       $ 71,539   

Jinghe Zhang

     49,992         49,976   
  

 

 

    

 

 

 

Total

   $ 113,911       $ 121,515   
  

 

 

    

 

 

 

Transactions with Shenyang Joway

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

 

   

On 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 Joway Shengshi entered into an agreement with Shenyang Joway pursuant to which Joway Shengshi and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. On May 10, 2007, the Company’s subsidiary Joway Technology and Shenyang Joway entered into an agreement pursuant to which Joway Technology and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. Through December 31, 2008, Joway Technology advanced $58,568 to Shenyang Joway, which was paid off by Shenyang Joway to Joway Technology in 2009. Through December 31, 2010, Shenyang Joway advanced an aggregate of $791,701 to Joway Shengshi and Joway Technology of which $727,782 has been repaid. For the three months ended March 31, 2013, the Company repaid $7,620 of these advances. As of March 31, 2013, the total unpaid principal balance due Shenyang Joway for advances was $63,919. Shenyang Joway ceased operations at the end of 2009.

 

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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 $4,587,405 has been repaid. In 2011 and 2012, Joway Shengshi was advanced $0 by Jinghe Zhang. As of March 31, 2013, the total unpaid principal balance due Jinghe Zhang for advances was $49,992.

 

   

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 March 31, 2013, the total unpaid principal balance due Jinghe Zhang for advances was $0.

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

NOTE 8 – INCOME TAXES

The Company operations in the People’s Republic of China are subject to the Income Tax Law of the People’s Republic of China. Pursuant to the PRC Income Tax Laws, the Company is subject to the Enterprise Income Tax (“EIT”) which is generally a statutory rate of 25% beginning January 2008, on income as reported in its statutory financial statements after appropriate tax adjustments. The Company’s subsidiary, Joway Decoration, as a wholesale and retail enterprise, is subject to taxable income at a verified rate of 5% of revenue in 2011 pursuant to “Measures for Verification Collection of Enterprise Income Tax” issued by the PRC State Administration of Taxation.

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

 

     For the three months
ended March 31,
 
     2013     2012  

Tax computed at China statutory rates

     25     25

Effect of reduced rate on Joway Decoration (1)

     0        (13 %) 

Effect of losses

     (25 %)      19

Effective rate

     0     31

 

(1) Pursuant to Measures for Verification Collection of Enterprise Income Tax issued by the PRC State Administration of Taxation, Joway Decoration, as a wholesale and retail enterprise, is subject to taxable income at a verified rate of 5% and 8% of revenue for the year of 2012 and 2013.

 

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NOTE 9 – STATUTORY RESERVES

Pursuant to the laws and regulations of the PRC, annual income of the Company’s subsidiaries is required to be partly allocated to the statutory reserves funds after the payment of the PRC income taxes. The allocation to the statutory reserves funds should be at least 10% of income after tax until the reserves reaches 50% of the entities’ registered capital or members’ equity. The reserve funds are not transferable to the Company in the form of cash dividends, loans or advances. Thus the reserve funds are not available for distribution except in liquidation. As of March 31, 2013, the Company had allocated $354,052 to statutory reserves.

NOTE 10 – SEGMENTS

In 2013 and 2012, the Company operated in three reportable business segments: (1) Healthcare Knitgoods Series, (2) Daily Healthcare and Personal Care Series and (3) Wellness House and Activated Water Machine Series. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. Information with respect to these reportable business segments is as follows:

For the three months ended March 31, 2013

 

     Sales      COGS      Gross profit      Loss from
operations
    Depreciation
and
amortization
     Assets  

Healthcare Knitgoods Series

   $ 34,188       $ 11,016       $ 23,172       $ -94,271      $ 26,295       $ 533,698   

Daily Healthcare and Personal Care Series

     63,464         17,799         45,665         -172,350        48,813         253,184   

Wellness House and Activated Water Machine Series

     80,242         26,440         53,802         -221,847        61,718         697,305   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Segment Totals

   $ 177,894       $ 55,255       $ 122,639         -488,468      $ 136,826         1,484,187   
  

 

 

    

 

 

    

 

 

      

 

 

    

Other Income, net

              3,538        

Income Tax

              1,378        
           

 

 

      

Unallocated Assets

                   9,129,718   
                

 

 

