0001213900-14-005807.txt : 20140814 0001213900-14-005807.hdr.sgml : 20140814 20140814110134 ACCESSION NUMBER: 0001213900-14-005807 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20140630 FILED AS OF DATE: 20140814 DATE AS OF CHANGE: 20140814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-108715 FILM NUMBER: 141040413 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-Q 1 f10q0614_jowayhealth.htm QUARTERLY REPORT f10q0614_jowayhealth.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
For the transition period from                    to                   
 
Commission File No. 333-108715
 
Joway Health Industries Group Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Nevada
 
98-0221494
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
   
No. 2, Baowang Road, Baodi Economic Development
Zone, Tianjin, PRC 301800
 
86-22-22533666
(Address of Principal Executive Offices)
 
(Issuer’s Telephone Number)
 
 
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
¨
Accelerated filer
¨
         
 
Non-accelerated filer
¨  
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
The number of shares outstanding of the Issuer’s Common Stock as of August 14, 2014 was 20,054,000 shares.
 


 
 

 
 
 
 
2

 
 
 
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements included in this Form 10-Q reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
 
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
 
3

 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
             
   
June 30,
   
December 31,
 
   
2014
   
2013
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
             
CURRENT ASSETS:
           
  Cash
  $ 456,055     $ 477,642  
Short-term investment
    81,199       -  
Accounts receivable
    1,476       1,486  
Other receivables
    28,694       37,333  
Inventories
    1,133,378       1,197,640  
Advances to suppliers
    49,423       180,968  
Prepaid taxes
    95,661       109,774  
Prepaid expense
    2,707       6,924  
Total current assets
    1,848,593       2,011,767  
                 
PROPERTY, PLANT AND EQUIPMENT, net
    5,998,399       6,258,336  
                 
OTHER ASSETS:
               
Long-term investment
    -       245,339  
Intangible assets, net
    636,320       653,321  
Total other assets
    636,320       898,660  
                 
Total assets
  $ 8,483,312     $ 9,168,763  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 53,412     $ 76,267  
Advances from customers
    210,574       18,178  
Other payables
    36,336       58,984  
Due to related parties
    49,637       71,168  
Total current liabilities
    349,959       224,597  
                 
COMMITMENTS
    -       -  
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock - par value $0.001; 1,000,000 shares authorized; no shares issued and outstanding
    -       -  
Common stock - par value $0.001; 200,000,000 shares authorized; 20,054,000 shares issued and outstanding at June 30, 2014 and December 31, 2013
    20,054       20,054  
Additional paid-in-capital
    7,361,665       7,361,665  
Statutory reserves
    354,052       354,052  
Retained earnings
    (830,909 )     (82,531 )
Accumulated other comprehensive income
    1,228,491       1,290,926  
Total stockholders' equity
    8,133,353       8,944,166  
Total liabilities and stockholders' equity
  $ 8,483,312     $ 9,168,763  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
4

 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
                         
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
REVENUES
  $ 316,880     $ 306,712     $ 500,417     $ 484,606  
                                 
COST OF REVENUES
    130,200       125,761       221,667       181,016  
                                 
GROSS PROFIT
    186,680       180,951       278,750       303,590  
                                 
    Selling expenses
    113,955       159,540       224,388       246,977  
    General and administrative expenses
    335,954       535,228       799,644       1,058,898  
OPERATING EXPENSES
    449,909       694,768       1,024,032       1,305,875  
                                 
LOSS FROM OPERATIONS
    (263,229 )     (513,817 )     (745,282 )     (1,002,285 )
                                 
    Interest income
    140       235       273       486  
    Other income
    30       2,593       464       7,649  
    Other expenses
    (636 )     (144,653 )     (2,134 )     (146,422 )
OTHER EXPENSE, NET
    (466 )     (141,825 )     (1,397 )     (138,287 )
                                 
LOSS BEFORE INCOME TAXES
    (263,695 )     (655,642 )     (746,679 )     (1,140,572 )
                                 
INCOME TAXES
    1,488       78,870       1,699       80,248  
                                 
NET LOSS
    (265,183 )     (734,512 )     (748,378 )     (1,220,820 )
                                 
OTHER COMPREHENSIVE INCOME:
                               
     Foreign currency translation adjustment
    7,859       153,886       (62,435 )     213,451  
                                 
COMPREHENSIVE LOSS
  $ (257,324 )   $ (580,626 )   $ (810,813 )   $ (1,007,369 )
                                 
NET LOSS PER COMMON SHARE, BASIC AND DILUTED
  $ (0.01 )   $ (0.04 )   $ (0.04 )   $ (0.06 )
                                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
    20,054,000       20,051,231       20,054,000       20,043,657  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
5

 
 
