0001213900-14-001921.txt : 20140331 0001213900-14-001921.hdr.sgml : 20140331 20140331141500 ACCESSION NUMBER: 0001213900-14-001921 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 29 CONFORMED PERIOD OF REPORT: 20131231 FILED AS OF DATE: 20140331 DATE AS OF CHANGE: 20140331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Joway Health Industries Group Inc CENTRAL INDEX KEY: 0001263364 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 980221494 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-108715 FILM NUMBER: 14729296 BUSINESS ADDRESS: STREET 1: NO 19 BAOWANG ROAD STREET 2: BAODI ECONOMIC DEVELOPMENT ZONE CITY: TIANJIN, PRC STATE: F4 ZIP: 300180 BUSINESS PHONE: 862258896888 MAIL ADDRESS: STREET 1: NO 19 BAOWANG ROAD STREET 2: BAODI ECONOMIC DEVELOPMENT ZONE CITY: TIANJIN, PRC STATE: F4 ZIP: 300180 FORMER COMPANY: FORMER CONFORMED NAME: G2 VENTURES INC DATE OF NAME CHANGE: 20030911 10-K 1 f10k2013_jowayhealth.htm ANNUAL REPORT f10k2013_jowayhealth.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-K
 
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2013
 
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
 
Commission File Number: 333-108715
 

 
 Joway Health Industries Group Inc.
(Exact Name of Registrant as specified in its charter)
 
Nevada
 
98-0221494
(State or other jurisdiction of
Incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
No. 19, Baowang Road, Baodi Economic Development Zone,
Tianjin, PRC 301800
(Address of principal executive office)
 
Registrant’s telephone number, including area code: +(86)-22-22533666
 
Securities registered under Section 12(b) of the Exchange Act:
None
 
Securities registered under Section 12(g) of the Exchange Act:
None
 

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
¨
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
 
As of June 30, 2013, the aggregate market value of the voting stock held by non-affiliates of the registrant was $75,180. For purposes of this information, the outstanding shares of Common Stock owned by directors and executive officers of the registrant were deemed to be shares of the voting stock held by affiliates.
 
As of March 31, 2014, there were 20,054,000 shares of the issuer’s common stock, $0.001 par value, issued and outstanding.
 


 
 

 
 
JOWAY HEALTH INDUSTRIES GROUP INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2013
 
TABLE OF CONTENTS
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
PART I
  
ITEM 1.     BUSINESS
1
ITEM 1A.  RISK FACTORS
19
ITEM 2.     PROPERTIES
30
ITEM 3.     LEGAL PROCEEDINGS
31
ITEM 4.     MINE SAFETY DISCLOSURES
31
PART II
  
ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
31
ITEM 6.     SELECTED FINANCIAL DATA
32
ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
32
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
43
ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
43
ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
43
ITEM 9A.  CONTROLS AND PROCEDURES
44
ITEM 9B.  OTHER INFORMATION
45
PART III
  
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
45
ITEM 11.   EXECUTIVE COMPENSATION
47
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
48
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
49
ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES
50
PART IV
  
ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES
51
SIGNATURES
53
 
 
 

 
 
Information Regarding Forward-Looking Statements
 
In addition to historical information, this report contains predictions, estimates and other forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. These risks and other factors include those listed under “Risk Factors” and elsewhere in this report. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology.
 
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in this report in greater detail under the heading “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of March 31, 2014. You should read this annual report on Form 10-K and the documents that we have filed as exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect.
 
Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
 
 
 

 
 
PART I
 
Item 1. BUSINESS.
 
Overview
 
Through our PRC Operating Entities, Joway Health Industries Group Inc. (the “Company” or “Joway Health”) is engaged in the manufacture, distribution and sale of tourmaline-related healthcare products. We are incorporated in the state of Nevada. Our principal executive offices are located at No. 19. Baowang Road, Baodi Economic Development Zone, Tianjin City, PRC 301800. Our website address is www.jowayhealth.com.
 
Corporate History
 
Joway Health Industries Group, Inc.
 
Until October 1, 2010, we were a “shell company,” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. We were originally formed as a Texas corporation on March 21, 2003 to acquire most of the assets and certain liabilities of and succeed to the business of G2 Companies, Inc., (formerly Hartland Investment, Inc.), as an independent recording company and artist management company. The acquisition of G2 Companies, Inc. was consummated on April 1, 2003. On May 13, 2008, through a registered offering, we sold 1,284,574 shares of our common stock raising an aggregate of $128,457, before costs of the Offering. Our common stock began trading on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “GTVI” on September 11, 2009. Prior to the Share Exchange Transaction, discussed below, we were a development stage music recording, production and artist management company that had limited operations, primarily due to our inability to raise sufficient capital.
 
On September 28, 2010, Mr. Kepler, our former Chief Executive Officer and majority shareholder, sold to Crystal Globe Limited, a British Virgin Islands company (“Crystal Globe”) 3,300,000 shares of common stock in the Company, which at that time represented 68.97% of the issued and outstanding capital stock of the Company. In connection with the sale, Mr. Kepler resigned as our sole officer and director and appointed Crystal Globe’s nominees, Mr. Jinghe Zhang, as our new President, Chief Executive Officer and sole director and Mr. Yuan Huang as our new Chief Financial Officer, Secretary and Treasurer. As a result, on September 28, 2010, there was a change in control of the Company.
 
On October 1, 2010, as a result of a transaction with Dynamic Elite (the “Share Exchange”), Dynamic Elite became our wholly-owned subsidiary and we ceased to be a shell company. Dynamic Elite is the holding company of all the equity of Tianjin Junhe Management Consulting Co., Ltd. (“Junhe Consulting”).
 
Share Exchange Transaction
 
On October 1, 2010, we entered into a Share Exchange Agreement with Crystal Globe, the sole shareholder of Dynamic Elite International Limited, pursuant to which Crystal Globe transferred all of its shares in Dynamic Elite to us in exchange for 15,215,426 shares of our common stock. As a result, Dynamic Elite became our wholly-owned subsidiary and we ceased to be a shell company, and Crystal Globe held a total of 18,515,426 shares (approximately 92.6%) of our issued and outstanding common stock.
 
The Share Exchange was treated for accounting purposes as a reverse acquisition. Therefore, the Company’s financial statements after the Share Exchange were those of Dynamic Elite and its subsidiaries and controlled companies on a consolidated basis, as if the Share Exchange had been in effect retroactively for all periods presented.
 
Change of State of Incorporation; Name Change
 
In December 2010, the Company changed its jurisdiction of incorporation from the State of Texas to the State of Nevada and changed its name to Joway Health Industries Group, Inc. In connection with these changes, the Company adopted new Articles of Incorporation and Bylaws.
 
 
1

 
 
Dynamic Elite
 
Dynamic Elite was founded on June 2, 2010 under the laws of the British Virgin Islands by Crystal Globe and Evan Liu, the sole shareholder of Crystal Globe, at the request of Mr. Jinghe Zhang. Mr. Liu is a friend of Mr. Jinghe Zhang. On September 15, 2010, Dynamic Elite established a wholly-owned subsidiary — Tianjin Junhe Management Consulting Co., Ltd. (“Junhe Consulting”), as a wholly foreign-owned enterprise (WOFE) under the laws of the PRC for the purposes of acquiring Tianjin Joway Shengshi Group Co., Ltd. and engaging in the manufacture, distribution and sale of tourmaline products in China. Under Article 6 of the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, adopted April 12, 1986 at the 4th Sess. of the 6th National People’s Congress and as amended on October 31, 2000 (“PRC WOFE Law”) and Article 7 of the Detailed Rules for the Implementation, any person or entity that intends to establish an enterprise in the PRC with foreign capital is required to submit an application for examination and approval to the appropriate department under the State Council. On September 9, 2010, the local Tianjin City government issued a certificate of approval approving the foreign ownership of Junhe Consulting by Dynamic Elite. Mr. Jinghe Zhang was appointed as the Executive Director of Junhe Consulting.
 
PRC Operating Entities
 
All of our business operations are conducted through our PRC Operating Entities. The chart below sets forth our corporate structure.
 
 
Joway Shengshi
 
On May 17, 2007, Mr. Jinghe Zhang, Mr. Lijun Si and Mr. Baogang Song founded Tianjin Joway Textile Co., Ltd. as a limited liability company under the PRC law. On November 24, 2009, the company changed its name to Tianjin Joway Shengshi Group Co., Ltd. (“Joway Shengshi”). The registered capital of Joway Shengshi is RMB 50,000,000 and its term of operation will expire on May 16, 2022. Mr. Jinghe Zhang is the Executive Director and General Manager of Joway Shengshi. On July 1, 2010, Mr. Lijun Si transferred 4% of the equity interest in Joway Shengshi to Mr. Jinghe Zhang. As a result, Mr. Zhang owns 99% of the equity interest in Joway Shengshi and Mr. Baogang Song owns the remaining 1% of the equity interest of Joway Shengshi. As of December 31, 2013 and 2012, Joway Shengshi was the sole shareholder of Joway Technology, Joway Decoration, and Shengtang Trading.
 
 
2

 
 
Joway Technology
 
Joway Technology was incorporated under PRC law on March 28, 2007, with a registered capital of RMB 1,100,000. Its term of operation expires on March 27, 2017. It was formed to engage in intelligent engineering design and construction, development and sales of electronics, water filters, and other similar products. Prior to July 25, 2010, Joway Shengshi held 90.91% of Joway Technology. On July 25, 2010 Joway Shengshi acquired the remaining 9.09% of Joway Technology from Mr. Jingyun Chen for RMB 100,000 in cash. As a result of the acquisition, Joway Shengshi became the sole shareholder of Joway Technology.
 
Joway Decoration
 
Joway Decoration was cofounded by Joway Shengshi and Mr. Jingyun Chen under PRC law on April 22, 2009, with a registered capital of RMB 2,000,000. Its term of operation expires on April 21, 2019. It was formed to engage in the business of intelligent electric heating project design and construction, development and sales of electronics technology and water filters, and the manufacture and sales of wood products. Prior to July 9, 2010, Joway Shengshi owned 90% of Joway Decoration. On July 9, 2010, Joway Shengshi entered into a share acquisition agreement with Mr. Jingyun Chen to acquire the remaining 10% of the shares of Joway Decoration for RMB 200,000 in cash. As a result of the acquisition, Joway Shengshi became the sole shareholder of Joway Decoration.
 
Shengtang Trading
 
Shengtang Trading was cofounded by Joway Shengshi and Mr. Jingyun Chen under PRC law on September 18, 2009, with a registered capital of RMB 2,000,000. Its term of operation expires on September 17, 2029. It was formed to engage in the business of importing and exporting merchandise and technology; knitwear, biochemistry (excluding toxic chemicals and drugs), and the wholesale and retail sale of hardware. Prior to July 28, 2010, Joway Shengshi owned 95% of Shengtang Trading. On July 28, 2010, Joway Shengshi entered into a share acquisition agreement with Mr. Aiying Wang to acquire the remaining 5% of the shares of Shengtang Trading for RMB 100,000 in cash. As a result of the acquisition, Joway Shengshi became the sole shareholder of Shengtang Trading.
 
VIE Agreements
 
On September 16, 2010, prior to the Share Exchange, Junhe Consulting, Dynamic Elite’s wholly owned subsidiary had entered into a series of control agreements with Joway Shengshi and all of the owners of Joway Shengshi, which agreements allow Junhe Consulting to control Joway Shengshi. Through our ownership of Dynamic Elite, Dynamic Elite’s ownership of Junhe Consulting and Junhe Consulting’s agreements with Joway Shengshi, we believe that Joway Health controls Joway Shengshi and therefore, we consolidate the results of operations of Joway Shengshi and its subsidiaries with ours as variable interest entities.
 
In connection with the Share Exchange and as consideration for entering into the VIE Agreements, Mr. Jinghe Zhang and Mr. Baogang Song, the shareholders of Joway Shengshi, entered into a Call Option Agreement with the sole shareholder of Crystal Globe, pursuant to which the shareholders of Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an aggregate price equal to $20,000 over the next three years. The Call Option vested as to 34% of the shares of Crystal Globe on April 2, 2011, and vests as to 33% on April 2 of 2012 and 2013. As a result, the shareholders of Joway Shengshi became the indirect beneficial owners of the shares of the Company held by Crystal Globe.
 
Under PRC law the acquisition of Joway Shengshi by Junhe Consulting must be structured as a cash transaction with the purchase price based on the appraised value of the equity interest or assets to be sold. Neither Junhe Consulting nor Dynamic Elite had sufficient cash to pay the appraised value of the equity interest or assets of Joway Shengshi. Alternatively, the shareholders of Joway Shengshi entered into a series of contractual agreements (the “VIE Agreements”) which enabled Dynamic Elite to gain control of Joway Shengshi and be entitled to receive 100% of the profits of Joway Shengshi and is obligated for 100% of the losses of Joway Shengshi. As a result of the VIE agreements, we are able to consolidate Joway Shengshi’s financial statements, including the results of operations, assets and liabilities of Joway Shengshi and its subsidiaries without triggering the regulatory requirements of PRC law. Under PRC law the VIE Agreements are considered commercial transactions among legal entities and individuals, and do not trigger the PRC requirements that apply to acquisitions, although the pledge by Joway Shengshi’s equity holders of all their equity in Joway Shengshi to Junhe Consulting pursuant to the Equity Pledge Agreement (the “Equity Pledge”) must be registered with the appropriate governmental agency. The Equity Pledge was registered with local administration department for industry and commerce pursuant to the Section 1 of Article 226 of PRC Property Law passed by National People's Congress on March 16, 2007.
 
Through Junhe Consulting, we effectively and substantially control Joway Shengshi and its three wholly owned subsidiaries Joway Technology, Shengtang Trading and Joway Decoration.
 
 
3

 
 
The VIE Agreements include:
 
 
 
a Consulting Services Agreement through which Junhe Consulting has the right to advise, consult, manage and operate Joway Shengshi and collect and own all of the net profits or losses of Joway Shengshi;
 
 
 
an Operating Agreement through which Junhe Consulting has the right to recommend director candidates and appoint the senior executives of Joway Shengshi, approve any transactions that may materially affect the assets, liabilities, rights or operations of Joway Shengshi, and guarantee the contractual performance by Joway Shengshi of any agreements with third parties, in exchange for a pledge by Joway Shengshi of its accounts receivable and assets;
 
 
 
a Proxy Agreement under which the two shareholders of Joway Shengshi have vested their collective voting control over Joway Shengshi to Junhe Consulting and may only transfer their respective equity interests in Joway Shengshi to Junhe Consulting or its designee(s);
 
 
 
an Option Agreement under which the shareholders of Joway Shengshi have granted to Junhe Consulting the irrevocable right and option to acquire all of their equity interests in Joway Shengshi with a consideration equal to the capital paid in by the shareholders in the amount of RMB 50 million (approximately USD $7.52 million). As executive director of Junhe Consulting, Mr. Jinghe Zhang has the power to exercise the option in his sole discretion; and
 
 
 
an Equity Pledge Agreement under which the owners of Joway Shengshi have pledged all of their rights, titles and interests in Joway Shengshi to Junhe Consulting to guarantee Joway Shengshi’s performance of its obligations under the Consulting Services Agreement.
 
Terms of the VIE Agreements
 
Consulting Agreement
 
Under the Consulting Agreement, Joway Shengshi retained Junhe Consulting to (i) provide general advice and assistance relating to the management and operation of Joway Shengshi’s business; (ii) provide general advice and assistance with respect to employment and staffing issues, including recruiting and training of management personnel, administrative personnel and other staff, establishing an efficient payroll management system, and relocation assistance; (iii) provide business development advice and assistance; and (iv) such other advice and assistance as may be agreed upon by the parties. In return, Joway Shengshi agreed to pay Junhe Consulting quarterly a consulting fee in an amount equal to all of Joway Shengshi’s net income for that quarter within fifteen (15) days after receipt of Joway Shengshi’s quarterly financial statements. Joway Shengshi shall cause the owners of Joway Shengshi to pledge their equity interests in Joway Shengshi to Junhe Consulting to secure the payment of the foregoing consulting fee.
 