 

Net Loss

            $ -486,308        
           

 

 

      

Total Assets

                 $ 10,613,905   
                

 

 

 

 

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For the three months ended March 31, 2012

 

     Sales      COGS      Gross profit      Income
(loss) from
operations
    Depreciation
and
amortization
     Assets  

Healthcare Knitgoods Series

   $ 349,918       $ 74,981       $ 274,937       $ 11,912      $ 60,275       $ 316,358   

Daily Healthcare and Personal Care Series

     148,436         40,307         108,129         (3,446     25,569         222,332   

Wellness House and Activated Water Machine Series

     292,278         80,093         212,185         (7,513     50,346         849,959   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Segment Totals

   $ 790,632       $ 195,381       $ 595,251         953      $ 136,190         1,388,649   
  

 

 

    

 

 

    

 

 

      

 

 

    

Other Income, net

              10,009        

Income Tax

              3,448        
           

 

 

      

Unallocated Assets

                   11,407,808   
                

 

 

 

Net Income

            $ 7,514        
           

 

 

      

Total Assets

                 $ 12,796,457   
                

 

 

 

NOTE 11 – FRANCHISE REVENUES

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

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

 

     For the three months ended March 31,  
     2013      2012  

Sales to franchise customers

   $ 144,098       $ 737,399   

Sales to non-franchise customers

     33,796         53,233   
  

 

 

    

 

 

 

Total sales

   $ 177,894       $ 790,632   
  

 

 

    

 

 

 

 

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NOTE 12 – INVESTMENT

Long-Term Investment:

On August 28, 2011, Joway Shengshi and Tianjin Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Tianjin Hezhi”) entered a cooperative contract, pursuant to which Joway Shengshi and Tianjin Hezhi established a new company named Tianjin Joway Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Joway Hezhi”) with registered capital of RMB 20,000,000. Joway Hezhi was incorporated on October 21, 2011 with initial registered capital of RMB5,000,000. It will engage in the production and distribution of Chinese-Western preparations, health food, healthcare products, medical instruments and plain food. On October 11, 2011, Joway Shengshi contributed RMB 1,500,000 and owned 30% of Joway Hezhi. As of the date of this Report, Joway Hezhi is in the early preparatory period and has no operations.

Short-Term Investment:

At December 31, 2012, the Company had a short-term wealth-management certificate with Industrial and Commercial Bank of China. This is classified as a level 2 investment within the fair value hierarchy. During the three months ended March 31, 2013, all of this short-term investment was liquidated and the funds were returned to the company.

 

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

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2013.

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 manufacturing 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 manufacturing 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.

 

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

Description of Selected Income Statement Items

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

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

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Sales and marketing expenses consist primarily of salaries and traveling expenses of our marketing department employees, transportation expenses, and advertising expenses. General and administrative expenses consist primarily of salaries of our administrative department employees, payroll taxes and benefits, general office expenses and depreciation. We expect administrative expenses to continue to increase as we incur expenses related to costs of compliance with U.S. securities laws and regulations, and our reporting obligations thereunder, 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, the income tax rate of our PRC subsidiaries is generally 25%. Joway Health Industries Group Inc. was established under the laws of the State of Nevada and is subject to U.S. federal income tax and Nevada annual reporting requirements. No provision for income taxes in the United States has been made as the Company has no income taxable in the United States. The Company’s PRC subsidiaries expect to use their retained earnings to support their PRC operations, and do not expect to declare any dividends within the foreseeable future.

Results of Operations

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

 

     For the three months ended March 31,  
     2013     2012  

REVENUES

   $ 177,894      $ 790,632   

COST OF REVENUES

     55,255        195,381   
  

 

 

   

 

 

 

GROSS PROFIT

     122,639        595,251   

OPERATING EXPENSES

     611,107        594,298   
  

 

 

   

 

 

 

(LOSS) INCOME FROM OPERATIONS

     (488,468     953   

OTHER INCOME, NET

     3,538        10,009   
  

 

 

   

 

 

 

(LOSS) INCOME BEFORE INCOME TAXES

     (484,930     10,962   

INCOME TAXES

     1,378        3,448   
  

 

 

   

 

 

 

NET (LOSS) INCOME

   $ (486,308   $ 7,514   
  

 

 

   

 

 

 

 