 
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
             
   
Six months ended
June 30,
 
   
2014
   
2013
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (748,378 )   $ (1,220,820 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation
    235,455       278,158  
Amortization
    11,596       13,817  
Stock-based compensation
            540  
Changes in operating assets and liabilities:
               
Accounts receivable, trade
    -       11,594  
Other receivables
    8,988       (34,499 )
Inventories
    65,325       (24,372 )
Advances to suppliers
    152,657       25,558  
Prepaid expense
    4,217       31,898  
Accounts payable
    (11,487 )     (15,048 )
Advances from customers
    192,396       (14,328 )
Other payable
    340       (11,237 )
Salary and welfare payable
    (22,988 )     (1,909 )
Taxes payable
    14,113       (234,404 )
Net cash used in operating activities
    (97,766 )     (1,195,052 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property plant and equipment
    (1,453 )     -  
Redemption of Long-term Investment
    245,339       -  
Purchase and redemption of short-Term Investment
    (81,199 )     1,266,604  
Net cash provided by investing activities
    162,687       1,266,604  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of due to related parties
    (21,531 )     (16,600 )
Net cash used in financing activities
    (21,531 )     (16,600 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    (64,977 )     34,493  
                 
NET INCREASE (DECREASE) IN CASH
    (21,587 )     89,445  
                 
CASH, beginning of period
    477,642       522,145  
                 
CASH, end of period
  $ 456,055     $ 611,590  
                 
SUPPLEMENTAL DISCLOSURES:
               
                 
Income taxes paid
  $ 2,897     $ 171,696  
Interest paid
  $ -     $ -  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
6

 
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 – ORGANIZATION
 
The unaudited condensed consolidated financial statements include the financial statements of Joway Health Industries Group Inc. (referred to herein as “Joway Health”), its subsidiaries, and variable interest entities (“VIEs”) where Joway Health is deemed the primary beneficiary. Joway Health, its subsidiaries and VIEs are collectively referred to herein as the “Company”, “we” and “us”.
 
Joway Health (formerly G2 Ventures, Inc.) was originally incorporated under the laws of the State of Texas on March 21, 2003. On September 21, 2010, Joway Health entered into a Share Exchange Agreement (the “Share Exchange”) with the sole stockholder of Dynamic Elite International Limited. As a result of the Share Exchange, Dynamic Elite became a wholly-owned subsidiary of Joway Health and the stockholders of Dynamic Elite acquired approximately 76.08% of the issued and outstanding stock of Joway Health. The share exchange transaction resulted in the shareholders of Dynamic Elite acquiring a majority voting interest in Joway Health. Generally accepted accounting principles in the United States of America require that the company whose shareholders retain the majority interest in the combined business be treated as the acquirer for accounting purposes. The reverse acquisition process utilizes the capital structure of Joway Health and the assets and liabilities of Dynamic Elite recorded at historical cost. On December 22, 2010, Joway Health changed its jurisdiction of incorporation from the State of Texas to the State of Nevada.
 
Dynamic Elite International Limited (referred to herein as “Dynamic Elite”) was incorporated under the laws of the British Virgin Islands on June 2, 2010 as a limited liability company (a BVI company). Dynamic Elite engages in manufacturing and distributing tourmaline products in China. Its wholly owned subsidiary, Tianjin Junhe Management Consulting Co., Ltd. was incorporated on September 15, 2010 in Tianjin, People’s Republic of China (“PRC”). Other than the equity interest in Junhe Consulting, Dynamic Elite does not own any assets or conduct any operations.
 
Tianjin Junhe Management Consulting Co., Ltd. (referred to herein as “Junhe Consulting”) conducts its business through Tianjin Joway Shengshi Group Co., Ltd. that is consolidated as a variable interest entity.
 
Tianjin Joway Shengshi Group Co., Ltd. (referred to herein as “Joway Shengshi”) was incorporated in PRC on May 17, 2007. Joway Shengshi is currently owned 99% by Jinghe Zhang, the Company’s current CEO and President and 1% by Song Baogang. Joway Shengshi engages in manufacturing and distributing tourmaline products in China. Shenyang Joway Electronic Technology Co., Ltd., Tianjin Joway Decoration Engineering Co., Ltd. and Tianjin Oriental Shengtang Trading Import & Export Trading Co., Ltd are subsidiaries of Joway Shengshi.
 
Shenyang Joway Electronic Technology Co., Ltd. (referred to herein as “Joway Technology”) was originally named Liaoning Joway Technology Engineering Co., Ltd. which was incorporated on March 28, 2007 in PRC. The name was changed on June 22, 2011. It engages in the distribution of Tourmaline Activated Water Machines and Tourmaline Wellness Houses. Prior to July 25, 2010, Joway Shengshi owned 90.91% of Joway Technology. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, another stockholder of Joway Technology on July 25, 2010 to acquire the remaining 9.09% of the share of Joway Technology. As a result of the share acquisition, Joway Technology became a wholly-owned subsidiary of Joway Shengshi.
 