Joway Shengshi is subject to a number of covenants typical for this type of transaction, including the obligation to provide monthly, quarterly and annual reports, and other information requested by Junhe Consulting. In addition, Joway Shengshi is subject to a number of negative covenants, including the agreement that it will not (i) issue, purchase or redeem any equity or debt, or equity or debt securities; (ii) create, incur, assume or suffer to exist any liens upon any of its property or assets (except certain enumerated liens); (iii) wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or sale of all or substantially all of its assets; (iv) declare or pay any dividends; (v) incur, assume or suffer to exist any indebtedness, (other than certain enumerated exceptions); (vi) lend money or credit or make advances to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any other Person, except receivables in the ordinary course of business; (vii) enter into any transaction or series of related transactions, whether or not in the ordinary course of business, with any of its affiliates or related parties, other than on terms and conditions substantially as favorable to Joway Shengshi as would be obtainable in a comparable arm’s-length transaction; (viii) make any expenditure for fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which are capitalized in accordance with generally accepted accounting principles in the PRC and capitalized lease obligations) during any quarterly period which exceeds the aggregate the amount contained in the budget; (ix) amend or modify or change its Articles of Association or business license, or any agreement entered into by it, with respect to its capital stock, or enter into any new agreement with respect to its capital stock; or (x) engage (directly or indirectly) in any business other than those types of business prescribed within the business scope of its business license.
 
The Consulting Agreement may be terminated by Junhe Consulting for any reason at any time. In addition, the Consulting Agreement may be terminated by Junhe Consulting by written notice in the event of a material breach by Joway Shengshi which, in the case of breach of a non-financial obligation, has not been remedied within fourteen (14) days following the receipt of such written notice. Either party may terminate the Consulting Agreement by written notice to the other party if (i) the other party becomes bankrupt or insolvent or is the subject of proceedings or arrangements for liquidation or dissolution or ceases to carry on business or becomes unable to pay its debts as they become due; (ii) if the operations of Junhe Consulting are terminated; or (iii) if circumstances arise which materially and adversely affect the performance or the objectives of the Consulting Agreement.
 
 
4

 
 
Operating Agreement
 
Under the Operating Agreement, Junhe Consulting agreed to guarantee Joway Shengshi’s performance of contracts, agreements or transactions with third parties in consideration for the pledge by Joway Shengshi to Junhe Consulting of all of Joway Shengshi’s assets. In addition, Joway Shengshi and its shareholders agreed that Joway Shengshi would not, without the prior written consent of Junhe Consulting, enter into any transactions which may materially affect the assets, obligations, rights or the operations of Joway Shengshi (excluding transactions entered into in the ordinary course of business and the lien obtained by relevant counter parties due to such agreements), including transactions involving (i) the borrowing of money or assumption of any debt; (ii) the sale or purchase from any third party any asset or right, including, but not limited to, any intellectual property rights; (iii) the provision of any guarantees to any third parties using its assets or intellectual property rights; or (iv) the assignment of any business agreements to any third party. Joway Shengshi and its shareholders also agreed to appoint to Joway Shengshi’s board of directors, and Joway Shengshi’s General Manager, Chief Financial Officer, and other senior officers those persons recommended or selected by Junhe Consulting.
 
Voting Rights Proxy Agreement
 
Under the Proxy Agreement, the Shareholders irrevocably granted to Junhe Consulting, for the maximum period of time permitted by law, all of their voting rights as shareholders of Joway Shengshi. In addition, the Shareholders agreed not to transfer their equity interest in Joway Shengshi to any third party (other than Junhe Consulting or a designee of Junhe Consulting). The Proxy Agreement may not be terminated without the unanimous consent of all Parties, except Junhe Consulting, which may terminate the Proxy Agreement with or without cause on thirty (30) days prior written notice.
 
Option Agreement
 
Under the Option Agreement, the Shareholders irrevocably granted to Junhe Consulting or its designee an exclusive option to purchase at any time, to the extent permitted under PRC Law, all or a portion of the Shareholders’ Equity Interest in Joway Shengshi for a price equal to the capital paid in by the Shareholders on a pro rata basis in accordance with the percentage of the Shareholders’ Equity Interest acquired, subject to applicable PRC laws and regulations.
 
Equity Pledge Agreement
 
Under the Equity Pledge Agreement, the Shareholders pledged all of their right, title and interest in their equity interests in Joway Shengshi to Junhe Consulting to guarantee Joway Shengshi’s performance of its obligations under the Consulting Services Agreement. The pledge expires two (2) years after the satisfaction by Joway Shengshi of all of its obligations under the Consulting Services Agreement. During the term of the Equity Pledge Agreement, Junhe Consulting is entitled to vote, control, sell, or dispose of the Pledged Collateral in the event the Company does not perform its obligations under the Consulting Services Agreement. In addition, Junhe Consulting is entitled to collect any and all dividends declared or paid in connection with the Pledged Collateral.
 
Through these contractual arrangements, we have the ability to substantially influence the daily operations and financial affairs of Joway Shengshi and to receive, through our subsidiaries, all of its profits. As a result, we are considered the primary beneficiary of Joway Shengshi and its operations, and Joway Shengshi and its subsidiaries are deemed to be our variable interest entities. Accordingly, we are able to consolidate into our financial statements the results, assets and liabilities of Joway Shengshi and its subsidiaries.
 
Call Option Agreement
 
As part of the reorganization of Joway Shengshi, Mr. Liu and the shareholders of Joway Shengshi entered into a Call Option Agreement, 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 of $20,000 over the next three years. In addition, the Option Agreement also provides that Mr. Liu shall not dispose any of the shares of Crystal Globe without consent of Mr. Zhang and Mr. Song. Upon the consummation of the Share Exchange Transaction, Crystal Globe became the principal shareholder of Joway Health (f/k/a G2 Ventures, Inc.) and Mr. Zhang and Mr. Song became indirect beneficial owners of the shares in Joway Health held by Crystal Globe pursuant to this Call Option Agreement.
 
Business Description
 
We are, through our PRC Operating Entities, engaged in the manufacture and sales of tourmaline-related healthcare products. As of December 31, 2013, we had 63 employees. Our principal executive offices are located at No. 19 Baowang Road, Baodi Economic Development Zone, Tianjin, PRC 301800.
 
 
5

 
 
Introduction to Tourmaline
 
Tourmaline is a crystal silicate mineral compounded with elements such as aluminum, iron, magnesium, sodium, lithium, or potassium. Tourmaline is classified as a semi-precious stone and the gem comes in a wide variety of colors. (Source: http://en.wikipedia.org/wiki/Tourmaline)
 
Tourmaline has the ability to become its own source of electric charge, as it is both pyroelectric, as well as piezoelectric. When it is put under pressure or when it is dramatically heated or cooled, tourmaline creates an electrical charge capable of emitting far infrared rays (“FIR”) and negative ions. (Source: http://www.globalhealingcenter.com/tourmaline.html)
 
FIRs are invisible waves of energy capable of penetrating deep into the human body. Negative ions are atoms that have a negative electric charge. FIRs and negative ions are perceived to have certain health benefits. (Source: http://www.globalhealingcenter.com/tourmaline.html)
 
Because it is a permanent source of FIRs and negative ions, tourmaline is perceived to have certain health benefits (Source: Niwa Institute for Immunology, Japan. Int J. Biometeorol 1993 Sep; 37(3) 133-8). In view of its perceived health benefits, tourmaline has been used to manufacture a wide range of healthcare products, including apparel, bedding, water purifiers, sauna rooms, and personal care products.
 
While tourmaline has perceived health benefits, the actual benefits of tourmaline to human health are unknown. The full efficacy of tourmaline to human health requires further significant clinical study. We are not aware of any formal clinical studies which have validated the health benefits of tourmaline.
 
We purchase liquid tourmaline from domestic companies which, in turn, import it from South Korea. Liquid tourmaline is readily available and its price has remained relatively stable. We have not experienced any shortage in tourmaline but as a precaution, we closely monitor its price and have several back-up suppliers.
 
China’s Tourmaline Health-Related Products Market
 
The use of tourmaline in health-related products in China began in 2001. Although more and more companies are producing tourmaline health-related products every year, the market for these products in China is still in its infancy and highly fragmented. (Source: 2010-2012 China's tourmaline market and investment prospects research report, Institute of China Uniway Economics, August, 2010).
 
Currently, there are numerous kinds of tourmaline health-related products on the market, including tourmaline clothes, tourmaline mattresses, tourmaline water machines, etc. In China, users of tourmaline health-related products are typically middle-aged and elderly people and demand for tourmaline health-related products is still relatively low compared to the size of the Chinese population.
 
We believe that the main challenge for the tourmaline health-related product companies is market development rather than competition. With rising living standards, increasing disposable income, higher health consciousness and the greater awareness of the health benefits of tourmaline, we believe that the tourmaline health products market will grow rapidly in the next few years.
 
Manufacturing Process
 
We have two manufacturing processes.
 
One manufacturing process consists of applying or infusing raw textiles with liquid or granular tourmaline and then producing products from these tourmaline-infused textiles. This process is used to produce Male and Female Underpants, Tourmaline Scarves and Tourmaline Pillowcases.
 
Our second manufacturing process consists of applying or infusing already finished products with liquid or granular tourmaline. We purchase finished products, such as clothing, bedding, and mattresses and then, using one or more of the techniques described below, coat and/or infuse the products with liquid or granular tourmaline.
 
We coat or infuse liquid or granular tourmaline into our products using one or more of the following methods:
 
The Spray Method
 
We use special high-pressure nozzles to spray liquid tourmaline onto the surface of the product. Through this process, the tourmaline particles attach onto the surface of the product. We then use a high-temperature ironing machine to embed the tourmaline particles into the fibers of the product. This method is used in the manufacture of large pieces of textile products, such as mattresses.
 
 
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The Dip Method
 
We completely immerse fabrics into liquid tourmaline and then stir the fabrics in the liquid tourmaline to ensure the tourmaline particles attach to the surface of the fabrics. Finally, we embed the tourmaline particles into the fibers by applying heat with our special high-temperature ironing machine. This method is used in the manufacture of smaller products, such as underwear, scarves, and shirts.
 
The Filling Method
 
We fill the products with tourmaline particles. This method is used to make activated water machines and other water treatment products.
 
The three methods mentioned above are keys to our manufacturing process. We protect our manufacturing methods via confidentiality agreements entered into between us and our employees. Pursuant to the confidentiality agreement, the employees are prohibited from unlawfully revealing and using our confidential technology during his/her term of employment and ten years after the termination of employment.
 
Our Products and Services
 
We primarily manufacture the following three series of tourmaline-related healthcare products:
 
1.         Healthcare Knit Goods Series
 
For the fiscal years ended December 31, 2013 and 2012, our healthcare knit goods series of products accounted for approximately 28.3% and 34.4%of our annual sales revenue, respectively. This series of products is comprised of tourmaline treated mattresses, bed linen, underwear, and shirts. We use either the spray or dip method to embed tourmaline particles into the fabric of this series of products.
 
Set forth below is a list of healthcare knit goods products, the trademarks or marks under which they are marketed and the manufacturing method employed:
 
No.
  
Products
  
Trademark/Mark
  
Manufacturing Method
1
  
Golden Mattress
  
  
  
Spray Method
2
  
Tourmaline Mattress
  
  
  
Spray Method
3
  
Tourmaline Undergarment
  
  
 
  
Dip Method
4
  
Tourmaline Bed Linens
  
  
  
Spray Method
5
  
Tourmaline Male Shirts
  
  
 
  
Dip Method
6
 
Tourmaline Pillow
       
Spray Method

2.         Daily Healthcare and Personal Care Series
 
For the fiscal years ended December 31, 2013 and 2012, our daily healthcare and personal care series of products accounted for approximately 31.5% and 26.8% of our annual sales revenue, respectively. This series is comprised of tourmaline-treated wrist protectors, knee protectors, scarves, and shampoo and soap products. We use all three production methods to embed tourmaline particles into these products.  We believe these tourmaline-treated daily healthcare products and personal care products produce FIRs and negative ions which have perceived health benefits.
 
Set forth below is a list of our products in the daily healthcare and personal care series, the trademarks or marks under which they are marketed and the manufacturing method employed:
 
No.
  
Products
  
Trademark/Mark
  
Manufacture Method
1
  
Tourmaline Wrist Protector
  
  
Spray Method
2
  
Tourmaline Knee Protector
  
  
Spray Method
3
  
Tourmaline Scarves
  
  
Dip Method
4
  
Tourmaline Shampoo
  
  
Filling Method
5
  
Tourmaline Soap
  
  
Filling Method
6
  
Tourmaline Socks
  
  
Dip Method

 
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 In 2012, we launched a series of diet health product. This series of product have different functional components and healthy functions. Below is a list of our new diet health products.
 
No.
  
Products
  
Trademark/Mark
  
Primary Functional Component
 
 Main Function
1
 
Lycopene capsule
     
Tomato extract, Carrot powder
 
Resist oxygen free radical damage to human body and improve skin allergy.
                 
2
 
Beautifying Collagen capsule
     
Highly concentrated collagen
extracted
from deep-sea sharkskin
 
Supplement human body with collagen necessary to maintain healthy.
                 
3
 
Maca capsule
     
Maca fine powder
 
Replenish physical strength, protect the ovaries, slim the body, whiten the skin and strengthen sex ability.
                 
4
 
East Asia migratory locust powder capsule
 
  
 
East Asia migratory locust powder
 
Regulate immunity, activate cells, inhibited aging, prevent diseases.
               
5
 
Spring awaken pieces
   
Soybean extract, Pearl powder,
Vitamin E, Vitamin C
 
Regulate estrogen level, improve bone density, prevent senile dementia, cardiovascular or cerebrovascular disease.
                 
6
 
Six ingredients tea
     
Prepared rehmannia, Cornus, Cortex Moutan,
Rhizoma alismatis, Yam, Poria cocos,
Yunnan Dian black tea
 
Refresh spirit, alleviate fatigue, clear heat and remove toxicity, invigorate stomach and promote digestion.

3.        Wellness House and Activated Water Machine
 
For the years ended December 31, 2013 and 2012, our wellness house and activated water machine series of products accounted for approximately 40.2% and 38.7% of our annual sales revenue, respectively. This series of products is comprised mainly of tourmaline wellness houses, tourmaline wellness house materials, tourmaline activated water machines and drinking mugs. Our tourmaline wellness house resembles a regular sauna room in which users experience heat sessions. However, the inner layer of our wellness house is coated with tourmaline, which emits FIRs and negative ions when heated. We supply two types of wellness houses: one for family use, which is designed to be installed in the corner of a room and can seat one to eight people depending on its size; the other is customized and constructed on site for commercial bathrooms or spas according to their specifications.
 
Below is a list of different models of our Wellness House for family use:
 
Model
  
Trademark/Mark
  
Material
  
Dimension
  
Capacity
  
Manufacturing
Method
Classic Mini
Wellness House
  
  
Hemlock
  
1.0mX1.0mX1.9m
  
1-2 persons
  
Spray Method
Classic Twin
Wellness House I
  
 
  
Hemlock
  
1.2mX1.05MX1.9m
  
2-3 persons
  
Spray Method
Classic Twin
Wellness House II
  
  
Snow Pine
  
1.2mX1.05mX1.9m
  
2-3 persons
  
Spray Method
Elegant Multi-Person 
Wellness House
  
  
Hemlock
  
1.5mX0.53mX1.37mX1.9m
  
4-5 persons
  
Spray Method
Classic Multi-Person 
Wellness House
  
  
Hemlock
  
1.75mX1.6mX1.9m
  
6-7 persons
  
Spray Method
 
 
8

 
 
We infuse tourmaline particles into the filters of our water machines and water mugs.  Tourmaline is perceived to have certain health benefits.
 
Below is a list of our water treatment products:
 
No.
  
Products
  
Trademark/Mark
  
Manufacturing Method
1
 
Tourmaline Water Machine
 
 
  Filling Method
             
2
 
Tourmaline Water Mug
 
 
Filling Method
             
3
 
Tap Water Purifier
 
 
Filling Method
 
Our Foot Sauna Bucket was introduced in 2011. The bottom of our Foot Sauna Bucket is filled with tourmaline particles.
 
Below is brief introduction to our Foot Sauna Bucket:
 
No.
  
Products
  
Trademark/Mark
  
Manufacturing Method
1
 
Foot Sauna Bucket
 
 
Filling Method
 
Return policy
 
It is the Company’s normal commercial practice to only allow the return of goods that do not conform to the customer’s order due to some occasional error in packaging or shipment. The return should be requested within seven days of purchase. Customers may also request a free repair of defective products within 15 days of purchase. For products purchased more than 15 days previously, we charge a service fee of 110% of the cost of repaired or replaced parts. During 2013 and 2012, we did not have sales return occurred.
 
Services: Wellness House Maintenance
 
Our wellness house products generally carry a one-year warranty. When the warranty expires, we provide our customers the option to engage us to service and maintain their wellness houses for a fee equal to 200% of the cost of the repaired or replaced parts.
 
There has been very little demand for our wellness house maintenance services in 2013 and 2012.
 
Manufacturing Facilities
 
Our manufacturing facilities are located in Baodi District, Tianjin City, PRC, and occupy an area of approximately 2,500 square meters. We have seven employees engaged in manufacturing as of December 31, 2013. We had our own design team comprising three designers who are responsible for designing new styles for our products every quarter. They are also responsible for product packaging design.
 