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Table of Contents

Business Segments

In 2013 and 2012, we operated in three reportable business segments: (1) Healthcare Knitgoods, (2) Daily Healthcare and Personal Care Products and (3) Wellness House and Activated Water Machine Products. The following table sets forth the contributions of each reportable business segment in dollars and as a percent of revenue:

For the three months ended March 31, 2013

 

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

REVENUES

  $ 34,188        19.2   $ 63,464        35.7   $ 80,242        45.1   $ 177,894   

COST OF REVENUES

    11,016        19.9     17,799        32.2     26,440        47.9     55,255   
 

 

 

     

 

 

     

 

 

     

 

 

 

GROSS PROFIT

    23,172        18.9     45,665        37.2     53,802        43.9     122,639   

GROSS MARGIN

    67.8       72.0       67.0       68.9

OPERATING EXPENSES

    117,443        19.2     218,015        35.7     275,649        45.1     611,107   
 

 

 

     

 

 

     

 

 

     

 

 

 

LOSS FROM OPERATIONS

  $ (94,271     19.3   $ (172,350     35.3   $ (221,847     45.4   $ (488,468
 

 

 

     

 

 

     

 

 

     

 

 

 

For the three months ended March 31, 2012

  

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

REVENUES

  $ 349,918        44.3   $ 148,436        18.8   $ 292,278        37.0   $ 790,632   

COST OF REVENUES

    74,981        38.4     40,307        20.6     80,093        41.0     195,381   
 

 

 

     

 

 

     

 

 

     

 

 

 

GROSS PROFIT

    274,937        46.2     108,129        18.2     212,185        35.6     595,251   

GROSS MARGIN

    78.6       72.8       72.6       75.3

OPERATING EXPENSES

    263,025        44.3     111,575        18.8     219,698        37.0     594,298   
 

 

 

     

 

 

     

 

 

     

 

 

 

INCOME (LOSS) FROM OPERATIONS

  $ 11,912        1249.9   $ (3,446     -361.6   $ (7,513     -788.4   $ 953   
 

 

 

     

 

 

     

 

 

     

 

 

 

For The Three Months Ended March 31, 2013 Compared to March 31, 2012

Revenue. For the three months ended March 31, 2013, revenue was $177,894 compared to $790,632 for the three months ended March 31, 2012, a decrease of $612,738 or 77.5%. This decrease was mainly due to the decrease in revenue from healthcare knit goods segment and wellness houses and activated water machines segment. The following three main reasons caused the decrease in revenue for these two segments in 2013. First, most products of our healthcare knit goods segment and wellness houses and activated water machines segment are durable consumables which have three or more years of life cycle. Our franchisees’ demand for our products for the first quarter of 2013 may have been affected because of the large amount of our main products they purchased in the end of 2010. Second, the demand to our products has been affected by the slowdown of the economy because China’s GDP growth dropped to 7.7% in the first quarter of 2013, compared with 8.1% in the first quarter of 2012. Finally, during the year of 2012, in order to concentrate on high-quality franchisees we strengthened the enforcement of the terms of our franchise agreements and policies in 2012 after focusing mostly on increasing franchise stores in 2011. As a result, the number of our franchisees decreased compared to the number in the first quarter of 2012, which also caused a decrease in revenue.

Revenue from healthcare knit goods segment decreased by $315,730 or 90.2% to $34,188 for the three months ended March 31, 2013 from $349,918 for the three months ended March 31, 2012. This decrease was mainly due to $0.2 million of decrease in sales of our mattress products. Our mattress products are durable consumables which have three or more years of life cycle, and our revenues for the first quarter of 2013 may have been negatively impacted by the large orders of this product by our franchisees in the end of 2010.

Revenue from daily healthcare and personal care products decreased by $84,972 or 57.2% to $63,464 for the three months ended March 31, 2013 from $148,436 for the three months ended March 31, 2012. This was primarily due to the decrease in sales of our cosmetic products and Tourmaline Soap.

 

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Revenue from wellness houses and activated water machines decreased by $212,036 or 72.5% to $80,242 for the three months ended March 31, 2013 from $292,278 for the three months ended March 31, 2012. This decrease was mainly due to the decrease in sales of Foot Sauna Bucket and wellness house for family use.