Tianjin Joway Decoration Engineering Co., Ltd. (referred to herein as “Joway Decoration”) was incorporated on April 22, 2009 in PRC. It engages in the distribution of Tourmaline Activated Water Machines, Tourmaline Wellness House for family use and Tourmaline Wellness House materials. Prior to July 9, 2010, Joway Shengshi owned 90% of Joway Decoration. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, another stockholder of Joway Decoration on July 9, 2010 to acquire the remaining 10% of the shares of Joway Decoration. As a result of the share acquisition, Joway Decoration became a wholly-owned subsidiary of Joway Shengshi.  Jingyun Chen is currently the General Manager of Joway Decoration.
 
 
7

 
 
Tianjin Oriental Shengtang Import & Export Trading Co., Ltd (referred to herein as “Shengtang Trading”) was incorporated on September 18, 2009 in the PRC. It engages in purchasing raw materials which it sells to other companies of the group. Prior to July 28, 2010, Joway Shengshi owned 95% of Shengtang Trading. Joway Shengshi entered into a share acquisition agreement with Wang Aiying, another stockholder of Shengtang Trading on July 28, 2010 to acquire the remaining 5% of the shares of Shengtang Trading. As a result of the share acquisition, Shengtang Trading became a wholly-owned subsidiary of Joway Shengshi.
 
The following table lists the Company and its subsidiaries:
 
Name
 
Domicile and
Date of
Incorporation
 
Paid in Capital
 
Percentage of
Effective
Ownership
 
Principal
Activities
Joway Health Industries
Group Inc.
 
March 21, 2003,
Nevada
 
USD 20,054
 
86.8% owned by
Crystal Globe Limited
13.2% owned by other
institutional and
individual investors
 
Investment
Holding
Dynamic Elite
International Limited
 
June 2, 2010,
British Virgin Islands
 
USD 10,000
 
100% owned by
Joway Health Industries
Group Inc.
 
Investment
Holding
Tianjin Junhe
Management Consulting Co., Ltd.
 
September 15, 2010, PRC
 
USD 20,000
 
100% owned by
Dynamic Elite International Limited
 
Advisory
Tianjin Joway Shengshi
Group Co., Ltd.
 
May 17, 2007, PRC
 
USD 7,216,140.72
 
99% owned by
Jinghe Zhang,  and 1% owned  by
Baogang Song
 
Production and
distribution of Healthcare
Knit Goods and Daily
Healthcare and Personal
Care products
Shenyang Joway Electronic
Technology Co., Ltd.
 
March 28, 2007, PRC
 
USD 142,072.97
 
100% owned by
Tianjin Joway Shengshi
Group Co., Ltd
 
Distribution of
Tourmaline Activated
Water Machine and
construction of
Tourmaline Wellness House
Tianjin Joway Decoration
Engineering Co., Ltd.
 
April 22, 2009, PRC
 
USD 292,367.74
 
100% owned by
Tianjin Joway Shengshi
Group Co., Ltd
 
Distribution of
Wellness House for
family use and
Activated Water Machine and
construction of Tourmaline
Wellness House
Tianjin Oriental
Shengtang Import & Export
Trading Co., Ltd.
 
September 18, 2009, PRC
 
USD 292,463.75
 
100% owned by
Tianjin Joway Shengshi
Group Co., Ltd
 
Distribution of tourmaline products
 
 
 
8

 
 
On September 16, 2010, prior to the share exchange, Junhe Consulting entered into a series of contractual agreements (the “Contractual Agreements”) with Joway Shengshi and Joway Shengshi’s owners. The following is a brief description of the Contractual Agreements entered into between Junhe Consulting and Joway Shengshi or Joway Shengshi’s owners
 
1. Consulting Services Agreement. Pursuant to the consulting services agreement between Junhe Consulting and Joway Shengshi, Junhe Consulting has the right to advise, consult, manage and operate Joway Shengshi, and collect and own all of the net profits of the Operating Entities.

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

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

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

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

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

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

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Operating results for the six month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s form 10-K for the fiscal year ended December 31, 2013 which was filed on March 31, 2014.
 
Use of Estimates
 
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. Actual results could differ from those estimates.
 
 
9

 
 
Basis of Consolidation
 
The accompanying consolidated financial statements include the Company and its wholly owned subsidiaries and controlled VIEs. All significant inter-company accounts and transactions have been eliminated in the consolidation.
 
Pursuant to Accounting Standards Codification Topic 810 “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.
 