 
9

 
 
Customers and Suppliers
 
Customers
 
Below is a list of our top ten customers for the years 2013 and 2012, respectively.
 
Top Ten Customers in 2013
 
No.
 
Name
 
Amount
(RMB)
   
Amount
(US$)
 
Products Sold
 
Percentage
of Sales
 
1  
Tiefeng Ma Store
  ¥ 316,351     $ 51,039  
Tourmaline Mattress, Tourmaline Soap, etc.
    3.7 %
2  
Weijing Xie Store
    253,127       40,839  
Wellness House, Tourmaline Soap, etc.
    2.9 %
3  
Chunxia Nan Store
    225,974       36,458  
Tourmaline Pillow, Tourmaline Mattress, etc.
    2.6 %
4  
Lijun Sun Store
    219,066       35,344  
Wellness House, Tourmaline Undergarment, etc.
    2.5 %
5  
Xiaomei Yang Store
    209,950       33,873  
Wellness House, Tourmaline Pillow, etc.
    2.4 %
6  
Xiangyun Xu Store
    198,195       31,976  
Wellness House , Tourmaline Mattress,, etc.
    2.3 %
7  
Yun Lei Store
    185,626       29,949  
Tourmaline Shampoo, Tourmaline Soap, etc.
    2.2 %
8  
Xiangyue Zhang Store
    182,901       29,509  
Wellness House, Tourmaline Pillow, etc.
    2.1 %
9  
Li Miao Store
    168,854       27,243  
Tourmaline Pillow, Wellness House, etc.
    2.0 %
10  
Suying Liu Store
    166,051       26,790  
Tourmaline Mattress, Wellness House, etc.
    1.9 %
        ¥ 2,126,095     $ 343,020         24.7 %
 
Top Ten Customers in 2012
 
No.
 
Name
 
Amount
(RMB)
   
Amount
(US$)
 
Products Sold
 
Percentage
of Sales
 
1  
Xiangyun Xue Store
  ¥ 420,554     $ 66,545  
Wellness House, Foot Sauna Bucket, etc.
    3.5 %
2  
Lijun Sun Store
    300,797       47,596  
Wellness House, Foot Sauna Bucket, etc.
    2.5 %
3  
Baocong Yang Store
    264,863       41,910  
Wellness House , Tourmaline Mattress, etc.
    2.2 %
4  
Xue Li Store
    201,895       31,946  
Tourmaline Mattress , Wellness House, etc.
    1.7 %
5  
Xiuxue Xu Store
    201,425       31,872  
Wellness House, Foot Sauna Bucket, etc.
    1.7 %
6  
Jianhui Zhou Store
    172,511       27,297  
Wellness House , Tourmaline Mattress,, etc.
    1.4 %
7  
Huilin Sun Store
    156,170       24,711  
Wellness House, Foot Sauna Bucket, etc.
    1.3 %
8  
Yan Yang Store
    154,884       24,508  
Wellness House, Tourmaline Water Machine, etc.
    1.3 %
9  
Guizhi Wu Store
    147,388       23,321  
Wellness House, Foot Sauna Bucket, etc.
    1.2 %
10  
Dejun Wang Store
    132,800       21,013  
Foot Sauna Bucket , Tourmaline Water Machine, etc.
    1.1 %
        ¥ 2,153,287     $ 340,719         18.0 %
 
 
10

 
 
Our main customers are franchisees that are authorized to sell our products exclusively. None of our customers accounted for more than 10% of our annual sales revenue in 2013 and 2012.
 
Suppliers
 
Below is a list of our top ten suppliers in 2013 and 2012, respectively.
 
Top Ten Suppliers in 2013
 
No.
 
Name
 
Amount
(RMB)
   
Amount
(US$)
 
Product Purchased
 
Percentage
of Purchase
 
1  
Tianjin Hezhi Pharmaceutical Co., Ltd.
  ¥ 829,499     $ 133,830  
Health food
    21.4 %
2  
Tianjin Yijuyong Wine Co., Ltd.
    475,916       76,783  
Wine
    12.3 %
3  
Shenzhen Zhuoxian Industry Co., Ltd.
    364,580       58,821  
Wellness House for family use
    9.4 %
4  
Penglai Huakang Healthcare Product Co., Ltd.
    355,130       57,296  
Xin-Nao-Ling Fish Oil Soft Gel and Zhi-Li-Bao Fish Oil Soft Gel
    9.2 %
5  
Xuzhou Kailier Sauna Equipment Co.,Ltd.
    316,874       51,124  
Food Sauna bucket
    8.2 %
6  
Hangzhou Siluhua Home Textile Co., Ltd.
    144,300       23,281  
Tourmaline Mattress
    3.7 %
7  
Healthland Sauna Equipment Co.,Ltd.
    128,690       20,763  
Wellness House for family use
    3.3 %
8  
Suzhou Xuezi Daliy Chemicals  Co., Ltd.
    83,428       13,460  
Soap
    2.2 %
9  
Yangzhou Qionghua Sports Goods Co.,Ltd
    75,127       12,121  
Tourmaline Waist Protector
    1.9 %
10  
Shanghai Huzheng Nano Technology Co., Ltd
    54,000       8,712  
Tourmaline
    1.4 %
        ¥ 2,827,544     $ 456,191         73.0 %
 
 
 
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Top Ten Suppliers in 2012
 
No.
 
Name
 
Amount
(RMB)
   
Amount
(US$)
 
Product Purchased
 
Percentage
of Purchase
 
1  
Hangzhou Siluhua Home Textile Co., Ltd.
  ¥ 916,827     $ 145,071  
Tourmaline Mattress
    11.8 %
2  
HEALTHLAND SAUNA EQUIPMENT CO.,LTD.
    793,815       125,607  
Wellness House for family use
    10.2 %
3  
Anhui Saunaking Co., Ltd.
    726,275       114,920  
Wellness House for family use and Food Sauna bucket
    9.3 %
4  
Xuzhou Kailier Sauna Equipment Co.,Ltd.
    487,500       77,138  
Food Sauna bucket
    6.3 %
5  
Penglai Huakang Healthcare Product Co., Ltd.
    452,900       71,663  
Xin-Nao-Ling Fish Oil Soft Gel and Zhi-Li-Bao Fish Oil Soft Gel
    5.8 %
6  
Jilin Luwang Sanbao Bio-Technique Co. Ltd.
    398,025       62,980  
Health food
    5.1 %
7  
Jiangsu Aidefu Latex Produce Co. , ltd.
    318,000       50,318  
Tourmaline Mattress
    4.1 %
8  
Tianjin Hezhi Pharmaceutical Co., Ltd.
    301,855       47,763  
Health food
    3.9 %
9  
Hangzhou Tiger Water Treatment Equipment Co. , Ltd.
    250,284       39,603  
Tourmaline Water Machine Materials
    3.2 %
10  
Guilin Xinzhu Nature Biological Engineering Materials Co. , Ltd.
    100,000       15,823  
Tourmaline
    1.3 %
        ¥ 4,745,481     $ 750,886         61.0 %
 
In 2013, two major suppliers accounted for 21.4% and 12.3%, respectively of our annual raw materials purchases and in 2012 another two major suppliers accounted for 11.8% and 10.2%, respectively of our annual raw materials purchases. We do not have long term contracts with any of our suppliers since the raw materials we use are readily available on the market at generally stable prices.
 
Franchise Stores
 
Approximately 92% of our annual sales in 2013 and 2012 were made to our franchisees.
 
As of December 31, 2013, there were approximately 176 franchise stores across the PRC that were authorized to sell our products exclusively. Set forth below is a geographical breakdown of the franchise stores:
 
Region
  
Number of 
Franchise Stores
 
Northeastern China (Liaoning, Jilin, Heilongjiang)
  
 
47
  
Northern China (Beijing, Tianjin, Hebei, Shanxi, Inner Mongolia)
  
 
63
  
Eastern China (Shanghai, Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi)
  
 
33
  
Southern China (Guangdong, Hainan, Guangxi)
  
 
10
  
Central China (Henan, Hubei, Hunan)
  
 
12
  
Southwestern China (Chongqing, Sichuan, Guizhou, Yunnan, Tibet)
  
 
11
  
Total
  
 
176
  
 
We use multiple criteria to select our franchisees, including financial condition, sales network, sales personnel, and facilities. Generally we approve applicants that meet a minimum working capital requirement of RMB 40,000 and have the requisite business facilities and resources.
 
We typically enter into a standard franchising agreement with the applicant. Pursuant to the agreement, the franchisee is authorized to sell our products exclusively at a predetermined retail price. In exchange, we provide them with products at a discounted price, geographical exclusivity, and marketing, training and technological support. The franchisee is also required to adhere to certain standards of product merchandising, promotion and presentment. No initial franchise fees are required from the franchisee, nor is the franchisee required to pay any continuing royalties. The agreement is generally for a term of three years and is renewable on the mutual agreement of both parties.
 
 
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Cooperative Contract on Investment in Establishing Joway Hezhi Pharmaceutical Co., Ltd.
 
On August 28, 2011, one of our subsidiaries, Joway Shengshi, and Tianjin Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Tianjin Hezhi”) entered into 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 a registered capital of RMB 20,000,000. Joway Hezhi was incorporated on October 21, 2011 with initial registered capital of RMB 5,000,000. Joway Hezhi 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 in consideration for 30% of the equity in Joway Hezhi. Pursuant to the Cooperative Contract, Joway Shengshi has the obligation to contribute to Joway Hezhi an additional capital of RMB 4,500,000 and 51 mu or approximately 3,400 square meter land use rights.
 
Marketing and Sales
 
Our primary marketing strategies are directed towards both our franchisees and end users, and the marketing efforts of our franchisees are directed towards end users. The Company assists franchisees on monthly product introduction seminars, which are open to both our franchisees and to the general public. We also host an annual conference, which is open to both our franchisees and to the general public as well. In 2013 and 2012, we held our annual conferences in Tianjin City and did not charge entrance fees.
 
The franchise stores are responsible for the cost of organizing the monthly product introduction seminars and meetings and we are responsible for the travel expenses of our employees who attend these meetings and seminars to explain and promote our various product lines. There are on average 15 such seminars and meetings each month nationwide. Generally, we choose the venue for the product seminars and meetings based on market prospects, sales volume and the extent of meeting preparation. During the year ended December 31, 2013, we held product seminars and meetings in approximately 60 cities in the PRC.
 
Generally, we are responsible for the cost of annual conferences. In 2013 and 2012, we incurred costs related to annual conferences of $58,563 (RMB 362,985) and $102,801 (RMB 649,685), respectively.
 
Below is a breakdown of our marketing expenses in the fiscal years 2013 and 2012.
 
   
2013
   
2012
 
Expenses
 
RMB
   
US$
   
RMB
   
US$
 
Promotion
  ¥ 1,016,046     $ 163,927     ¥ 861,418     $ 136,304  
Printing
    15,181       2,449       22,902       3,624  
Travelling
    506,098       81,653       234,528       37,110  
Training
    104,967       16,935       331,410       52,440  
Salaries
    984,973       158,914       915,352       144,838  
Total
  ¥ 2,627,265     $ 423,878     ¥ 2,365,610     $ 374,316  
 
For the fiscal year 2014, we have a marketing and sales budget of $490,677 (RMB3,000,000), of which, $98,135 (RMB600,000) is budgeted for our 2014 annual conference, $163,559 (RMB1,000,000) for sales personnel, and the remainder for travel, training and other expenses of our sales and marketing department.
 
Seasonality
 
Because our products are for daily use, seasonal variations do not have meaningful impact on the market demand for our products.
 
Competition
 
Competitive Environment
 
China’s tourmaline health products market is highly segmented and is in the stage with great demand.
 
 
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However, given the highly segmented nature of the market, we are unable to locate any information on the size of the tourmaline healthcare-related market in China. Currently, Japanese and Korean companies are leaders in tourmaline technology. However, they have not yet developed a sizeable market share for their products in the PRC (Source: 2010-2012 China's tourmaline market and investment prospects research report, Institute of China Uniway Economics, August 2010). Therefore, we believe that there is a great opportunity for us to create demand and market share and establish ourselves as a leader in the tourmaline-related healthcare products field.
 
Our Competitors
 
Our major competitors in the PRC are as follows:
 
 
 
Heilongjiang Xingfuren Technology Development Co., Ltd. operates in PRC. They mainly focus on producing far-infrared health products and tourmaline health products.
 
 
 
Harbin Jiuguang Daily Health Products Co., Ltd. operates in PRC. They mainly focus on the manufacture of tourmaline sauna rooms and tourmaline health products.
 
 
 
Ihanya Nano Technology Co., Ltd. operates in Changsha, Hunan province, PRC. They mainly focus on manufacturing tourmaline sauna rooms and tourmaline health products.
 
 
 
Harbin Handu Tourmaline Nano Technology Development Co., Ltd. operates in PRC. They mainly focus on manufacturing tourmaline sauna rooms and tourmaline health products.
 
 
 
Harbin Wanshou Nano Science and Technology Co., Ltd. operates in the PRC. They mainly focus on new Nano technology research and development, and the manufacture of tourmaline health products and tourmaline sauna rooms.
 
Our Competitive Advantages
 
We believe that by leveraging the following strengths, we can effectively compete and enhance our market position:
 
 
 
Brand Advantage: We are one of the first companies to manufacture, distribute and sell tourmaline health-related products in the PRC and we believe that our trademark, “Joway”, is the most established and well-known brand in the market.
 
 
 
Technology Advantage: We possess several patents for tourmaline health-related products. We also invest a significant amount of time and expense in new product research and development.
 
 
 
Sales Channels Advantage: As of December 31, 2013, we had approximately 176 franchise stores in most of the big cities in the PRC and we continue to expand our franchise network. We believe our extensive franchisee network will assure that our sales continue to grow.
       
 
 
Talent Advantage: We have recruited additional employees in the fields of marketing, franchise and training, who have several years of relevant experience in their previous careers. We plan to focus the efforts of these individuals to enhance our marketing and sales.
       
 
 
Public Relation Advantage: We enjoy  the benefits of a membership at China Health Care Association and China Home Textile Association.  For example, as a member, we are entitled to  obtain the fist-hand technology related to tourmaline and apply such technology to our business when necessary.
 
Business Strategy
 
We believe the market for tourmaline health-related products in the PRC will grow rapidly. In order to benefit from the market opportunities, we plan to implement the following strategies:
 
 
 
We will focus on expanding our sales and franchise network in the PRC. Over the past few years, most of our franchises are located in north of China, our target is to cover the most provinces in China especially the southern part in which economy remains high development.
 
 
 
We will continue to expand our product offerings and seek to optimize our product portfolio to include more products with higher profit margins. For example, we believe that tourmaline daily health-related products, water treatment products, tourmaline home accessories and tourmaline environmentally friendly paint have more profit potential and we plant on investing more research and development dollars into developing these products.
 
 
 
We intend to improve our operations, exploit our competitive strengths, and look for ways to expand our business, including through the acquisition of other existing businesses.
 
 
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Research and Development
 
As of December 31, 2013, we had three employees engaged in research and development activities. Our research and development focus is on developing new products in the daily health-related, tourmaline products, including tourmaline undergarment, tourmaline scarf and shawl, wellness room for family use.
 
During 2013 and 2012, we spent $48,360 (RMB 299,746) and $28,946 (RMB 182,943), respectively, on research and development activities. The following is a breakdown of our research and development expenses for 2013 and 2012 as well as our budget for 2014.

   
2013
   
2012
   
2014 (Budget)
 
Item
 
RMB
   
US$
   
RMB
   
US$
   
RMB
   
US$
 
Equipment
    10,935       1,764       2,068       327       10,000       1,636  
Samples
    25,388       4,096       140       22       20,000       3,271  
Travel Expense
    159       26       2,947       466       3,000       491  
Salary
    235,564       38,005       158,428       25,068       200,000       32,712  
Inspection Fee
    27,700       4,469       19,360       3,063       20,000       3,271  
Total
    299,746       48,360       182,943       28,946       253,000       41,381  
 
Intellectual Property
 
We regard our trademarks, trade secrets, patents and similar intellectual property as critical factors to our success. We rely on patent, trademark and trade secret law, as well as confidentiality and license agreements with certain of our employees, customers and others to protect our proprietary rights.
 
The trademarks we currently use include the “Joway” trademark, which is owned by our President, Chief Executive Officer and director, Mr. Jinghe Zhang. We are permitted to use the “Joway” trademark pursuant to a license agreement with Mr. Jinghe Zhang dated December 1, 2009 for a term of ten years. The agreement is renewable at the end of its respective term. There is no license fees to Mr. Jinghe Zhang for the use of the trademark.
 