Cost of Goods Sold. For the three months ended March 31, 2013, cost of goods sold was $55,255 compared to $195,381 for the three months ended March 31, 2012, a decrease of $140,126, or 71.7%. This decrease was mainly due to the decrease in sales.

Cost of goods sold for healthcare knit goods segment decreased to $11,016 for the three months ended March 31, 2013 from $74,981 for the three months ended March 31, 2012, a decrease of $63,965 or 85.3%. This decrease was mainly due to the decrease in the cost of Mattress products.

Cost of goods sold for the daily healthcare and personal care segment decreased to $17,799 for the three months ended March 31, 2013 from $40,307 for the three months ended March 31, 2012, a decrease of $22,508 or 55.8%. This decrease was primarily due to the decrease in the cost of our cosmetic goods and Tourmaline Soap.

Cost of goods sold for our wellness house and activated water machine segment decreased to $26,440 for the three months ended March 31, 2013 from $80,093 for the three months ended March 31, 2012, a decrease of $53,653 or 67%. This decrease was mainly due to the decrease in the cost of Foot Sauna Bucket and wellness house for family use.

Gross profit. Our gross profit decreased by $472,612 or 79.4% to $122,639 for the three months ended March 31, 2013, compared to $595,251 for the three months ended March 31, 2012. This decrease was mainly due to the decrease in gross profit for healthcare knit goods segment and wellness houses and activated water machines segment. Our gross margin decreased from 75.3% for the three months ended March 31, 2012 to 68.9% for the three months ended March 31, 2013. This decrease was mainly due to the decrease in the gross margin of our healthcare knit goods segment.

Gross profit for the healthcare knit goods segment decreased by $251,765 or 91.6% to $23,172 for the three months ended March 31, 2013 compared to $274,937 for the three months ended March 31, 2012. This decrease was mainly due to decreased sales of our mattress products, which have higher gross margins. The gross margins of healthcare knit goods segment decreased from 78.6% for the three months ended March 31, 2012 to 67.8% for the three months ended March 31, 2013. The reduced output of our healthcare knit goods caused higher cost rate and lower gross profit margin.

Gross profit of daily healthcare and personal care segment decreased by $62,464 or 57.8% to $45,665 for the three months ended March 31, 2013, compared to $108,129 for the three months ended March 31, 2012. This decrease was primarily due to the decrease in gross profit of our cosmetic products and Tourmaline Soap. The gross margin of daily healthcare and personal care segment slightly decreased from 72.8% for the three months ended March 31, 2012 to 72% for the three months ended March 31, 2013.

Gross profit of the wellness house and activated water machine segments decreased by $158,383 or 74.6% to $53,802 for the three months ended March 31, 2013, compared to $212,185 for the three months ended March 31, 2012. This decrease was mainly due to the decrease in gross profit of Foot Sauna Bucket and wellness house for family use. The gross margin of our wellness house and activated water machine segments decreased from 72.6% for the three months ended March 31, 2012 to 67% for the three months ended March 31, 2013. This decrease was mainly due to the more discount to our franchisees.

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses increased by $16,809, or 2.8%, from $594,298 for the three months ended March 31, 2012 to $611,107 for the three months ended March 31, 2013. This slight increase was mainly due to the increase of heating fees. Operating expenses for healthcare knit goods segment decreased by $145,582 or 55.3% to $117,443 for the three months ended March 31, 2013 from $263,025 for the three months ended March 31, 2012. Operating expenses for daily healthcare and personal care segment increased by $106,440 or 95.4% to $218,015 for the three months ended March 31, 2013 from $111,575 for the three months ended March 31, 2012. Operating expenses for our wellness house and activated water machine segment increased by $55,951 or 25.5% to $275,649 for the three months ended March 31, 2013 from $219,698 for the three months ended March 31, 2012.

 

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Income from operations. As a result of the foregoing, our income from operations was negative $488,468 for the three months ended March 31, 2013, compared to $953 for the three months ended March 31, 2012, a decrease of $489,421. This decrease was mainly due to the decrease in sales.

Income taxes. Our income tax expenses was $1,378 for the three months ended March 31, 2013, compared to $3,448 for the three months ended March 31, 2012.

Net income. For the three months ended March 31, 2013, our net income was negative $486,308 compared to $7,514 for the three months ended March 31, 2012. This decrease was mainly due to a significant decrease in our income from operations.