Based on the various Contractual Agreements, the Company is able to exercise control over the VIEs, and to obtain the full economic benefits. The terms of the exclusive option agreement are currently exercisable and legally enforceable under PRC laws and regulations. The minimum amount of consideration permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for the Company to exercise its rights under the exclusive option agreement. A simple majority vote of the Company’s board of directors is required to pass a resolution to exercise its rights under the exclusive option agreement, for which consent of the shareholder of VIEs is not required. Therefore, this gives the Company the power to direct the activities that most significantly impact VIEs’ economic performance. The Company’s ability to exercise effective control, together with the consulting service agreements and the equity pledge agreements, give the Company the rights to receive substantially all of the economic benefits from VIEs in consideration for the services provided by its wholly owned subsidiaries in China. Accordingly, as the primary beneficiary of VIEs and in accordance with U.S. GAAP, Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading, as VIEs of Junhe Consulting, has been consolidated in the Company’s financial statements. Sales from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading are included in the Company’s total sales, their incomes or losses from operations are consolidated with the Company’s, and the Company’s net income or loss includes net income or loss from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading.
 
Foreign Currency Translation
 
The accompanying consolidated financial statements are presented in USD. The functional currency of the Company is RMB. The consolidated financial statements are translated into United States dollars from RMB at period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Equity accounts are translated at their historical exchange rates when the equity transactions occurred. The resulting transaction adjustments are recorded as a component of stockholders’ equity. Gains and losses from foreign currency transactions are included in net income.
 
   
For the six months ended
June 30,
   
For the year ended
December 31,
 
   
2014
   
2013
   
2013
 
Period ended RMB: USD Exchange rate
    6.1577       6.1882       6.114  
Average RMB: USD Exchange rate
    6.14411       6.24794       6.19817  

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

 
 
10

 
 
Foreign currency translation adjustments have been reported as comprehensive income in the consolidated financial statements and totaled $7,859 and $153,886 for the three months ended June 30, 2014 and 2013, respectively, and ($62,435) and $213,451 for the six months ended June 30, 2014 and 2013, respectively.
 
Other Comprehensive Income
 
Other comprehensive income is defined as the change in equity during the period from transactions and other events, excluding the changes resulting from investments by owners and distributions to owners, and is not included in the computation of income tax expense or benefit. Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.
 
Concentrations of Credit Risk
 
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
 
Fair Value of Financial Instruments
 
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
 
Level 1—defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
 
 
Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
 
 
Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
The carrying amounts reported in the balance sheets for cash, accounts receivable, other receivable, accounts payable, other payable, and amounts due from related parties generally approximate their fair market values based on the short-term maturity of these instruments. ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
 
Cash and Cash Equivalents
 
For financial reporting purposes, the Company considers all highly liquid financial instruments with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at any point during the period of the financial statements presented. Balances at financial institutions or state-owned banks within the PRC are not covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
 
 
11

 
 
Accounts Receivable
 
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. On a periodic basis, the Company reviews the composition of the accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these allowances. Accounts are written off after exhaustive efforts at collection. As of June 30, 2014 and December 31, 2013, based on a review of its outstanding balances, the Company allowance for doubtful accounts had a zero balance, respectively.
 
Inventories
 
Inventories are stated at the lower of cost, as determined by the specific identification method on contract level (for each individual contract, inventories cost flow are determined by weighted-average method), or the net realizable value, which is determined on selling prices less any further costs expected to be incurred for completion and disposal. The Company regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether a valuation allowance is required. As of June 30, 2014 and December 31, 2013, the Company recorded $148,756 and $149,819 for inventory valuation allowance, respectively.
 
Advances to Suppliers
 
Advances to suppliers represent the cash paid in advance for inventory items or construction in progress. The advance payments are meant to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $49,423 and $180,968 as of June 30, 2014 and December 31, 2013, respectively.
 
Long-term Investments
 
Investments in which the Company has a 20% to 50% interest are accounted for by the equity method. Under the equity method the carrying value of the investment is adjusted for the Company’s proportionate share of the investee’s income or loss.
 
Investments in which the Company has less than a 20% interest are accounted for by the cost method. Under the cost method, investments are carried at cost and income is recorded when dividends are received from those investments.
 
Property, Plant, and Equipment
 
Property, plant and equipment are stated at cost less accumulated depreciation, and include expenditures that substantially increase the useful lives of existing assets.
 
Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:
 
Building
20 years
Operating Equipment
10 years
Office furniture and equipment
3 or 5 years
Vehicles
10 years
 
 
12

 
 
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts, and any gain or loss is included in the consolidated statements of operations. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Significant renewals and betterment to buildings and equipment are capitalized. Leasehold improvements are depreciated over the lesser of the useful life or the life of the lease.
 
Intangible Assets
 
Intangible assets mainly consist of land use rights. All land located in the PRC is owned by the government and cannot be sold to any individual or company. The land use rights granted to the Company are being amortized using the straight-line method over the lease term of 50 years. Other intangible assets are software programs that are amortized over their estimated useful life of 10 years.
 