Set forth below is a detailed description of the trademarks we use.

Mark
 
Registration
/Application No.
 
Class
 
Effective Date
 
Expiration
Date
 
Owner/Applicant
 
4794111
 
Class 24: Fabrics.
Textiles and textile goods, not included in other classes; bed and table covers.
 
February 21, 2009
 
February 20, 2019
 
Jinghe Zhang
                     
 
6104256
 
Class 3: Cosmetics and Cleaning Preparations.
Bleaching preparations and other substances for laundry use; cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.
 
March 21, 2010
 
March 20, 2020
 
Tianjin Joway
Shengshi Group Co., Ltd.
                     
 
6104253
 
Class 11: Environmental control apparatus.
Apparatus for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply and sanitary purposes.
 
February 14, 2010
 
February 13, 2020
 
Tianjin Joway
Shengshi Group Co., Ltd.
 
 
15

 
 
 
8467175
 
Class 30: Staple foods.
Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces (condiments); spices; ice.
 
July 21, 2011
 
July 20, 2021
 
Tianjin Joway
Shengshi Group Co., Ltd.
                     
 
8236524
 
Class 24: Fabrics.
Textiles and textile goods, not included in other classes; bed and table covers.
 
April 28, 2011
 
April 27, 2021
 
Tianjin Joway
Shengshi Group Co., Ltd.
                     
 
8029052
 
Class 5: Pharmaceuticals.
Pharmaceutical, veterinary and sanitary preparations; dietetic substances adapted for medical use, food for babies; plasters, materials for dressings; material for stopping teeth, dental wax; disinfectants; preparations for destroying vermin; fungicides, herbicides.
 
April 14, 2011
 
April 13, 2021
 
Tianjin Joway
Shengshi Group Co., Ltd.
                     
 
8029009
 
CLASS 2: Paints
Paints, varnishes, lacquers; preservatives against rust and against deterioration of wood; colorants; mordants; raw natural resins; metals in foil and powder form for painters, decorators, printers and artists.
 
April 14, 2011
 
April 13, 2021
 
Tianjin Joway
Shengshi Group Co., Ltd.
                     
 
8236733
 
Class 30: Staple foods.
Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces (condiments); spices; ice.
 
December 14, 2011  
  December 13, 2021  
Tianjin Joway
 Shengshi Group Co., Ltd
                     
 
8236538
 
Class 24: Fabrics.
Textiles and textile goods, not included in other classes; bed and table covers.
 
June 7, 2011
 
June 6, 2021
 
Tianjin Joway
Shengshi Group Co., Ltd
                     
 
8236684
 
Class 11: Environmental control apparatus.
Apparatus for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply and sanitary purposes
 
June 21, 2011
 
June 20, 2021
 
Tianjin Joway
 Shengshi Group Co., Ltd
                     
 
8236641
 
Class 3: Cosmetics and Cleaning Preparations.
Bleaching preparations and other substances for laundry use; cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.
 
May 28, 2011
 
May 27, 2021
 
Tianjin Joway
Shengshi Group Co., Ltd
                     
 
11275200
 
Class 30: Staple foods.
Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces (condiments); spices; ice.
 
December 28, 2013
 
December 27, 2023
 
Tianjin Joway
Shengshi Group Co., Ltd
 
 
16

 
 
 
11232054
 
Class 33: Alcoholic beverages.
Fruit extracts [alcoholic], aperitifs, distilled beverages, cider, digesters [liqueurs and spirits], wine, clear wine, alcoholic beverages [except beer] and sake.
 
December 14, 2013
 
December 13, 2023
 
Tianjin Joway Shengshi Group Co., Ltd
                     
  11203446  
Class 5: Pharmaceuticals.
Glue ball, Reducing tea, air purifying preparations, mosquito-repellent incense , sanitary pads, sanitary towels, antisepsis paper and babies' diapers.
 
December 7, 2013
 
December 6, 2023
 
Tianjin Joway Shengshi Group Co., Ltd
 
Currently, the patents the Company is using are owned by our Chief Executive Officer, Mr. Jinghe Zhang. Pursuant to a license agreement with our President, Chief Executive Officer and director, Mr. Jinghe Zhang, we are permitted to use the following five patents for free from December 1, 2009 to the expiration date of each patent.
 
No.
 
Product
 
Type
  
Patent No.
 
Application Date
 
Effective Date
 
Term
 
Owner &
Inventor
1  
Water Purifier
 
Utility Model
  
 
ZL200720014571.6
  
September 17, 2007
 
October 29, 2008
 
Ten years
 
Jinghe Zhang
2  
Tourmaline Undergarment
 
Utility Model
  
 
ZL200720015434.4
  
October 22, 2007
 
July 16, 2008
 
Ten years
 
Jinghe Zhang
3  
Tourmaline Mattress
 
Utility Model
  
 
ZL200720015435.9
  
October 22, 2007
 
December 24, 2008
 
Ten years
 
Jinghe Zhang
4  
Tourmaline Wellness House
 
Utility Model
  
 
ZL200720014570.1
  
September 17, 2007
 
July 16, 2008
 
Ten years
 
Jinghe Zhang
5  
Drinking Water Purifier
 
Design
  
 
ZL200730011189.5
  
September 17, 2007
 
April 1, 2009
 
Ten years
 
Jinghe Zhang
 
Insurance
 
We maintain product liability insurance policies for claims resulting from personal injury or damage to property caused by our water machine and our wellness house for family use. We also maintain limited insurance coverage for our vehicles. The total product liability insurance coverage for our water machines is RMB 1,000,000 ($163,559). The total insurance coverage for our wellness house for family use is RMB 2,000,000 ($327,118).  We do not carry property insurance on our buildings, facilities, and major operating assets, but on our vehicles, and we do not have any business interruption insurance due to the limited availability of this type of coverage in the PRC. During 2013 and 2012, we had no product liability claims.
 
Employees
 
As of December 31, 2013, the Company, including its subsidiaries, had a total of 63 full time employees.
 
Joway Shengshi
 
As of December 31, 2013 Joway Shengshi had 51 full-time employees based in Tianjin City, PRC. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.
 
Below is a breakdown of Joway Shengshi’s employees:
 
Departments
  
Number of
Employees
 
Management
  
 
19
  
Sales
  
 
7
  
Distribution
  
 
4
  
Production
  
 
6
  
Research and development
  
 
2
  
Franchising
  
 
9
  
Finance
  
 
4
  
 
 
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Joway Decoration
 
As of December 31, 2013, Joway Decoration had 9 full-time employees based in Tianjin City, PRC. There were no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.
 
Shengtang Trading
 
As of December 31, 2013, Shengtang Trading had 3 full-time employees based in Tianjin, PRC. There were no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.
 
We are required to contribute a portion of our employees’ total salaries to the PRC government’s social insurance funds, including pension insurance, medical insurance, unemployment insurance, work-related injury insurance, and maternity insurance, in accordance with relevant regulations. We have purchased work injury insurance and medical insurance for all our employees.
 
Effective January 1, 2008, the PRC introduced a new labor contract law that enhances rights for the nation's workers, including open-ended work contracts and severance pay. The legislation requires employers to provide written contracts to their workers, restricts the use of temporary laborers and makes it harder to lay off employees. It also requires that employees with fixed-term contracts be entitled to an indefinite-term contract after a fixed-term contract is renewed twice. Although the new labor contract law will increase our labor costs, we do not anticipate there will be any significantly effects on our overall profitability in the near future since such amount was historically not material to our operating cost. Management anticipates this may be a step toward improving candidate retention for skilled workers.
 
Government Regulations and Compliance with Applicable Laws
 
Below is a list of agencies which may have jurisdiction over our business:
 
Agency
  
Functions
State Food and Drug Administration (“SFDA”)(1)
  
Supervise the entire process from research and development, manufacturing, and distribution to utilization of drugs; supervise and coordinate the safety management of food, health food and cosmetics and organize investigations of serious accidents.
   
National Development and Reform Commission (“NDRC”)
  
Make strategic and mid- to long-term plans for the PRC healthcare industry; regulate drug prices; manage disaster relief funds and carry out healthcare development projects sponsored by the government.
   
Ministry of Commerce (“MOFCOM”)
  
Formulate regulations and policies on foreign trade, foreign direct investments, consumer protection, and market competition; negotiate bilateral and multilateral trade agreements.
   
Ministry of Science and Technology (“MST”)
  
Lay out science and technology development plans and policies; draft relevant regulations and rules and guarantee implementation of regulations and rules
     
General Administration of Quality Supervision, Inspection and Quarantine (“AQSIQ”)
 
Manage national quality, metrology, entry-exit commodity inspection, entry-exit health quarantine, entry-exit animal and plant quarantine, import-export food safety, certification, accreditation, and standardization, as well as enforce administrative laws
     
State Administration of Taxation (“SAT”)
 
Draft tax regulations and implementation rules and propose tax policies.
     
State Administration of Foreign Exchange (“SAFE”)
 
Make regulations and policies governing foreign exchange market activities and manage state foreign exchange reserves.
 
(1)
The PRC State Food and Drug Administration is responsible for (i) regulating the research and development, manufacturing, distribution and utilization of drugs; (ii) supervising and coordinating the safety management of food, health food and cosmetics; and (iii) investigating serious accidents with respect to the foregoing. The products we manufacture are not regulated by the SFDA as they are not drugs, diet supplements or food consumed by humans. There are no existing laws or regulations in China governing the manufacture and sale of tourmaline health care products such as those sold by the Company nor are there any inspection requirements applicable to our products.
 
 
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We act as a distributor for eleven edible products including Xin-Nao-Ling Fish Oil Soft Gel and Zhi-Li-Bao Fish Oil Soft Gel, which are subject to SFDA regulation. These products are manufactured by Penglai Huakang Healthcare Industries, Ltd., Beijing Shenghua Meiye Technology Development Co., Ltd., Tianjin Hezhi Pharmaceutical Co., Ltd.., and Jilin Luwang Sanbao Biological Technology Co., Ltd., which all have obtained the necessary manufacturing licenses and certifications from the SFDA.
 
Environmental Regulations
 
The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution. To date, the Company’s costs to comply with applicable environmental laws have been minimal.
 
According to Article 32 of the PRC Environmental Protection Law, a project that may cause pollution to the environment cannot be undertaken until an environmental impact statement has been approved by the applicable department of environmental protection administration.
 
In March 2008, Joway Shengshi submitted an environmental impact statement with respect to the manufacturing of 300,000 sets of knitwear annually to the Tianjin Baodi Environmental Protection Bureau. The environmental impact statement assesses the pollution that the manufacturing is likely to produce and its impact on the environment. In addition, the report stipulates the preventive and curative measures the company will undertake. Tianjin Baodi Environmental Protection Bureau approved the environmental impact statement on March 12, 2008 and on April 22, 2009, the Tianjin Baodi Environmental Protection Bureau approved the manufacture of 300,000 sets of knitwear annually.
 
The Company’s production process does not produce industrial waste water or waste gas emissions of a type that is regulated by current PRC laws and regulations. The Company’s other emissions, including noise, waste water, solid waste and atmospheric pollutants meet regulatory standards. According to the Letter regarding Environment Protection of Tianjin Joway Shengshi Group Co, Ltd. issued by Tianjin Baodi Environmental Protection Bureau dated August 8, 2013, Joway Shengshi complies with applicable environmental protection laws and regulations and its discharge of pollutants meets with the standards of the state and Tianjin City.
 
In addition, Joway Shengshi obtained ISO 140001 International Environmental Management System Certification on January 15, 2009. ISO 140001 was first published as a standard in 1996 and specifies the requirements for an organization’s environmental management system. It applies to those environmental aspects over which an organization has control and where it can be expected to have an influence. Joway Shengshi passed each annual inspection of the ISO 140001. Such Certification covers the production and service of tourmaline health-related products such as underwear, bras, eyeshades, scarves, hats, kneepads, waist-protectors, socks, bedding and daily commodities.
 
We have not been named as a defendant in any legal proceedings alleging violation of environmental laws and have no reasonable basis to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect on our business, financial condition or results of operations due to any non-compliance with environmental laws.
 
To date, the Company has not incurred any significant costs in connection with complying with PRC national or local environmental laws.
 
Item 1A. RISK FACTORS.
 
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this report before deciding to invest in our common stock.
 
Risks Related To Our Business
 
The purchase of many of our products is discretionary, and may be particularly affected by adverse trends in the general economy; therefore challenging economic conditions may make it more difficult for us to generate revenue.
 
Our business is affected by global, national and local economic conditions since many of the products we sell are discretionary and we depend, to a significant extent, upon a number of factors relating to discretionary consumer spending in the PRC. These factors include economic conditions and perceptions of such conditions by consumers, employment rates, the level of consumers' disposable income, business conditions, interest rates, consumer debt levels, availability of credit and levels of taxation in regional and local markets in the PRC where we sell such products. There can be no assurance that consumer spending on the products we sell, will not be adversely affected by changes in general economic conditions in the PRC and globally.
 
 
19

 
 
The success of our business depends on our ability to market and advertise the products we sell effectively.
 
Our ability to establish effective marketing and advertising campaigns is the key to our success. Our advertisements promote our corporate image, our merchandise and the pricing of such products. If we are unable to increase awareness of our brands and our products, we may not be able to attract new customers. Our marketing activities may not be successful in promoting the products we sell or pricing strategies or in retaining and increasing our customer base. We cannot assure you that our marketing programs will be adequate to support our future growth, which may result in a material adverse effect on our results of operations.
 
If we fail to maintain optimal inventory levels, our inventory holding costs could increase or cause us to lose sales, either of which could have a material adverse effect on our business, financial condition and results of operations.
 
While we must maintain sufficient inventory levels to operate our business successfully and meet our customers' demands, we must be careful to avoid amassing excess inventory. Changing consumer demands, manufacturer backorders and uncertainty surrounding new product launches expose us to increased inventory risks. Demand for products can change rapidly and unexpectedly, including the time between when the product is ordered from the supplier to the time it is offered for sale. We carry a wide variety of products and must maintain sufficient inventory levels of the products we sell. We may be unable to sell certain products in the event that consumer demand changes. Our inventory holding costs will increase if we carry excess inventory. However, if we do not have a sufficient inventory of a product to fulfill customer orders, we may lose orders or customers, which may adversely affect our business, financial condition and results of operations. We cannot assure you that we can accurately predict consumer demand and events and avoid over-stocking or under-stocking products.
 
We may not be able to optimize the management of our distribution network or be successful in expanding our distribution network.
 
We sell our products to our customers mainly through our franchise stores across the PRC. Any disruption in the operation of our franchise stores distribution network could result in higher costs or longer lead times associated with distributing our products. In addition, as it is difficult to predict accurate sales volumes in our industry, we may be unable to optimize our distribution activities, which may result in excess or insufficient inventory, warehousing, fulfillment of logistics or value-added services, or distribution capacity. In addition, failure to effectively control product damage or spoilage during the distribution process could decrease our operating margins and reduce our profitability.
 
Our operations would be adversely affected if third-party carriers were unable to transport our products on a timely basis.
 
Some of our products are shipped through third party carriers. If a strike or other event prevented or disrupted these carriers from transporting our products, other carriers may be unavailable or may not have the capacity to deliver our products to our customers. If adequate third party sources to ship our products were unavailable at any time, our business would be adversely affected.
 
There may be shortages of, or price fluctuations with respect to, raw materials or components, which would cause us to curtail our manufacturing or incur higher than expected costs.
 
We purchase the raw materials and certain components we use in producing our products, and we may be required to bear the risk of price fluctuations of raw materials or components. Shortages of raw materials and price fluctuations may occur in the future and we may not be able to pass through a substantial portion of such raw material cost increases to our customers if we experience significant supply disruptions or excess levels of industry capacity or due to other factors outside of our control, in which case our profitability could suffer. Our ability to pass through raw material price increases may be limited by the level of industry excess capacity, competitive practices and other regional-specific factors which are out of our control. In addition, if we experience a shortage of materials or components, we may not be able to produce products for our customers in a timely fashion.
 
In addition, the Dodd-Frank Act of 2010 requires the Securities and Exchange Commission (the “SEC”) to establish new annual disclosure and reporting requirements for public companies to report their use of "conflict minerals" originating from the Democratic Republic of Congo and its nine immediate neighbors. The current list of "conflict minerals" under the Dodd-Frank Act includes gold, tantalum, tin and tungsten (although additional minerals may be added in the future). If tourmaline is classified as a "conflict mineral" in the future, there may only be a limited pool of suppliers who provide conflict-free tourmaline, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices.
 
 
20

 
 
If we are unable to renew the leases of any of our property, our operations may be adversely affected.
 