Franchising

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

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

 

     For the three months ended March 31,  
     2013      2012  

Sales to franchise customers

   $ 144,098       $ 737,399   

Sales to non-franchise customers

     33,796         53,233   
  

 

 

    

 

 

 

Total sales

   $ 177,894       $ 790,632   
  

 

 

    

 

 

 

Liquidity and Capital Resources

Our cash at the beginning of the three months ended March 31, 2013 was $522,145 and increased to $1,163,608 by the end of March 31, 2013, an increase of $641,463. This increase was mainly due to the recovery of Marketable Security in Industrial and Commercial Bank of China in the amount of $1,266,604. On March 31, 2013, we had net working capital of $3,046,259, a decrease of $336,319 from $3,382,578 on December 31, 2012.

Our cash flow information summary is as follows:

 

     For the three months ended March 31,  
     2013     2012  

Net cash provided by (used in):

    

Operating activities

   $ (630,700     (62,737

Investing activities

     1,266,604        (127,728

Financing activities

   $ (7,604     (21,643

 

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Net Cash Used In Operating Activities

Net cash used in operating activities was $630,700 for the three months ended March 31, 2013 compared to $62,737 for the three months ended March 31, 2012. This change was primarily due to the reduced cash collection driven by $493,822 of decrease in net income.

For the three months ended March 31, 2013, cash was mainly used to cover the loss of $486,308 and the increase of other receivables of $169,118, which were primarily offset by an add-back of $130,400 of depreciation for non-cash expense.

For the three months ended March 31, 2012, cash was mainly used to purchase materials of $247,127 and increase other receivables of $82,226, which were primarily offset by an increase of accounts payable of $137,465 and an add-back of $131,474 of depreciation for non-cash expense.

Net Cash Provided by (Used In) Investing Activities

Net cash provided by investing activities was $1,266,604 for the three months ended March 31, 2013, compared to $127,728 of net cash used for the three months ended March 31, 2012. For the three months ended March 31, 2013, we took back our short-term wealth-management product, a kind of Marketable Security in Industrial and Commercial Bank of China in the amount of $1,266,604, which was invested in 2012. For the three months ended March 31, 2012, cash was mostly used to remodel our training building in the amount of $0.08 million.

Net Cash Used In Financing Activities

Net cash used in financing activities was $7,604 for the three months ended March 31, 2013, compared to $21,643 for the three months ended March 31, 2012. The cash was used to repay Jinghe Zhang and Shenyang Joway for advances made in prior periods.

On May 10, 2007, our operating subsidiaries, Joway Shengshi entered into a cash advance agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the agreements, Jinghe Zhang agreed to advance operating capital to Joway Shengshi. These advances are interest free, unsecured and are repayable upon demand. During the period beginning May 17, 2007 (inception of Joway Shengshi) through December 31, 2010, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang. We repaid $0 and $12,672 of these advances for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, the total unpaid principal balance due Jinghe Zhang for advances made to Joway Shengshi was $49,992.

On May 7, 2007, our operating subsidiary, Joway Shengshi entered into an agreement with Shenyang Joway pursuant to which Joway Shengshi and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. On May 10, 2007, our subsidiary, Joway Technology and Shenyang Joway entered into an agreement pursuant to which Joway Technology and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. Pursuant to these agreements, Shenyang Joway advanced an aggregate of $791,701 to Joway Shengshi and Joway Technology through December 31, 2010. We repaid $7,620 and $8,971 of these advances for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, the total unpaid principal balance due Shenyang Joway for advances was $63,919. Shenyang Joway ceased operations at the end of 2009, although it still exists as a legal entity.

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

 

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Table of Contents

STATUTORY RESERVES

Pursuant to the laws and regulations of the PRC, the Company’s PRC subsidiaries are required to allocate a portion of their after-tax income to statutory reserves funds. The minimum statutory reserves allocation is 10% of after-tax income until the reserves reach 50% of the entities’ registered capital or members’ equity. The reserve funds are not transferable to the Company in the form of cash dividends, loans or advances. Thus, the reserve funds are not available for distribution except in liquidation. As of March 31, 2013, the Company had allocated $354,052 to statutory reserves.

Critical Accounting Policies

Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.