Impairment of Long-lived Assets
 
Long-lived assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in FASB ASC 360. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. The Company did not record any impairment loss for the six months ended June 30, 2014 and 2013.
 
Revenue Recognition
 
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured.

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

For Tourmaline Wellness House sales, the Company recognizes revenue under the completed contract method. Customers contact the Company with requests to construct a Wellness House. The Company and the customer enter into a contract, at which time the customer pays a deposit of at least one-half of the sales price. A contract is considered completed when all significant costs have been incurred and the project has been accepted by the customer. The contracts have a place for the customer to sign indicating their acceptance of the completed Wellness House. At this time the customer will also pay any remaining balance on the contract. The Company recognizes the full contract revenue at this point. Contract costs consist primarily of materials and labor costs. The construction period of a Wellness House generally does not exceed five days.
 
Shipping Costs
 
Shipping costs are included in selling expenses and totaled $4,410 and $3,146 for the three months ended June 30, 2014 and 2013, respectively, and $8,584 and $7,715 for the six months ended June 30, 2014 and 2013, respectively.
 
Income Taxes
 
The Company is governed by the Income Tax Law and associated legislations of the PRC. The Company accounts for income taxes in accordance with FASB ASC 740 “Income Taxes”, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets is dependent upon future earnings, if any, of which the timing and amount are uncertain.
 
 
13

 
 
According to ASC 740, the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition.
 
Basic and Diluted Earnings per Share
 
The Company reports earnings per share in accordance with FASB ASC 260 “Earnings per share”. The Company’s basic earnings per share are computed using the weighted average number of shares outstanding for the periods presented. Diluted earnings per share are computed based on the assumption that any dilutive options or warrants were converted or exercised. Dilution is computed by applying the treasury stock method.  Under this method, the Company’s outstanding stock warrants are assumed to be exercised, and funds thus obtained were assumed to be used to purchase common stock at the average market price during the period. There were no dilutive instruments outstanding during the six months periods ended June 30, 2014 and 2013.
 
Segment Information
 
The Company follows FASB ASC 280-Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance.
 
For the six months ended June 30, 2014 and the year ended December 31, 2013, management has determined that the Company is operating in three reportable business segments, (1) Healthcare Knit Goods Series, (2) Daily Healthcare and Personal Care Series, and (3) Wellness House and Activated Water Machine Series. The Company's reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations.
 
Recently Issued Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-9, “Revenue from Contracts with Customers” (“ASU 2014-9”). ASU 2014-9 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:
 
Step 1: Identify the contract(s) with a customer.
 
Step 2: Identify the performance obligations in the contract.
 
Step 3: Determine the transaction price.
 
Step 4: Allocate the transaction price to the performance obligations in the contract.
 
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
 
The updated guidance related to revenue recognition which affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for us starting on January 1, 2017. We are currently evaluating the impact this guidance will have on our combined financial position, results of operations and cash flows.

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard that raises the threshold for disposals to qualify as discontinued operations and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The standard revised the definition of a discontinued operation to cover only asset disposals that are considered to be a strategic shift with a major impact on an entity's operations and finances, such as the disposal of a major geographic area or a significant line of business. Application of the standard, which is to be applied prospectively, is required for fiscal years beginning on or after December 15, 2014, and for interim periods within that year. The Company currently plans to adopt the standard in January 2015.
 
 
14

 
 
NOTE 3 – ACCOUNTS RECEIVABLE
 
Accounts receivable consisted of the following:
 
   
June 30,
   
December 31,
 
   
2014
   
2013
 
Accounts receivable
  $ 1,476     $ 1,486  
Less: Allowance for bad debt
    -       -  
    $ 1,476     $ 1,486  
 
As of the periods presented, the Company has no allowance for bad debts, because the Management, based on their analysis, considers all the accounts receivable to be collectible.
 
NOTE 4 – INVENTORIES
 
Inventories consisted of the following:
 
   
June 30,
   
December 31,
 
   
2014
   
2013
 
Raw materials
  $ 263,782     $ 326,245  
Packages
    5,459       5,878  
Finished goods
    972,099       974,382  
Low value consumables
    40,794       40,954  
Total
    1,282,134       1,347,459  
Less: impairment loss
    (148,756 )     (149,819 )
Inventory, net
  $ 1,133,378     $ 1,197,640  
 
Low value consumables represent low priced and easily worn articles and are amortized on equal-split amortization method. Pursuant to this method, half value of the low value consumable should be amortized once used and the remaining half value should be amortized when disposed of.
 
As of June 30, 2014 and December 31, 2013, the Company recognized $148,756 and $149,819, respectively, as a reserve for impairment loss from inventory.
 