We do not directly own any land use rights over the properties we lease. We may lose our leases or may not be able to renew them when they are due on terms that are reasonable or favorable to us. This may have adverse impact on our operations, including disrupting our operations or increasing our cost of operations.
 
Counterfeit products sold in the PRC could negatively impact our revenues, brand reputation, business and results of operations.
 
The products we sell are also subject to competition from counterfeit products, which are healthcare products manufactured without proper licenses or approvals and are fraudulently mislabeled with respect to their content and/or manufacturer. Counterfeit products are generally sold at lower prices than authentic products due to their low production costs, and in some cases are very similar in appearance to authentic products. Although the PRC government has recently been increasingly active in policing counterfeit products, including counterfeit healthcare products, there is a lack of effective counterfeit product regulation control and enforcement systems in the PRC. The proliferation of counterfeit products has grown in recent years and may continue to grow in the future. Despite our implementation of quality controls, we cannot assure you that we would not be distributing or selling counterfeit products inadvertently. Any accidental sale or distribution of counterfeit products can subject our company to fines, administrative penalties, litigation and negative publicity, which could negatively impact our revenues, brand reputation, business and results of operations. Moreover, the continued proliferation of counterfeit products and other products in recent years may reinforce the negative image of retailers among consumers in the PRC. The continued proliferation of counterfeit products in the PRC could have a material adverse effect on our business, financial condition, and results of operation.
 
The required certificates, permits, and licenses related to our operations are subject to governmental control and renewal and failure to obtain renewal will cause all or part of our operations to be terminated.
 
We are subject to various PRC laws and regulations pertaining to our manufacture and sales of healthcare products. We have attained certificates, permits, and licenses required for the operation of a healthcare products manufacturer and distributor. We cannot assure you that we will have all necessary permits, certificates and authorizations for the operation of our business at all times. Additionally, our certifications, permits and authorizations are subject to periodic renewal by the relevant government authorities. We intend to apply for renewal of these certificates, permits and authorizations prior to their expiration. During the renewal process, we will be re-evaluated by the appropriate governmental authorities and must comply with the then prevailing standards and regulations which may change from time to time. In the event that we are not able to renew the certificates, permits and licenses, all or part of our operations may be terminated. Furthermore, if escalating compliance costs associated with governmental standards and regulations restrict or prohibit any part of our operations, it may adversely affect our operations and profitability.
 
If we become subject to product liability claims, personal injury claims or defective products our business may be harmed.
 
We will be exposed to risks inherent in the manufacture and sales of healthcare products, such as the unintentional distribution of counterfeit healthcare products. Furthermore, we may sell products which inadvertently have an adverse effect on the health of individuals. Product liability claims may be asserted against us. Any product liability claim, product recall, adverse side effects caused by improper use of the products we sell or manufacturing defects may result in adverse publicity regarding us and the products we sell, which would harm our reputation. If we are found liable for product liability claims, we could be required to pay substantial monetary damages in excess of insurance coverage amounts. Furthermore, even if we successfully defend ourselves against this type of claim, we could be required to spend significant management, financial and other resources, which could disrupt our business, and our reputation and our brand name may also suffer. In addition, we do not have any business interruption insurance due to the limited coverage of any business interruption insurance in the PRC, and as a result, any business disruption or natural disaster could severely disrupt our business and operations and significantly decrease our revenue and profitability.
 
The failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.
 
Any significant growth in the market for our products or our entry into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes. As of December 31, 2013, we had approximately 63 full time employees. During any growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.
 
 
21

 
 
Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the purchase of raw materials and supplies, development of new products, and the hiring of additional employees. For effective growth management, we will be required to continue improving our operations, management, and financial systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.
 
If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
 
If adequate additional financing is not available on reasonable terms, we may not be able to undertake our expansion plans or purchase additional equipment for our operations and we would have to modify our business plans accordingly. There is no assurance that additional financing will be available to us.
 
In connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our profitability; (ii) the release of competitive products by our competitors; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot assure you that we will be able to obtain capital in the future to meet our needs.
 
If we cannot obtain additional funding, we may be required to: (i) limit our investments in research and development; (ii) limit our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect our business and our ability to compete.
 
Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.
 
We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.
 
Our success is, to a certain extent, attributable to the management, sales and marketing, and operational and technical expertise of certain key personnel. In addition, we will require an increasing number of experienced and competent executives and other members of senior management to implement our growth plans. We do not maintain key-man insurance for members of our management team because it is not a customary practice in the PRC. If we lose the services of any member of our senior management, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and prospects.
 
We are dependent on a trained workforce and any inability to retain or effectively recruit such employees, particularly distribution personnel and regional retail managers for our business, could have a material adverse effect on our business, financial condition and results of operations.
 
We must attract, recruit and retain a sizeable workforce of qualified and trained staff to operate our business. Our ability to implement effectively our business strategy and expand our operations will depend upon, among other factors, the successful recruitment and retention of highly skilled and experienced distribution personnel, regional retail managers and other technical and marketing personnel. There is significant competition for qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified personnel consistent with our current and future operational needs.
 
We rely on the high quality of customer service and any poor service may lead to adverse impact on our business.
 
Our goal is to provide customer with first class service. It will be attained by the one-stop consultancy, analysis on feedback of customer to provide information on customer’s potential demand, customer file system to introduce new product and promotion policy. If we fail to supply high quality of customer service, we may incur considerable complaints from our customers and lose loyalty of our customers, as a result, more and more customers may pursue competitors' products and our competitive ability may drop correspondingly.

Our Chinese operating companies maintain their books and records in accordance with PRC GAAP and, as a result, it involves a risk of accuracy when our personnel convert the financial statements to U.S. GAAP.
 
Under PRC law, our operating companies in China are required to maintain their books and records in accordance with PRC GAAP. We do not retain an outside accounting firm or consultant to prepare our financial statements or to evaluate our internal controls over financial reporting. Our Financial Manager prepares the U.S. GAAP financial statements and converts the financial statements prepared under PRC GAAP into U.S. GAAP. Our CFO is responsible for supervising the preparation of our financial statements under PRC GAAP and for reviewing such financial statements to ensure their accuracy and completeness. In addition, he is responsible for reviewing the adjustments made to the financial statements to convert them into U.S. GAAP for SEC reporting requirements. Our CFO and CEO are responsible for evaluating the effectiveness of our internal controls over financial reporting.
 
 
22

 
 
Our company is at the early stage of adopting necessary financial reporting concepts and practices, including strong corporate governance, internal controls and, computer, financial and other control systems. Most of our accounting and finance staff are not educated and trained in U.S. GAAP and SEC reporting requirements, and we may have difficulty hiring new employees in the PRC with such training. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet SEC reporting requirements. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls, which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business.
 
Our financial results may fluctuate because of many factors and, as a result, investors should not simply rely on our historical financial data as indicative of future results.
 
Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact the market price of our securities. Operating results may fluctuate in the future due to a variety of factors that could affect revenues or expenses in any particular quarter. Fluctuations in operating results could cause the value of our securities to decline. Investors should not rely on comparisons of results of operations as an indication of future performance. As result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:
 
 
 
vulnerability of our business to a general economic downturn in the PRC;
 
 
 
fluctuation and unpredictability of the prices of the products we sell;
 
 
 
changes in the laws of the PRC that affect our operations;
 
 
 
competition from other healthcare products manufacturers and distributors; and
 
 
 
our ability to obtain necessary government certifications and/or licenses to conduct our business.
 
We are dependent on certain suppliers and a failure to continue to obtain our supplies from such suppliers may adversely affect our business.
 
We do not have any long-term supply contracts with our raw materials suppliers. Any significant fluctuation in price of our raw materials could have a material adverse effect on the manufacturing cost of our products. We are subject to market conditions and although raw materials are generally available and we have not experienced any raw materials shortage in the past, we cannot assure you that the necessary materials will continue to be available to us at prices currently in effect or acceptable to us.
 
We may have limited options in the short-term for alternative supplies if our suppliers fail for any reason, including their business failure or financial difficulties, to continue the supply of raw materials. Moreover, identifying and accessing alternative sources may increase our costs.  
 
Risks Related to Conducting Business in the PRC
 
Our operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof, may have a material and adverse effect on our business.
 
The PRC’s legal system is a civil law system based on written statutes. Unlike the common law system prevalent in the United States, decided legal cases have little value as precedent in the PRC. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to, the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. The PRC government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of authority as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
 
 
23

 
 
Our principal operating subsidiaries are regarded as foreign invested enterprises (“FIE”s) under PRC laws, and as a result are required to comply with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct of FIEs. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:
 
 
 
levying fines;
 
 
 
revoking our business license, other licenses or authorities;
 
 
 
requiring that we restructure our ownership or operations; and
 
 
 
requiring that we discontinue any portion or all of our business.
 
PRC Labor Laws may adversely affect our results of operations.
 
On January 1, 2008, the PRC government promulgated the Labor Contract Law of the PRC, or the New Labor Contract Law. The New Labor Contract Law imposes greater liabilities on employers and significantly impacts the cost of an employer’s decision to reduce its workforce. Further, it may require certain terminations to be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost effective manner, thus materially and adversely affecting our financial condition and results of operations.
 
We may not be able to comply with applicable Good Manufacture Practice (“GMP”) requirements and other regulatory requirements, which could have a material adverse effect on our business, financial condition and results of operations.
 
We are required to comply with applicable GMP regulations, which include requirements relating to quality control and quality assurance as well as corresponding maintenance, record-keeping and documentation standards. Manufacturing facilities must be approved by governmental authorities before we use them to commercially manufacture our products and are subject to inspection by regulatory agencies. If we fail to comply with applicable regulatory requirements, including following any product approval, we may be subject to sanctions, including:
 
 
 
fines;
 
 
 
product recalls or seizure;
 
 
 
injunctions;
 
 
 
refusal of regulatory agencies to review pending market approval applications or supplements to approval applications;
 
 
 
total or partial suspension of production;
 
 
 
civil penalties;
 
 
 
withdrawals of previously approved marketing applications; or
 
 
 
criminal prosecution.
 
 
24

 
 
If we fail to protect our intellectual property rights, it could harm our business and competitive position.
 
Our business relies in part on intellectual properties to stay competitive in the market place. We rely on a combination of trademark laws, patent law, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property rights and the obligations we have to third parties from whom we license intellectual property rights. Nevertheless, these afford only limited protection and policing unauthorized use of proprietary technology can be difficult and expensive. In addition, intellectual property rights historically have not been enforced in the PRC to the same extent as in the United States, and intellectual property theft presents a serious risk in doing business in the PRC. We may not be able to detect unauthorized use of, or take appropriate steps to enforce our intellectual property rights and this could have a material adverse effect on our business, operating results and financial condition.
 
Under the new EIT Law, we may be classified a “resident enterprise” for PRC tax purposes, which may subject us to PRC enterprise income tax for any dividends we receive from our PRC Operating Entities and to PRC income tax withholding for any dividends we pay to our non-PRC shareholders.
 
On March 16, 2007, the National People’s Congress (“NPC”) promulgated the Law of the People’s Republic of China on Enterprise Income Tax, and the new EIT Law as amended became effective on January 1, 2008. In accordance with the new EIT Law, the corporate income tax rate is set at 25% for all enterprises. However, certain industries and projects, such as FIEs, may enjoy favorable tax treatment pursuant to the new EIT Law and its implementing rules.
 
Under the new EIT Law, an enterprise established outside of the PRC whose “de facto management bodies” are located in the PRC is considered a “resident enterprise” and is subject to the 25% enterprise income tax rate on its worldwide income. The new EIT Law and its implementing rules are relatively new, and currently, no official interpretation or application of this new “resident enterprise” classification is available. Therefore, it is unclear how tax authorities will determine the tax residency of enterprises established outside of the PRC.
 
Most of our management is currently based in the PRC. If the PRC tax authorities determine that our U.S. holding company is a “resident enterprise” for PRC enterprise income tax purposes, we may be subject to an enterprise income tax rate of 25% on our worldwide taxable income. The “resident enterprise” classification also could subject us to a 10% withholding tax on any dividends we pay to our non-PRC shareholders if the relevant PRC authorities determine that such income is PRC-sourced income. In addition to the uncertainties regarding the interpretation and application of the new “resident enterprise” classification, the new EIT Law may change in the future, possibly with retroactive effect. If we are classified as a “resident enterprise” and we incur these tax liabilities, our net income will decrease accordingly.
 
Our ability to pay dividends is restricted by PRC laws.
 
Our ability to pay dividends is primarily dependent on receiving distributions of funds from our PRC Operating Entities. Relevant PRC statutory laws and regulations permit payments of dividends by our PRC Operating Entities only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) differ from those reflected in the statutory financial statements of our PRC Operating Entities.
 
The principal laws, rules and regulations governing dividends paid by our PRC Operating Entities include the Company Law of the PRC, Wholly Foreign Owned Enterprise Law and its Implementation Rules. Under these laws and regulations, our PRC Operating Entities are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to its statutory surplus reserve fund until the accumulative amount of such reserve reaches 50% of their respective registered capital. These reserve funds are recorded as part of shareholders' equity but are not available for distribution to shareholders other than in the case of liquidation. As a result of this requirement, the amount of net income available for distribution to shareholders will be limited.
 
Our business is subject to a variety of environmental laws and regulations. Our failure to comply with environmental laws and regulations may have a material adverse effect on our business and results of operations.
 
Since the beginning of the 1980s, the PRC has formulated and implemented a series of environmental protection laws and regulations. Our operations are subject to these environmental protection laws and regulations in the PRC. These laws and regulations impose fees for the discharge of waste substances, permit the levy of fines and claims for damages for serious environmental offences and allow the PRC government, at its discretion, to close any facility that fails to comply with orders requiring it to correct or stop operations causing environmental damage. Our operations are in compliance with PRC environmental regulations in all material aspects. The PRC government has taken steps and may take additional steps towards more rigorous enforcement of applicable environmental laws, and towards the adoption of more stringent environmental standards. If the PRC national or local authorities enact additional regulations or enforce current or new regulations in a more rigorous manner, we may be required to make additional expenditures on environmental matters, which could have an adverse impact on our financial condition and results of operations. In addition, environmental liability insurance is not common in the PRC. Therefore, any significant environmental liability claims successfully brought against us would adversely affect our business, financial condition and results of operations.
 
 
25

 
 
PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate.
 
On August 8, 2006, the PRC Ministry of Commerce (“MOFCOM”), joined by the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission (“CSRC”) and the State Administration of Foreign Exchange (“SAFE”), released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises (the "Revised M&A Regulations"), which took effect on September 8, 2006. These new rules significantly revised the PRC's regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. These new rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions in the PRC and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions. Further, the new rules establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability of the PRC government to monitor and prohibit foreign control transactions in key industries.
 
These rules may significantly affect the means by which offshore-onshore restructurings are undertaken in the PRC in connection with offshore private equity and venture capital financings, mergers and acquisitions. It is expected that such transactional activity in the PRC in the near future will require significant case-by-case guidance from MOFCOM and other government authorities as appropriate. It is anticipated that application of the new rules will be subject to significant administrative interpretation, and we will need to closely monitor how MOFCOM and other ministries apply the rules to ensure its domestic and offshore activities continue to comply with PRC laws. Given the uncertainties regarding interpretation and application of the new rules, we may need to expend significant time and resources to maintain compliance. It is uncertain how our business operations or future strategy will be affected by the interpretations and implementation of the SAFE notices and new rules. Our business operations or future strategy could be adversely affected by the SAFE notices and the new rules. For example, we may be subject to more stringent review and approval processes with respect to our foreign exchange activities.
 
The foreign currency exchange rate between U.S. dollars and Renminbi (“RMB”) could adversely affect our reported financial results and condition.
 
To the extent that we need to convert U.S. dollars into RMB for our operational needs, our financial position and the price of our common stock may be adversely affected should RMB appreciate against U.S. dollar at that time. Conversely, if we decide to convert our RMB into U.S. dollars for the operational needs or paying dividends on our common stock, the dollar equivalent of our earnings from our subsidiaries in the PRC would be reduced should U.S. dollar appreciate against RMB.
 
Until 1994, RMB experienced a gradual but significant devaluation against most major currencies, including dollars, and there was a significant devaluation of RMB on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system. Since 1994, the value of RMB relative to U.S. dollar has remained stable and has appreciated slightly against U.S. dollar. Countries, including the United States, have argued that RMB is artificially undervalued due to the PRC's current monetary policies and have pressured the PRC to allow RMB to float freely in world markets. In July 2005, the PRC government changed its policy of pegging the value of RMB to the U.S. dollar. Under the new policy, RMB is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies. While the international reaction to RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further and more significant appreciation of RMB against the dollar.
 