Basis of Consolidation

The accompanying consolidated financial statements include Joway Health, its wholly owned subsidiaries, and controlled VIEs. All significant inter-company accounts and transactions have been eliminated in the consolidation. Pursuant to Accounting Standards Codification Topic 810 “Consolidation,” Joway Shengshi, as a VIE of Junhe Consulting, 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 the full 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 shipment upon the receipt of a customer’s purchase order. Sales prices are based on fixed price lists that are different depending on whether the price list is for franchisee customers or for non-franchisee customers. We recognize revenue when the product is shipped. We do not sell product to any customers with a right of return as defined in ASC 605-15-25-4. Sales are presented net of value added tax (VAT).

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

Accounts Receivable

Accounts receivable are carried at net realizable value. We provide reserves for potential credit losses on accounts receivable. Management reviews the composition of the accounts receivable and analyzes historical bad debts, customer concentrations, customers’ credit worthiness, current economic trends, and changes in customer’s payment patterns to evaluate the adequacy of these reserves.

 

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Table of Contents

Inventories

Inventories are stated at the lower of cost, as determined by the specific identification method on contract level (for each individual contract, inventories cost flow is determined by weighted-average method), or the net realizable value, which is determined on selling prices less any further costs expected to be incurred for completion and disposal. Management regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether a valuation allowance is required.

Property, Plant, and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation, and include expenditures that substantially increase the useful lives of existing assets.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:

 

Building

   20 years

Operating Equipment

   10 years

Office furniture and equipment

   3 or 5 years

Vehicles

   10 years

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts, and any gain or loss is included in the consolidated statements of income and other comprehensive income. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Significant renewals and betterment to buildings and equipment are capitalized. Leasehold improvements are depreciated over the lesser of the useful life or the life of the lease.

Recent Accounting Pronouncements

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which is codified in ASC Topic 210, Balance Sheet. This pronouncement contains new disclosure requirements about a company’s right of setoff and related arrangements associated with its financial and derivative instruments. ASU 2011-11 will be effective retrospectively for annual and interim periods beginning on or after January 1, 2013. The adoption of this standard did not have a material impact on our consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We do not anticipate that the adoption of this standard will have a material effect on our consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments are effective prospectively for annual reporting periods beginning after December 15, 2012, with early adoption permitted. We do not anticipate that the adoption of this standard will have a material effect on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

 

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Table of Contents

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2013, our disclosure controls and procedures were not effective, based on the material weakness described below:

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

Remediation Initiative

 

   

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

 

   

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

 

   

We have implemented an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatment identified in such report have been fully implemented and confirmed by our internal control department.

 

   

In 2011 we established the position of internal audit manager. In September 2011, we hired an internal audit manager who implemented an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatments identified in such report have been fully implemented and confirmed by our internal control department. We are seeking a potential candidate who has sufficient experience in internal control and audit to fill the position vacated in July 2012 by the internal audit manager. As an alternative, we also consider hiring an external professional organization to undertake the work.

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

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting for the three months ended March 31, 2013 that materially affected, or were reasonably likely to materially affect our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

As of the date of this filing, there have been no material changes from the risk factors disclosed in Part I, Item 1A (Risk Factors) contained in our Annual Report on Form 10-K for the year ended December 31, 2012. We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect out operations. The risks, uncertainties and other factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2012 may cause our actual results, performances and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occurs, our business, financial condition or results of operations may be adversely affected.

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

None.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

EXHIBIT INDEX

 

Exhibit

No.

  

Description

  31.1    Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and Rule 14d-14(a). *
  31.2    Certification of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a). *
  32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. *
  32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. *
101.INS    XBRL Instance Document*
101.SCH    XBRL Schema Document*
101.CAL    XBRL Calculation Linkbase Document*
101.LAB    XBRL Label Linkbase Document*
101.PRE    XBRL Presentation Linkbase Document*
101.DEF    XBRL Definition Linkbase Document*

 

* Filed herewith

 

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SIGNATURES

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

DATE: May 15, 2013

 

Joway Health Industries Group Inc.
By:  

/s/ Jinghe Zhang

       Jinghe Zhang
       President and Chief Executive Officer
By:  

/s/ Yuan Huang

       Yuan Huang
       Chief Financial Officer

 

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