 
15

 
 
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consisted of the following:
 
   
June 30,
   
December 31,
 
   
2014
   
2013
 
Building
  $ 6,428,809     $ 6,442,048  
Operating Equipment
    387,700       390,119  
Office furniture and equipment
    342,890       343,809  
Vehicles
    1,105,951       1,113,856  
Total
    8,265,350       8,289,832  
Less: accumulated depreciation
    (2,266,951 )     (2,031,496 )
Property, plant and equipment, net
  $ 5,998,399     $ 6,258,336  
 
Depreciation expense for the three months ended June 30, 2014 and 2013 amounted to $124,664 and $147,758, respectively, and for the six months ended June 30, 2014 and 2013 amounted to $235,455 and $278,158, respectively.
 
NOTE 6 – INTANGIBLE ASSETS
 
Intangible assets consisted of the following:
 
   
June 30,
   
December 31,
 
   
2014
   
2013
 
Land use rights
  $ 670,390     $ 675,182  
Other intangible assets
    85,773       86,386  
Total
    756,163       761,568  
Less: accumulated amortization
    (119,843 )     (108,247 )
Intangible assets, net
  $ 636,320     $ 653,321  
 
Amortization expense of intangible assets for the three months ended June 30, 2014 and 2013 was $6,225 and $7,391, respectively, and for the six months ended June 30, 2014 and 2013 amounted to $11,596 and $13,817, respectively.
 
The estimated amortization expense for the next five years is as follows:
 
Estimated amortization expense for
     
the year ending December 31,
 
Amount
 
2014
  $ 24,581  
2015
  $ 24,581  
2016
  $ 24,581  
2017
  $ 24,581  
2018
  $ 24,581  
Thereafter
  $ 530,416  
 
 
16

 
 
NOTE 7 – RELATED PARTY TRANSACTIONS
 
Payables due to related parties consist of the following:
 
   
June 30,
   
December 31,
 
   
2014
   
2013
 
Shenyang Joway Industrial Development Co., Ltd.
  $ 12,660     $ 30,915  
Jinghe Zhang
    36,977       40,253  
Total
  $ 49,637     $ 71,168  
 
Transactions with Shenyang Joway

Shenyang Joway Industrial Development Co., Ltd. (“Shenyang Joway”) was formed in 2005 in Shenyang, China by Mr. Jinghe Zhang and three other individuals. Mr. Zhang holds more than 50% of the equity in Shenyang Joway. Shenyang Joway was in the business of marketing and distributing clothing and related products to other companies.  In 2009, Mr. Zhang decided to shut down the operations of Shenyang Joway in order to focus his attention on Joway Shengshi’s business.  Shenyang Joway has ceased operations, although it still exists as a legal entity, and Joway Shengshi was able to find new suppliers with no material adverse impact to the Company.
 
 
On December 1, 2009, the Company, through its subsidiary Joway Shengshi, entered into a royalty-free license agreement with Shenyang Joway. Pursuant to the license agreement, the Company is authorized to use the trademark “Xi” for a term of nine years.
 
 
On May 7, 2007, the Company’s subsidiary Joway Shengshi entered into an agreement with Shenyang Joway pursuant to which Joway Shengshi and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital.  On May 10, 2007, the Company’s subsidiary Joway Technology and Shenyang Joway entered into an agreement pursuant to which Joway Technology and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital.  Through December 31, 2008, Joway Technology advanced $58,568 to Shenyang Joway, which was paid off by Shenyang Joway to Joway Technology in 2009. Through December 31, 2010, Shenyang Joway advanced an aggregate of $791,701 to Joway Shengshi and Joway Technology of which $779,041 has been repaid. For the six months ended June 30, 2014 and 2013, the Company repaid $18,255 and $15,041 of these advances, respectively. As of June 30, 2014, the total unpaid principal balance due Shenyang Joway for advances was $12,660. Shenyang Joway ceased operations at the end of 2009.
 
Transactions with Jinghe Zhang

 
On December 1, 2009, the Company, through its subsidiary Joway Shengshi, entered into a royalty-free license agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the license agreement, we are authorized to use the trademark “Joway” for a term of nine years and five patents from December 1, 2009 till the expiration dates of the patents.
 
 
On May 10, 2007, Joway Shengshi entered into a cash advance agreement with Jinghe Zhang, the Company’s President, Chief Executive Officer and director. Pursuant to the agreement, Jinghe Zhang agreed to advance operating capital to Joway Shengshi. The advances are interest free, unsecured, and have no specified repayment terms. The agreement is valid throughout Joway Shengshi’s term of operation. During the period beginning May 17, 2007 (inception of Joway Shengshi) through December 31, 2009, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang of which $4,600,420 has been repaid. For the six months ended June 30, 2014 and 2013, the Company repaid $3,276 and $1,559 of these advances, respectively. As of June 30, 2014, the total unpaid principal balance due Jinghe Zhang for advances was $36,977.
 