Restrictions on currency exchange may limit our ability to utilize our revenues effectively and the ability of our PRC Operating Entities to obtain financing.
 
Substantially all of our revenues and operating expenses are denominated in RMB. Restrictions on currency exchange imposed by the PRC government may limit our ability to utilize revenues generated in RMB to fund our business activities outside the PRC, if any, or expenditures denominated in foreign currencies. Under current PRC regulations, RMB may be freely converted into foreign currency for payments relating to “current account transactions,” which include among other things dividend payments and payments for the import of goods and services, by complying with certain procedural requirements. Our PRC Operating Entities may also retain foreign exchange in their respective current account bank accounts, subject to a cap set by SAFE or its local counterpart, for use in payment of international current account transactions.
 
 
26

 
 
However, conversion of RMB into foreign currencies and of foreign currencies into RMB, for payments relating to “capital account transactions,” which principally includes investments and loans, generally requires the approval of SAFE and other relevant PRC governmental authorities. Restrictions on the convertibility of the RMB for capital account transactions could affect the ability of our PRC Subsidiary to make investments overseas or to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us.
 
In August 2008, SAFE promulgated Circular 142, a notice regulating the conversion by FIEs of foreign currencies into RMB by restricting how the converted RMB may be used. Circular 142 requires that RMB converted from the foreign currency-denominated capital of a FIE may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC unless specifically provided for otherwise. In addition, SAFE strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-denominated capital of a FIE. The use of such RMB may not be changed without approval from SAFE, and may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the SAFE rules.
 
Any existing and future restrictions on currency exchange may affect the ability of our PRC Subsidiary or affiliated entity to obtain foreign currencies, limit our ability to utilize revenues generated in RMB to fund our business activities outside the PRC that are denominated in foreign currencies, or otherwise materially and adversely affect our business.
 
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.
 
We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties and we make all of our sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents or distributors of our company and its affiliate, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees, and we have implemented a policy to comply specifically with the FCPA. In spite of these efforts, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our company and its affiliate may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
 
If we make equity compensation grants to persons who are PRC citizens, they may be required to register with SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt an equity compensation plan for our directors and employees and other parties under PRC law.
 
On April 6, 2007, SAFE issued the Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, also known as Circular 78. It is not clear whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company's covered equity compensation plan prior to April 6, 2007. We intend to adopt an equity compensation plan in the future and make option grants to our officers and directors, most of whom are PRC citizens. Circular 78 may require our officers and directors who receive option grants and are PRC citizens to register with SAFE. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming. If it is determined that any of our equity compensation plans is subject to Circular 78, failure to comply with such provisions may subject us and participants of our equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees. In that case, our ability to compensate our employees and directors through equity compensation would be hindered and our business operations may be adversely affected.
 
 
27

 
 
Any recurrence of severe acute respiratory syndrome (“SARS”), Avian Flu, or another widespread public health problem in the PRC could adversely affect our operations.
 
A renewed outbreak of SARS, Avian Flu or another widespread public health problem in the PRC, where all of our businesses are located and where all of our sales occur, could have a negative effect on our operations. Our businesses are dependent upon our ability to continue to efficiently distribute and sell our products. Such an outbreak could have an impact on our operations as a result of:
 
 
 
quarantines or closure of our distribution center, which would severely disrupt our operations,
 
 
 
the sickness or death of our key officers and employees, and
 
 
 
a general slowdown in the PRC economy.
 
Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.
 
Adverse changes in political, economic and other policies of the PRC government could have a material adverse effect on the overall economic growth of the PRC, which could reduce the demand for our products and materially and adversely affect our competitive position.
 
All of our business operations are conducted in the PRC, and all of our sales are currently made in the PRC. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in the PRC. The PRC economy differs from the economies of most developed countries in many respects, including:
 
 
 
the extent of government involvement;
 
 
 
the level of development;
 
 
 
the growth rate;
 
 
 
the control of foreign exchange;
 
 
 
the allocation of resources;
 
 
 
an evolving regulatory system; and
 
 
 
a lack of sufficient transparency in the regulatory process.
 
While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
 
The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in the PRC are still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially and adversely affect our business. The PRC government also exercises significant control over PRC economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the PRC government to slow the pace of growth of the PRC economy could result in decreased expenditures by the users of our products, which in turn could reduce demand for our products.
 
Moreover, the political relationship between the United States, Europe, or other Asian nations and the PRC is subject to sudden fluctuation and periodic tension. Changes in political conditions in the PRC and changes in the state of foreign relations are difficult to predict and could adversely affect our operations or cause our products to become less attractive. This could lead to a decline in our profitability.
 
Any adverse change in the economic conditions or government policies in the PRC could have a material adverse effect on overall economic growth and the level of healthcare investments and expenditures in the PRC, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our businesses.
 
 
28

 
 
Because our business is located in the PRC, we may have difficulty establishing adequate management, legal and financial controls, which are required in order to comply with United States securities laws.
 
PRC companies have historically not adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and, computer, financial and other control systems. In addition, we may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of its financial statements and prevent us from complying with the rules and regulations promulgated by the Securities Exchange Commission (the “SEC”) and the requirements of the Sarbanes-Oxley Act of 2002 (“SOX”). Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business.
 
Investors may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in the PRC based upon United States laws, including the federal securities laws or other foreign laws against us or our management.
 
All of our current business operations are conducted in the PRC. Moreover, our president and all of our officers are nationals and residents of the PRC. All the assets of these persons are located outside the United States and in the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside the PRC upon these persons. In addition, uncertainty exists as to whether the PRC courts would recognize or enforce judgments of United States courts obtained against such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in the PRC against us or such persons predicated upon the securities laws of the United States or any state thereof.
 
If we are found to be in violation of current or future PRC laws, rules or regulations regarding the legality of foreign investment in the PRC with respect to our ownership structure, we could be subject to severe penalties.
 
We currently conduct business operations solely in the PRC through our subsidiaries, in which we hold 100% equity ownership interest. We are now a Nevada corporation. As a result, our subsidiaries in the PRC are regarded as FIEs under PRC law and we are subject to PRC law limitations on foreign ownership of PRC companies. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our healthcare products distribution and production businesses.
 
Accordingly, it is possible that the relevant PRC authorities could, at any time, assert that any portion of our existing or future ownership structure and businesses violate existing or future PRC laws, regulations or policies. It is also possible that the new laws or regulations governing our business operations in the PRC that have been adopted or may be adopted in the future will prohibit or restrict foreign investment in, or other aspects of, any of our PRC Operating Entities' and our current or proposed businesses and operations. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
 
The PRC government has broad discretion in dealing with violations of laws and regulations, including:
 
 
 
levying fines;
 
 
 
confiscating our income;
 
 
 
revoking business and other licenses;
 
 
 
requiring us to discontinue any portion or all of our business;
 
 
 
requiring us to restructure our ownership structure or operations; and
 
 
 
requiring actions necessary for compliance.
 
In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which, in turn, could materially and adversely affect our business, financial condition and results of operations.
 
 
29

 
 
Risks Relating to Investment in Our Securities
 
An active public market for our common stock may not develop or be sustained, which would adversely affect the ability of our investors to sell their securities in the public market.
 
We cannot predict the extent to which an active public market for our common stock will develop or be sustained.
 
Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.
 
Holders of a significant number of our shares and/or their designees may be eligible to sell our shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a non-affiliate stockholder (or stockholders whose shares are aggregated) who has satisfied a six-month holding period, and provided that there is current public information available, may sell all of its securities. Rule 144 also permits the sale of securities, without any limitations, by a non-affiliate that has satisfied a one-year holding period. Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.
 
If we fail to maintain effective internal controls, we may not be able to accurately report our financial results or prevent fraud, and our business, financial condition, results of operations and reputation could be materially and adversely affected.
 
The effectiveness of our internal controls is essential to the integrity of our business and financial results. Our public reporting obligations currently place and are expected to continue to place a strain on our management, operational and financial resources and systems. We have implemented measures to enhance our internal controls, and plan to take steps to further improve our internal controls. We cannot assure you that the measures taken to improve our internal controls will be effective. If we fail to maintain effective internal controls in the future, our business, financial condition, results of operations and reputation may be materially and adversely affected.
 
Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses.
 
Changing laws, regulations and standards relating to corporate governance and public disclosure, including SOX and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
 
We do not foresee paying cash dividends in the near future.
 
We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income.
 
Item 2. PROPERTIES.
 
There is no private land ownership in the PRC. Individuals and companies are permitted to acquire land use rights for specific purposes.
 
Our main offices and manufacturing facilities are located in Baodi District, Tianjin City, PRC.
 
We have been issued a Land Use Rights and Property Ownership Certificate for approximately 27,500 square meters of land and nine buildings thereon in Baodi District, Tianjin City, PRC by the People’s Government of Tianjin City, which expires October 10, 2057.
 
We believe that our existing facilities are well maintained are in good operating condition and are sufficient for our present needs.
 
 
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Among the nine buildings, four buildings are used for production, two for employee and franchisee training, one for employee accommodation, one for storage, and one for parking.
 
Item 3. LEGAL PROCEEDINGS.
 
We have no knowledge of any material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.
 
Item 4. MINE SAFETY DISCLOSURES.
 
Not applicable.
 
PART II
 
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Market Information
 
Our common stock has been quoted on the OTCBB since September 11, 2009 under the symbol “GTVI”, however, there was no trading in our common stock until after the closing of the Share Exchange in October 2010.
 
The market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.
 
The following table sets forth the high and low bid quotations per share of our common stock as reported on the OTC Bulletin Board for the periods indicated. The high and low bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
 
Fiscal Year 2013
  
High
 
  
Low
 
First Quarter
  
$
0.03
   
$
0.02
  
Second Quarter
  
$
0.03
   
$
0.03
  
Third Quarter
  
$
0.04
   
$
0.03
  
Fourth Quarter
  
$
0.05
   
$
  0.035
  
 
Holders of Our Common Stock
 
As of December 31, 2013, we had 410 shareholders of record of our common stock, and we believe a greater number of beneficial owners. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.
 
Dividends
 
If we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt of funds from Junhe Consulting, which in turn would be dependent on the receipt of funds from our variable interest entities, Joway Shengshi and its subsidiaries. Payments of dividends by Junhe Consulting to our Company are subject to laws and regulations in the PRC including the requirement that foreign invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business. Further, such remittances would require Junhe Consulting to provide an application for remittance that includes, in addition to the application form, a foreign registration certificate, board resolution, capital verification report, audit report on profit and stock bonuses, and a tax certificate.
 
Additionally, under applicable PRC regulations, foreign-invested enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in the PRC is required to set aside at least 10% of its after-tax profit (determined in accordance with PRC accounting standards) each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends.
 
 
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We have not paid dividends on our common stock and do not anticipate paying such dividends in the foreseeable future. We will rely on dividends from our PRC Operating Entities for our funds and PRC regulations (described above) may limit the amount of funds distributable to us from our PRC Operating Entities, which will affect our ability to declare any dividends.

Stock Option Grants
 
To date, we have not granted any stock options.
 
Registration Rights
 
We have not granted registration rights to any person.
 
Securities authorized for issuance under equity compensation plans
 
From January 2011 to September 2013, we agreed to pay (i) Ms. Quintero annual cash compensation in the amount of $38,000 and an annual grant of 10,000 shares of the Company’s common stock; and (ii) Mr. Pryor annual cash compensation in the amount of $30,000 and an annual grant of 8,000 shares of the Company’s common stock in connection with their service on the Company’s Board of Directors, In 2013, the Company granted Ms. Quintero and Mr. Pryor 10,000 and 8,000 shares of the Company’s common stock, respectively, valued at $300 and $240.. This compensation plan was terminated when Ms. Quintero and Mr. Pryor resigned in September 2013.
 
Penny Stock Regulations
 
Our shares of common stock are subject to the “penny stock” rules of the Securities Exchange Act of 1934 and various rules under this Act. In general terms, “penny stock” is defined as any equity security that has a market price less than $5.00 per share, subject to certain exceptions. The rules provide that any equity security is considered to be a penny stock unless that security is registered and traded on a national securities exchange meeting specified criteria set by the SEC, issued by a registered investment company, and excluded from the definition on the basis of price (at least $5.00 per share), or based on the issuer's net tangible assets or revenues. In the last case, the issuer must meet one of the following requirements: (i) net tangible assets must exceed $3,000,000 if the issuer has been in continuous operation for at least three years; or (ii) net tangible assets must exceed $5,000,000 if the issuer has been in operation for less than three years; or (iii) the issuer's average revenues for each of the past three years must exceed $6,000,000.
 
Trading in shares of penny stock is subject to additional sales practice requirements for broker-dealers who sell penny stocks to persons other than established customers and accredited investors. Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 (or $300,000 together with their spouse), and certain institutional investors. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of the security and must have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security. Finally, monthly statements must be sent disclosing recent price information for the penny stocks. These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock, to the extent it is penny stock, and may affect the ability of shareholders to sell their shares.
 
Item 6. SELECTED FINANCIAL DATA.
 
We are a smaller reporting company as defined by Rule 229.10(f)(1) and are not required to provide information under this item.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
 
The following discussion should be read in conjunction with our consolidated financial statements and notes to those consolidated financial statements, included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk factors” and elsewhere in this prospectus.
 
 
32

 
 
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 176 franchisees in China. Our franchisees, in turn, sell the products to their customers. All of our revenues to date have been generated by sales to customers located in the PRC.
 
Beginning in 2009, we began to develop a franchise network to distribute our healthcare knit goods, daily healthcare products and personal care products. Through these franchisees, we were able to significantly increase sales of our healthcare knit goods segment and daily healthcare and personal care segment. In 2010, we began distributing our wellness house and activated water machine products through our franchise network. As of December 31, 2013, we had 176 franchisees compared to 193 as of December 31, 2012.
 
We are a holding company with no material operations of our own. All of our operations are conducted through Joway Shengshi and its three subsidiaries, Joway Technology, Joway Decoration and Shengtang Trading. Joway Shengshi engages in the manufacture and distribution of tourmaline health-related products such as knit goods, and daily healthcare and personal care products. Joway Technology and Joway Decoration engage in the manufacture and distribution of activated water machines and wellness houses. We utilize our Shengtang Trading subsidiary to purchase raw materials, which are then sold to Joway Shengshi and Joway Decoration.
 
As a holding company, our ability to pay dividends and other cash distributions to our shareholders depends in part upon dividends and other distributions paid to us by our PRC subsidiaries. The amount of dividends paid by our PRC subsidiaries to us primarily depends on the service fees paid to our PRC subsidiaries from Joway Shengshi and its subsidiaries, and, to a lesser degree, our PRC subsidiaries’ retained earnings. Conducting our operations through contractual arrangements with Joway Shengshi and its subsidiaries has a risk that we may lose the power to direct the activities that most significantly affect the economic performance of Joway Shengshi and its subsidiaries, which may result in our being unable to consolidate their financial results with our results and may impair our access to their cash flow from operations and thereby reduce our liquidity.
 
Important Factors Affecting our Results of Operations and Existing Trends
 
Price of Raw Materials
 
Tourmaline powder and textiles are the most important raw materials used in the production of our products. The price of tourmaline powder remained stable in 2013. The average price of textiles that we purchased and the average sales prices of our products were stable in fiscal year 2013 and 2012. We expect the price of textiles to remain stable in 2014. We closely monitor textile prices and have several alternative sources of supply.
 
Increase in production capacity
 
In order to capture additional market share for our products and take advantage of increased demand in the PRC, we have expanded our production capacity over the past several years, including the completion of our manufacturing plant in Tianjin and purchase of new equipment. In order to take advantage of anticipated growth in our industry in the PRC, we plan to continue to expand our production capacity in the future, although we do not yet have a specific timeframe for this expansion. Increased capacity has had, and could continue to have, a significant effect on our results of operations, by allowing us to produce and sell more products to generate higher revenues and profits.
 
 
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Growth of the Chinese economy
 
We operate our manufacturing facilities in China and derive all of our revenues from sales to customers in China. As such, economic conditions in China affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our raw materials and our other expenses. According to the National Bureau of Statistics, China’s gross domestic product in 2013 dropped to 7.7% compared with 7.8% in 2012. Domestic demand for, and consumption of, health-related products decreased substantially as a result of this slowdown.
 
Costs of being a public company
 
Prior to the Share Exchange, we were a privately-held company. We expect that compliance with our obligations as a U.S. public company will require significant management time and significantly increase our general and administrative expenses, including insurance, legal and financial compliance costs.
 
Foreign currency translation
 
Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiaries is in RMB. Our results of operations are translated at average exchange rates during the relevant financial reporting periods, assets and liabilities are translated at the unified exchange rate at the end of these periods and equity is translated at historical exchange rates. Adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.
 