The amounts owed to related parties are non-interest bearing and have no specified repayment terms.
 
 
17

 
 
NOTE 8 – INCOME TAXES
 
The Company operations in the People’s Republic of China are subject to the Income Tax Law of the People’s Republic of China. Pursuant to the PRC Income Tax Laws, the Company is subject to the Enterprise Income Tax (“EIT”) which is generally a statutory rate of 25% beginning January 2008, on income as reported in its statutory financial statements after appropriate tax adjustments.

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

   
For the six months ended
June 30,
 
   
2014
   
2013
 
Tax computed at China statutory rates
    25 %     25 %
Tax adjustment from China tax authority for 2012 income tax (1)
    0 %     (7 %)
Effect of losses
    (25 %)     (25 %)
Effective rate
    0 %     (7 %)
 
(1) The Company’s 2012 Corporate Income Tax Filing in China was reviewed by the PRC tax authority and reduced the Company’s income tax deduction for the 2012 taxable year. As a result, the Company paid additional income tax of $70,224.
 
NOTE 9 – STATUTORY RESERVES
 
Pursuant to the laws and regulations of the PRC, annual income of the Company’s subsidiaries is required to be partly allocated to the statutory reserves funds after the payment of the PRC income taxes. The allocation to the statutory reserves funds should be at least 10% of income after tax until the reserves reaches 50% of the entities’ registered capital or members’ equity. The reserve funds are not transferable to the Company in the form of cash dividends, loans or advances. Thus the reserve funds are not available for distribution except in liquidation. As of June 30, 2014, the Company had allocated $354,052 to statutory reserves.
 
 
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NOTE 10 –  SEGMENTS
 
In 2014 and 2013, the Company operated in three reportable business segments: (1) Healthcare Knit Goods Series, (2) Daily Healthcare and Personal Care Series and (3) Wellness House and Activated Water Machine Series. The Company's reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations.  Information with respect to these reportable business segments is as follows:

For the three months ended June 30, 2014
 
   
Sales
   
COGS
   
Gross profit
   
Loss from
operations
   
Depreciation and amortization
   
Assets
 
Healthcare Knit Goods Series
  $ 84,130     $ 33,611     $ 50,519     $ (53,838 )   $ 34,750     $ 384,160  
Daily Healthcare and Personal Care Series
    91,896       41,177       50,719       (73,292 )     37,958       318,915  
Wellness House and Activated
Water Machine Series
    140,854       55,412       85,442       (136,099 )     58,181       433,961  
Segment Totals
  $ 316,880     $ 130,200     $ 186,680       (263,229 )   $ 130,889       1,137,036  
Other Expense, net
                            (466 )                
Income Tax
                            1,488                  
Unallocated Assets
                                            7,346,276  
Net Loss
                          $ (265,183 )                
Total Assets
                                          $ 8,483,312  

For the three months ended June 30, 2013
 
   
Sales
   
COGS
   
Gross
profit
   
Loss from
operations
   
Depreciation and amortization
   
Assets
 
Healthcare Knit Goods Series
  $ 65,704     $ 17,831     $ 47,873     $ (103,862 )   $ 33,236     $ 555,287  
Daily Healthcare and Personal Care Series
    112,399       40,198       72,201       (183,689 )     56,857       287,026  
Wellness House and Activated
Water Machine Series
    128,609       67,732       60,877       (226,266 )     65,056       632,156  
Segment Totals
  $ 306,712     $ 125,761     $ 180,951       (513,817 )   $ 155,149       1,474,469  
Other Expense, net
                            (141,825 )                
Income Tax
                            78,870                  
Unallocated Assets
                                            8,495,850  
Net Loss
                          $ (734,512 )                
Total Assets
                                          $ 9,970,319  
 
 
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For the six months ended June 30, 2014
 
   
Sales
   
COGS
   
Gross
profit
   
Loss from
operations
   
Depreciation and amortization
   
Assets
 
Healthcare Knit Goods Series
  $ 146,808     $ 70,473     $ 76,335     $ (224,085 )   $ 72,478     $ 384,160  
Daily Healthcare and Personal Care Series
    151,093       70,270       80,823       (228,364 )     74,593       318,915  
Wellness House and Activated
Water Machine Series
    202,516       80,924       121,592       (292,833 )     99,980       433,961  
Segment Totals
  $ 500,417     $ 221,667     $ 278,750       (745,282 )   $ 247,051       1,137,036  
Other Expense, net
                            (1,397 )                
Income Tax
                            1,699                  
Unallocated Assets
                                            7,346,276  
Net Loss
                          $ (748,378 )                
Total Assets
                                          $ 8,483,312  