Description of Selected Income Statement Items
 
Revenues. 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 employee remuneration and traveling expenses from our marketing department, transportation expenses and advertising expenses. General and administrative expenses consist primarily of employee remuneration from administrative departments, payroll taxes and benefits, general office expenses and depreciation.
 
Other (expense) income. Our other (expense) income consists primarily of interest income, subsidy income, other revenue from sales of obsolete equipment and other expenses related to the tax penalty requested by PRC tax authority after a review of our 2012 tax filings of corporate income and value added tax (VAT).
 
Income taxes. According to the revised Enterprise Income Tax Law effective as of January 1, 2008, our income tax rate is 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.
 
 
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Results of Operations
 
The following table sets forth certain information regarding our results of operations.

   
For the year ended December 31,
 
   
2013
   
2012
 
REVENUES
  $ 1,391,345     $ 1,897,906  
COST OF REVENUES
    546,445       601,028  
GROSS PROFIT
    844,900       1,296,878  
OPERATING EXPENSES
    2,800,497       2,631,730  
LOSS FROM OPERATIONS
    (1,955,597 )     (1,334,852 )
OTHER INCOME (LOSS), NET
    (138,669 )     53,206  
LOSS BEFORE INCOME TAXES
    (2,094,266 )     (1,281,646 )
INCOME TAXES
    77,416       17,969  
NET LOSS
  $ (2,171,682 )   $ (1,299,615 )
 
Business Segments
 
In 2013 and 2012, the Company operated in three reportable business segments: (1) Healthcare Knit Goods, (2) Daily Healthcare and Personal Care Products and (3) Wellness House and Activated Water Machine Products. The following table sets forth the contributions of each reportable business segment in dollars and as a percent of revenue:
 
For the year ended December 31, 2013
 
   
Healthcare
Knit
Goods Series
   
% of
Total
   
Daily
Healthcare
and Personal
Care Series
   
% of
Total
   
Wellness
House and
Activated
Water
Machine Series
   
% of
Total
   
Total
 
REVENUES
  $ 394,140       28.3 %   $ 437,867       31.5 %   $ 559,338       40.2 %   $ 1,391,345  
COST OF REVENUES
    139,184       25.5 %     145,154       26.6 %     262,107       48.0 %     546,445  
GROSS PROFIT
    254,956       30.2 %     292,713       34.6 %     297,231       35.2 %     844,900  
GROSS MARGIN
    64.7 %             66.8 %             53.1 %             60.7 %
OPERATING EXPENSES
    837,641       29.9 %     895,251       32.0 %     1,067,605       38.1 %     2,800,497  
LOSS FROM OPERATIONS
  $ -582,685       29.8 %   $ -602,538       30.8 %   $ -770,374       39.4 %   $ -1,955,597  
 
For the year ended December 31, 2012
 
   
Healthcare
Knit
Goods Series
   
% of
Total
   
Daily
Healthcare
and Personal
Care Series
   
% of
Total
   
Wellness
House and
Activated
Water
Machine Series
   
% of
Total
   
Total
 
REVENUES
  $ 653,660       34.4 %   $ 509,327       26.8 %   $ 734,919       38.7 %   $ 1,897,906  
COST OF REVENUES
    158,233       26.3 %     165,182       27.5 %     277,613       46.2 %     601,028  
GROSS PROFIT
    495,427       38.2 %     344,145       26.5 %     457,306       35.3 %     1,296,878  
GROSS MARGIN
    75.8 %             67.6 %             62.2 %             68.3 %
OPERATING EXPENSES
    906,395       34.4 %     706,259       26.8 %     1,019,076       38.7 %     2,631,730  
LOSS FROM OPERATIONS
  $ -410,968       30.8 %   $ -362,114       27.1 %   $ -561,770       42.1 %   $ -1,334,852  
 
 
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Year Ended December 31, 2013 Compared to December 31, 2012
 
Revenue. For the year ended December 31, 2013, revenue was $1,391,345 compared to $1,897,906 for the year ended December 31, 2012, a decrease of $506,561, or 26.7%. This decrease was mainly due to the decrease in the number of our franchisees. Since 2012, in order to concentrate on high-quality franchisees, we strengthened the enforcement of the terms of our franchise agreements and policies after focusing mostly on increasing franchise stores in 2011. As a result, the number of our franchisees dropped to 176 at the end of 2013 compared to 193 at the end of 2012. In addition, the demand to our products has been affected by the slowdown of the economy because China’s GDP growth continued to drop to 7.7% in 2013, compared with 7.8% in 2012.
 
Revenue from healthcare knit goods segment decreased by $259,520, or 39.7% to $394,140 for the year ended December 31, 2013 from $653,660 for the year ended December 31, 2012. This is primarily due to the decrease in sales of our mattress products. Our mattress products are durable consumables which have three or more years of life cycle and had been successfully sold to our customers in 2012 and 2011. However, considering the 3 or more years of life cycle of our mattress products and reducing customer size during 2013, our current consumers would not replace their purchases within this period and we have limited new customers increased which both directly affected our sales from mattress products.
 
Revenue from daily healthcare and personal care products decreased by $71,460, or 14% to $437,867 for the year ended December 31, 2013 from $509,327 for the year ended December 31, 2012.  This decrease was mainly due to the decrease of our franchisees and loss of our market share.
 
Revenue from wellness houses and activated water machines decreased by $175,581 or 23.9% to $559,338 for the year ended December 31, 2013 from $734,919 for the year ended December 31, 2012. Our wellness houses and activated water machines are durable consumables which have three or more years of life cycle and had been successfully sold to our customers in 2012 and 2011. However, considering the 3 or more years of life cycle of our products and reducing customer size during 2013, our current consumers would not replace their purchases within this period and we have limited new customers increased which both directly affected our sales from this segment.
 
Cost of Goods Sold. For the year ended December 31, 2013, cost of goods sold was $546,445 compared to $601,028 for the year ended December 31, 2012, a decrease of $54,583, or 9.1%. This decrease was mainly due to the decrease in sales.
 
Cost of goods sold for healthcare knit goods segment decreased to $139,184 for the year ended December 31, 2013 from $158,233 for the year ended December 31, 2012. This decrease was mainly due to a decrease in the cost of our mattress products as a result of the decrease in sales.
 
Cost of goods sold for the daily healthcare and personal care segment decreased to $145,154 for the year ended December 31, 2013 from $165,182 for the year ended December 31, 2012. This decrease was in line with the decrease in sales.
 
Cost of goods sold for wellness house and activated water machine segment decreased to $262,107 for the year ended December 31, 2013 from $277,613 for the year ended December 31, 2012. This decrease was primarily due to the decrease in sales.
 
Gross profit. Our gross profit decreased by $451,978 or 34.9% to $844,900 for the year ended December 31, 2013, compared to $1,296,878 for the year ended December 31, 2012. This decrease was mainly due to the decrease in sales. Our gross margin decreased from 68.3% for the year ended December 31, 2012 to 60.7% for the year ended December 31, 2013. This decrease was mainly due to the decreased gross margin in our healthcare knit goods segment and wellness houses and activated water machines segment.
 
Gross profit for the healthcare knit goods segment decreased by $240,471 or 48.5% to $254,956 for the year ended December 31, 2013 compared to $495,427 for the year ended December 31, 2012. This decrease was mainly due to decreased sales of our mattress products, which have higher gross margins. The gross margin of our healthcare knit goods segment decreased from 75.8% for the year ended December 31, 2012 to 64.7% for the year ended December 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 $51,432 or 14.9% to $292,713 for the year ended December 31, 2013, compared to $344,145 for the year ended December 31, 2012. This decrease was primarily due to the decreased sales. Gross margin of daily healthcare and personal care segment slightly decreased from 67.6% for the year ended December 31, 2012 to 66.8% for the year ended December 31, 2013.
 
Gross profit of the wellness house and activated water machine segment decreased by $160,075 or 35% to $297,231 for the year ended December 31, 2013, compared to $457,306 for the year ended December 31, 2012. This decrease was mainly due to the decrease in sales. The gross margin of our wellness house and activated water machine segment decreased from 62.2% for the year ended December 31, 2012 to 53.1% for the year ended December 31, 2013. In 2013, we give more discounts to our franchisees for promoting sales of our wellness house and activated water machine segments.
 
 
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Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses increased by $168,767, or 6.4%, from $2,631,730 for the year ended December 31, 2012 to $2,800,497 for the year ended December 31, 2013. This increase was mainly due to $147,785 of impairment loss from inventory recognized in 2013. Operating expenses for healthcare knit goods segment decreased by $68,754 or 7.6% to $837,641 for the year ended December 31, 2013 from $906,395 for the year ended December 31, 2012. This decrease was mainly due to a decreased cost on promotion of our business represented by healthcare knit goods, most of which are the existing products for a long time. Operating expenses for daily healthcare and personal care segment increased by $188,992 or 26.8% to $895,251 for the year ended December 31, 2013 from $706,259 for the year ended December 31, 2012. This increase was mainly due to an increased cost on promoting our new products in daily healthcare and personal care segment. Operating expenses for wellness house and activated water machine segment increased by $48,529 or 4.8% to $1,067,605 for the year ended December 31, 2013 from $1,019,076 for the year ended December 31, 2012. This increase was mainly due to the increased marketing expenses on this segment.
 
Loss from operations. As a result of the foregoing, our loss from operations was $1,955,597 for the year ended December 31, 2013, compared to $1,334,852 for the year ended December 31, 2012, an increased loss of $620,745. This was mainly due to the decrease in sales of $506,561 and increase in operating expenses of $168,767 partly offset by the decreases of $54,583 from our cost of goods sold.
 
Income taxes. Our income tax expenses increased from $17,969 for the year ended December 31, 2012 to $77,416 for the year ended December 31, 2013. The increase was due to an additional income tax requested by PRC tax authority after a review of our 2012 Corporate Income Tax Filing.
 
Net loss. For the year ended December 31, 2013, our net loss was $2,171,682 compared to $1,299,615 for the year ended December 31, 2012. This was primarily due to the decrease in our market shares which reduced our operating incomes of $620,745 and an impairment loss of $147,785 from inventory.
 
Franchising
 
We enter into franchising agreements to develop retail outlets for our products. The agreements provide that franchisees will sell our products exclusively. In exchange we provide them with geographic exclusivity, discounted products, training and supports. 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:
 
    Year ended December 31,  
   
2013
   
2012
 
             
Sales to franchise customers
  $ 1,281,106     $ 1,751,863  
Sales to non-franchise customers
    110,239       146,043  
                 
Total sales
  $ 1,391,345     $ 1,897,906  
                 
Change in franchise outlets:
               
Number of franchise outlets open at beginning of the year
    193       247  
Number of franchise outlets opened during the year
    27       14  
Number of franchise outlets closed during the year
    (44 )     (68 )
                 
Number of franchise outlets open at the end of the year
    176       193  
 
Liquidity and Capital Resources
 
Our cash at the beginning of the year ended December 31, 2013 was $522,145 and decreased to $477,642 by the end of the year, a decrease of $44,503. In addition, our marketable security was $0 by the end of the year ended December 31, 2013, compared to $1,266,604 at the beginning of the year. The decrease at our cash level was due to the cash flow out from our operating activities which partly offset by the proceeds from disposal of our short-term investment. We had net working capital of $1,787,170 at December 31, 2013, a decrease of $1,595,408 from $3,382,578 at December 31, 2012.
 
 
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Our cash and marketable security are held in large, reputable financial institutions as follows:
 
   
December 31, 2013
   
December 31, 2012
 
Cash on hand
  $ 21,951     $ 22,423  
Cash in Industrial and Commercial Bank of China
    452,231       472,696  
Cash in Agricultural Bank of China
    2,732       26,026  
Cash in Standard Chartered Hong Kong
    728       1,000  
Total of Cash
    477,642       522,145  
Marketable Security in Industrial and Commercial Bank of China
            1,266,604  
Total of Cash and Marketable Security
  $ 477,642     $ 1,788,749  
 
Our cash flow information summary is as follows:
 
   
For the year ended December 31,
 
   
2013
   
2012
 
Net cash provided by (used in):
           
Operating activities
  $ (1,232,881 )   $ (1,184,590 )
Investing activities
  $ 1,233,139     $ (1,520,695 )
Financing activities
  $ (50,347 )   $ (237,163 )
 
Net Cash Used in Operating Activities
 
Net cash used in operating activities was $1,232,881 for the year ended December 31, 2013 compared to $1,184,590 for the year ended December 31, 2012. This was mainly due to $872,067 of increase in net loss which was partly offset by a non cash impairment loss of $147,785 from inventory, less expenditures of $346,004 in our inventory, $115,061 in accounts payable, and $127,983 in tax payable.
 
For the year of 2013, cash was mainly used to cover the loss of $2,171,682. This was primarily offset by cash provided from an add-back of $549,364 of depreciation for non-cash expense and $147,785 of impairment loss from inventory.
 
For the year of 2012, cash was mainly used to cover the loss of $1,299,615 and purchase inventories of $409,733. This was primarily offset by cash provided from an add-back of $489,752 of depreciation for non-cash expense.
 
Net Cash Provided by (Used in) Investing Activities
 
Net cash provided by investing activities was $1,233,139 for the year ended December 31, 2013, compared to $1,520,695 of net cash used in for the year ended December 31, 2012. In 2012, we redeemed our short-term wealth-management investment, a kind of Marketable Security in Industrial and Commercial Bank of China in the total amount of $1,266,604, which was invested in 2012.
 
Net Cash Used in Financing Activities
 
Net cash used in financing activities was $50,347 for the year ended December 31, 2013, compared to $237,163 for the year ended December 31, 2012. For the year of 2013 and 2012, cash was used to repay Mr. Jinghe Zhang and Shenyang Joway Industrial Development Co., Ltd. (“Shenyang Joway”) for advances made in prior periods.
 
On May 10, 2007, one of our operating subsidiaries, Joway Shengshi entered into a cash advance agreement with Mr. Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the agreement, Mr. 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, 2013, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang of which $4,597,144 has been repaid. During the year of 2013 and 2012, Joway Shengshi repaid $9,723 and $20,393 of these advances, respectively. As of December 31, 2013, the total unpaid principal balance due to Mr. Jinghe Zhang for advances made to Joway Shengshi was $40,253.
 
 
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On May 7, 2007, one of our operating subsidiaries, 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, one of our subsidiaries, 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 of which $760,786 has been repaid.  During the year of 2013 and 2012, the Company repaid $40,624 and $216,770 of these advances, respectively. As of December 31, 2013, the total unpaid principal balance due to Shenyang Joway for advances was $30,915.  Shenyang Joway ceased operations at the end of 2009, although it still exists as a legal entity.
 
We believe that we have sufficient liquidity from internal and external sources to meet our operating cash needs over the next 12 months even if Mr. Zhang or Shenyang Joway were to demand immediate repayment of the remaining balance under these loans and no longer wish to provide future loans to us or any of our operating units.
 
Transfer of Cash
 
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At December 31, 2013 our working capital was $1,787,170 as compared to $3,382,578 at December 31, 2012, reflecting a decrease in cash and cash equivalents balances to $477,642 at the end of 2013 as compared to $522,145 at the end of 2012. These funds are located in financial institutions located as follows:

   
December 31, 2013
   
December 31, 2012
 
Country
 
Dollar
   
%
   
Dollar
   
%
 
United States
  $ -       -     $ -       -  
China
    477,642       100 %     522,145       100 %
    $ 477,642       100 %   $ 522,145       100 %
 
All of our revenues are earned by Joway Shengshi, our PRC controlled consolidated affiliate and subsidiaries. PRC regulations restrict the ability to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividends only out of accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of its annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amount of said fund reaches 50% of its registered capital. Allocations to this statutory reserve fund can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiary to transfer funds could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
 
Dynamic Elite, a Hong Kong corporation and Junhe Consulting, a WFOE, is a bridge to transfer funds inside and outside the PRC. There are three ways for foreign cash to be transferred into Chinese subsidiaries:
 
(1) Capital funds: At the establishment of the WFOE, in accordance with the provisions of PRC Foreign-Owned Enterprise Law, funds were injected as capital by Dynamic Elite into its wholly foreign owned enterprise established in mainland China, Junhe Consulting.
 
(2) Raised capital - acquisition: if the Company raised sufficient capital, it could transfer the capital to Joway Shengshi by causing Dynamic Elite to apply to the Chinese Ministry of Commerce (MOFCOM) for approval of an acquisition of Joway Shengshi. MOFCOM would approve such an acquisition only after a lengthy review process, and only if it determined that the price paid by Dynamic Elite for Joway Shengshi represented a commercially fair price.
 
 
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(3) Raised capital - joint venture: If the Company obtained capital that was less than the purchase price for Joway Shengshi deemed acceptable by MOFCOM, Dynamic Elite could still inject the funds into Joway Shengshi by complying with the provisions of the PRC Sino-Foreign Equity Joint Venture Law. To accomplish this capital transfer, we would be required to apply to the Chinese government for approval to convert Joway Shengshi into an equity joint venture, in which Dynamic Elite would be its equity joint venture. If approved, Dynamic Elite would then own a portion of the equity in Joway Shengshi and the VIE agreements between Joway Shengshi and Junhe Consulting (WFOE) would be modified accordingly to reduce the portion of net income payable by Joway Shengshi to Junhe Consulting.
 
We have no current plans for the Company to fund Joway Shengshi, and expect the VIE structure to remain in place for the foreseeable future.
 
According to Consulting Services Agreement between Junhe Consulting (WFOE) and Joway Shengshi, 100% of the net income of Joway Shengshi will be paid to Junhe Consulting as a service fee, and in turn Junhe Consulting will in compliance with the provisions of PRC Foreign-Owned Enterprise Law, transfer this income to Dynamic Elite (HK company) for the purpose of profit distribution. The earnings transfer procedures is designed to comply with PRC regulations. As a result, there will be no government regulations which will impact our transactions to transfer cash within our corporate structure. However, when the funds are transferred to outside the PRC, all transferred amounts will be reported to the national tax bureau to examine whether the local and national taxes have been fully paid by Joway Shengshi and Junhe Consulting.
 
PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consisted of the following:
 
    December 31,  
   
2013
   
2012
 
Building
  $ 6,442,048     $ 6,204,017  
Operating Equipment
    390,119       377,636  
Office furniture and equipment
    343,809       331,449  
Vehicles
    1,113,856       1,078,215  
Total
    8,289,832       7,991,317  
Less:accumulated depreciation
    (2,031,496 )     (1,482,132 )
Property, plant and equipment, net
  $ 6,258,336     $ 6,509,185  
 
Depreciation expense for the years ended December 31, 2013 and 2012 amounted to $549,364 and $489,752, respectively.
 
STATUTORY RESERVES
 
Pursuant to the laws and regulations of the PRC, annual income of the Company’s PRC subsidiaries are required to be partly allocated to the statutory reserves funds after the payment of the PRC income taxes. The allocation to the statutory reserves funds should be at least 10% of after tax income until the reserves reach 50% of the entities’ registered capital or members’ equity. The reserve funds are not transferable to the Company in the form of cash dividends, loans or advances. Thus, the reserve funds are not available for distribution except in liquidation. For each fiscal year of 2013 and 2012, we had allocated $0 to the statutory reserve.
 
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.
 
 
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Basis of Consolidation
 
The accompanying consolidated financial statements include Joway Health and its wholly owned subsidiaries and controlled VIEs. All significant inter-company accounts and transactions have been eliminated in the consolidation.
 
Pursuant to Accounting Standards Codification Topic 810 “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.
 
Based on the various Contractual Agreements, we believe we are able to exercise control over the VIEs, and to obtain the full economic benefits. We believe that the terms of the exclusive option agreement are currently exercisable and legally enforceable under PRC laws and regulations. We also believe that the minimum amount of consideration permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for us to exercise our rights under the exclusive option agreement. A simple majority vote of our board of directors is required to pass a resolution to exercise our rights under the exclusive option agreement, for which consent of the shareholder of VIEs is not required. Therefore, we believe this gives us the power to direct the activities that most significantly impact VIEs’ economic performance. T We believe that our ability to exercise effective control, together with the consulting service agreements and the equity pledge agreements, give us the rights to receive substantially all of the economic benefits from VIEs in consideration for the services provided by its wholly owned subsidiaries in China. Accordingly, as the primary beneficiary of VIEs and in accordance with U.S. GAAP, Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading, as VIEs of Junhe Consulting, has been consolidated in the Company’s financial statements. Sales from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading are included in our total sales, their incomes or losses from operations are consolidated with ours, and our net income or loss includes net income or loss from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading.
 
Revenue Recognition
 
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured.
 
With respect to sales of product to both franchisee and non-franchisee customers, we prepare product shipments upon the receipt of a customer’s purchase order. Sales prices are based on fixed price lists that are different depending on whether the price list is for a franchisee customer or for non-franchisee customers. We recognize revenue when the product is shipped. We do not sell product to any customers with a right of return as defined in ASC 605-15-25-4. Sales are presented net of value added tax (VAT).
 
We recognize revenue on the sale of our Wellness Houses under the completed contract method. At the time when we enter into a contract with a 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 complete when all significant costs have been incurred and the customer accepts the project in writing by signing in the appropriate place on the contract. At this time the customer will also pay any remaining balance on the contract. We recognize the full contract revenue at this point. Contract costs consist primarily of materials and labor costs. The construction period of a Wellness House generally does not exceed five days.
 
Accounts Receivable
 
Accounts receivable are carried at net realizable value. We provide reserves for potential credit losses on accounts receivable. Management reviews the composition of the accounts receivable and analyzes historical bad debts, customer concentrations, customers’ credit worthiness, currents economic trends and changes in customer’s payment patterns to evaluate the adequacy of these reserves.
 
Inventories
 
Inventories are stated at the lower of cost, as determined by the specific identification method on contract level (For each individual contract, inventories cost flow are determined by weighted-average method), or the net realizable value, which is determined on selling prices less any further costs expected to be incurred for completion and disposal. Management regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether a valuation allowance is required.
 
 
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Property, Plant, and Equipment
 
Property, plant and equipment are stated at cost less accumulated depreciation, and include expenditures that substantially increase the useful lives of existing assets.
 
Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:
 
Building
20 years
Operating Equipment
10 years
Office furniture and equipment
3 or 5 years
Vehicles
10 years
 
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts, and any gain or loss is included in the consolidated statements of income and other comprehensive income. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Significant renewals and betterment to buildings and equipment are capitalized. Leasehold improvements are depreciated over the lesser of the useful life or the life of the lease.
 
Recent Accounting Pronouncements
 
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date, clarifying how entities are required to measure obligations resulting from joint and several liability arrangements and outlining the required disclosures around these liabilities. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not believe this ASU will have a significant impact on our financial statements.
 
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2013-02, “Other Comprehensive Income (Topic 220)” (“ASU 2013-02”). The objective of ASU 2013-02 is to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 seeks to attain that objective by requiring 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 under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 was effective prospectively for the Company in its first quarter of 2013. The adoption ASU 2013-02 did not impact our consolidated financial statements.
 
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters, (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, to resolve a diversity in accounting for the cumulative translation adjustment of foreign currency upon derecognition of a foreign subsidiary or group of assets. ASU 2013-05 requires the parent to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. Further, ASU 2013-05 clarified that the parent should apply the guidance in subtopic 810-10 if there is a sale of an investment in a foreign entity, including both (1) events that result in the loss of a controlling financial interest in a foreign entity and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date. Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events. The guidance is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The guidance should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the guidance, it should apply the guidance as of the beginning of the entity's fiscal year of adoption. We do not expect ASU 2013-05 to have a significant impact on our consolidated results of operations and financial condition.
 
 
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In July 2013, the FASB issued Accounting Standards Update 2013-11, “Income Taxes (Topic 740)—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). The objective of ASU 2013-11 is to eliminate diversity in practice of presenting unrecognized tax benefits as a liability or presenting unrecognized tax benefits as a reduction of a deferred tax asset for a net operating loss or tax credit carryforward in certain circumstances by requiring that an unrecognized tax benefit be presented in the financial statements as a reduction to deferred tax assets excluding certain exceptions. ASU 2013-11 will be effective prospectively for the Company in its first quarter of 2014. We do not expect ASU 2013-11 to have a material effect on our financial statements.
 
We have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our audited consolidated financial statements.

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable.

Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
The audited financial statements of Joway Health Industries Group Inc. as of December 31, 2013 and 2012 are appended to this report beginning on page F-1.
 
Item 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
By letter dated December 11, 2013, the Company dismissed RBSM LLP as independent registered public accounting firm for the Company. The dismissal of RBSM LLP was approved by the Board of Directors of the Company.
 
RBSM LLP issued an audit report on the consolidated financial statements of the Company as at and for the year ended December 31, 2012, which did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with the audit of the consolidated financial statements of the Company as at and for the year ended December 31, 2012 and through date of dismissal, (i) there were no disagreements between the Company and RBSM LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of RBSM LLP, would have caused RBSM LLP to make reference to the subject matter of the disagreement in its report on the Company's financial statements for such year or during the interim period through the date of this Report, and (ii) there were no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K
 
Prior to filing a Form 8-K reporting such dismissal, the Company provided RBSM LLP with a copy of the disclosures in the Form 8-K and RBSM LLP furnished the Company with a letter addressed to the Securities and Exchange Commission stating that it agreed with the Company's statements in the Form 8-K.
 
A copy of the letter furnished by RBSM LLP was filed as an exhibit to that Form 8-K.
 
On December 17, 2013, the Company signed a letter to engage HHC as its registered independent public accountants for the fiscal year ending December 31, 2013. The decision to engage HHC was approved by the Board of Directors of the Company.
 
During the Company's two most recent fiscal years ended December 31, 2013 and 2012 and through the date of engagement, the Company did not consult with HHC on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company's financial statements, and HHC did not provide either a written report or oral advice to the Company that HHC concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K..
 
 
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Item 9A. CONTROLS AND PROCEDURES.
 
Disclosure Controls and Procedures
 
Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures as defined in SEC Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this Annual Report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management including our CEO and CFO, to allow timely decisions regarding required disclosures.
 
Based on their evaluation, our CEO and CFO have concluded that, as of December 31, 2013, our disclosure controls and procedures were not effective.
 
Management Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Our internal control over financial reporting was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published consolidated financial statements.  Internal control over financial reporting is promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Internal control over financial reporting, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Therefore, even effective internal control over financial reporting can only provide reasonable assurance with respect to the financial statement preparation and presentation.
 
Our management has conducted, with the participation of our CEO and CFO, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of December 31, 2013.  Management’s assessment of internal control over financial reporting was conducted using the criteria in Internal Control over Financial Reporting—Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on such evaluation, management identified deficiencies that were determined to be a material weakness.
 
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Because of the material weakness described below, management concluded that our internal controls over financial reporting were not effective as of December 31, 2013.
 
The specific material weakness identified by the Company’s management as of December 31, 2013 is described as follows:
 
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 consolidated financial statements, are inadequate, and determined to be a material weakness. Additionally, we currently do not have a functional audit committee or qualified independent directors working as our directors.
 
Since members of our audit committee resigned at September 2013, we do not have an audit committee at the present time. Our board of directors serves as our audit committee to analyze and evaluate our financial statements and understanding internal controls and procedures for financial reporting. Our board of directors has limited experience with U.S. GAAP. We recognize the importance of good corporate governance and intend to appoint an audit committee comprised entirely of independent directors, including at least one financial expert, in the near future.
 
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.
 
 
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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. From September 2011 to July 2012, we hired an internal audit manager who implemented an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatments identified in such report have been fully implemented and confirmed by our internal control department. Currently, we are still in the process of seeking for a proper candidate to perform as our internal audit manager.
 
Conclusion
 
Despite the material weakness and deficiencies reported above, our management believes that our consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
 
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report.
 
Changes in Internal Control Over Financial Reporting
 
There were no significant changes in our internal controls over financial reporting that occurred for the year ended December 31, 2013, that have materially affected, or are reasonably like to materially affect, our internal controls over financial reporting.
 
Item 9B. OTHER INFORMATION.
 
None.
 
PART III
 
Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
Our Board of Directors
 
The Board of Directors has only one director, Mr. Jinghe Zhang, who is also our Chief Executive Officer since 2010. We currently have neither independent director nor audit committee.
 
In connection with the change in control of the Company on September 28, 2010, Gust Kepler resigned as our sole director and officer and we appointed Jinghe Zhang as our new President, Chief Executive Officer and sole director, Yuan Huang as our new Chief Financial Officer, Secretary and Treasurer on September 28, 2010.
 
Here is a summary of the biographical information of our director: JINGHE ZHANG, age 48, is the founder of Tianjin Joway Shengshi. Mr. Zhang has extensive experience in business management and product marketing. He has served as Chairman of the Board and CEO for Joway Shengshi since its incorporation in 2007. Since January 2005 he has served as the Chairman and general manager for Shenyang Joway. From May 2003 to December 2004, he served as Chairman and general manager of Shenyang Dazhou Healthcare Products Co., Ltd. He headed the marketing department of Tianjin Tianshi Biological Engineering Co., Ltd. from July 2000 to May 2003. From July 1988 to July 2000, he was employed as sales manager by Tianjin Hardware Procurement & Supply Station. Mr. Zhang received his bachelor degree in economics from Tianjin University of Finance and Economics in July 1988.
 
Involvement in Certain Legal Proceedings
 
To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:
 
 
 
Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
 
 
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Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
 
 
 
Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
 
 
 
Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
 
 
 
Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
 
Audit Committee
 
We do not presently have an audit committee. Our Board of Directors currently acts as our audit committee.
 
Compensation Committee
 
We do not presently have a compensation committee. Our Board of Directors currently acts as our compensation committee.
 
Nominating Committee
 
We do not presently have a nominating committee. Our Board of Directors currently acts as our nominating committee.
 
Code of Ethics
 
On May 11, 2012, our Board of Directors approved a renewed Code of Ethics which is applicable to our officers and senior executives, which include our Chief Financial Officer, Treasurer and Chief Accounting Officer. This Code embodies our commitment to conduct business in accordance with the highest ethical standards and applicable laws, rules and regulations. The Company has posted the text of the Code of Ethics on its Internet Website www.jowayhealth.com. We will provide any person a copy of our Code of Ethics, without charge, upon written request to the Company’s Secretary. Requests should be addressed in writing to Huang Yuan (No. 19, Baowang Road, Baodi Economic Development Zone, Tianjin, PRC 301800)..
 
Our Executive Officers and Other Significant Employees
 
Set forth below is information regarding our executive and certain key officers, including officers of our operating subsidiaries.
 
Name
  
Age
  
Position
Jinghe Zhang
  
48
  
President and Chief Executive Officer and Chairman of the Board
Yuan Huang
  
42
  
Chief Financial Officer, Joway Shengshi
Yanli Feng
  
41
  
General Manager, Shengtang Trading
 
JINGHE ZHANG, age 48, is the founder of Joway Shengshi. Mr. Zhang has extensive experience in business management and product marketing. He has served as Chairman of the Board and CEO for Joway Shengshi since its incorporation in 2007. Since January 2005 he has served as the Chairman and general manager for Shenyang Joway. From May 2003 to December 2004, he served as Chairman and general manager of Shenyang Dazhou Healthcare Products Co., Ltd. He headed the marketing department of Tianjin Tianshi Biological Engineering Co., Ltd. from July 2000 to May 2003. From July 1988 to July 2000, he was employed as sales manager by Tianjin Hardware Procurement & Supply Station. Mr. Zhang received his bachelor degree in economics from Tianjin University of Finance and Economics in July 1988.
 
YUAN HUANG, age 42, has served as the Chief Financial Officer of Joway Shengshi since September 2009. Prior to his appointment as Joway Shengshi’s Chief Financial Officer, he was a Senior Financial Manager of Tianjin Tianshi Group Co., Ltd. from September 2005 to August 2009. From November 2003 to July 2005, he served as a financial manager of Herbie (Tianjin) Electronics Co., Ltd. from. From December 1998 to November 2003, he served as Section Chief of the Budget Department of Bridgestone Tires (Tianjin) Co., Ltd. Mr. Huang received his master degree and bachelor degree in accounting from Tianjin University of Finance and Economics in July 2009 and July 1993, respectively.
 
YANLI FENG, age 41, has served as the General Manager of Shengtang Trading since 2009. From 2005 to 2009, Ms. Feng served as the Inventory Purchasing Manager for Joway Shengshi. From 2003 to 2004, Ms. Feng served as a sales director for Guangdong Province Zhongshan Jingmei Chemical Inc. From 1994 to 2002, Ms. Feng served as a financial director for Jilin Petroleum Chemical Inc. Ms. Feng graduated from Changchun City Taxation College.
 
 
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Item 11.  EXECUTIVE COMPENSATION.

Executive Officer Compensation
 
The following is a summary of the compensation we paid to our Chief Executive Officer for the fiscal years ended December 31, 2013 and 2012. This includes all compensation, including any compensation paid to our Chief Executive Officer by any of our subsidiaries. No executive officer received compensation in excess of $100,000 in 2013 or 2012.
 
Summary Compensation Table

Name and principal position
 
Year
 
Salary
($)
   
Bonus
($)
   
Stock awards
($)