For the six months ended June 30, 2013
 
   
Sales
   
COGS
   
Gross
profit
   
Loss from
operations
   
Depreciation and amortization
   
Assets
 
Healthcare Knit Goods Series
  $ 99,892     $ 28,847     $ 71,045     $ (198,133 )   $ 60,185     $ 555,287  
Daily Healthcare and Personal Care Series
    175,863       57,997       117,866       (356,039 )     105,957       287,026  
Wellness House and Activated
Water Machine Series
    208,851       94,172       114,679       (448,113 )     125,833       632,156  
Segment Totals
  $ 484,606     $ 181,016     $ 303,590       (1,002,285 )   $ 291,975       1,474,469  
Other Expense, net
                            (138,287 )                
Income Tax
                            80,248                  
Unallocated Assets
                                            8,495,850  
Net Loss
                          $ (1,220,820 )                
Total Assets
                                          $ 9,970,319  
 
 
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NOTE 11 - FRANCHISE REVENUES
 
The Company enters into franchising agreements to develop retail outlets for the Company's products. The agreements provide that franchisees will sell Company products exclusively at a predetermined retail price. In exchange the Company provides them with geographic exclusivity, discounted products, training and support. The agreements also require franchisees to adhere to certain standards of product merchandising, promotion and presentment. The agreements also prohibit franchisees from selling competitor’s products. The agreements do not require any initial franchise fees from the franchisees, nor do they require the franchisees to pay continuing royalties. The agreements do not require the franchisees to purchase any minimum levels of product, but do require that they make at least one purchase during each year. The Company does not act to manage the franchisees’ levels of product. Franchisees hold periodic conferences, assisted by the Company’s marketing department, to promote product awareness and the introduction of new products. The franchising agreements are generally for terms of three years and are renewable at the mutual agreement of both parties. The franchising agreements are cancelable at the Company’s discretion if franchisees violate the terms of the agreements.
 
The following is a breakdown of revenue between franchise and non-franchise customers:
 
   
For the three months ended
June 30,
   
For the six months ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Sales to franchise customers
  $ 217,498     $ 302,666     $ 392,191     $ 446,764  
Sales to non-franchise customers
    99,382       4,046       108,226       37,842  
                                 
Total sales
  $ 316,880     $ 306,712     $ 500,417     $ 484,606  
 
NOTE 12 - INVESTMENT
 
Long-Term Investment:
 
On August 28, 2011, Joway Shengshi and Tianjin Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Tianjin Hezhi”) entered a cooperative contract, pursuant to which Joway Shengshi and Tianjin Hezhi established a new company named Tianjin Joway Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Joway Hezhi”) with registered capital of RMB 20,000,000. Joway Hezhi was incorporated on October 21, 2011 with initial registered capital of RMB 5,000,000. It will engage in the production and distribution of Chinese-Western preparations, health food, healthcare products, medical instruments and plain food. On October 11, 2011, Joway Shengshi contributed RMB 1,500,000 and owned 30% of Joway Hezhi. Since Joway Hezhi failed to finish its early preparatory period for three years, the Company withdrew its investment from Joway Hezhi in the amount of RMB 1,500,000 on June 26. 2014. No gain or loss was recognized from this withdraw. As of June 30, 2014, the Company owned no share of Joway Hezhi.
 
Short-Term Investment:
 
At December 31, 2013, the Company had a short-term wealth-management certificate with Industrial and Commercial Bank of China. This is classified as a level 2 investment within the fair value hierarchy. During the first quarter of 2013, this short-term investment of $1,266,604 were redeemed in full and returned to the Company. On June 18, 2014, the Company invested the same wealth-management certificate in the amount of RMB 500,000 or $81,199, which would be liquidated in September, 2014.
 
 
21

 
 
 
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2014.
 
FORWARD-LOOKING STATEMENTS:
 
Certain statements made in this report may constitute “forward-looking statements on our current expectations and projections about future events.” These forward-looking statements involve known or unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases you can identify forward-looking statements by some words such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions, and are subject to a number of risks and uncertainties. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements are made as of the date of this report, and we assume no obligation to update these forward-looking statements whether as a result of new information, future events, or otherwise, other than as required by law. In light of these assumptions, risks, and uncertainties, the forward-looking events discussed in this report might not occur and actual results and events may vary significantly from those discussed in the forward-looking statements.
 
Overview
 
General
 
We develop, manufacture, market, distribute, and sell products, including knit goods, daily healthcare and personal care products, and wellness house and activated water machine products, that are coated, embedded or filled with tourmaline. Most of our products, such as clothing, bedding, and mattresses are purchased as finished products which we then coat and/or infuse with liquid or granular tourmaline using one or more of our manufacturing techniques. We conduct all of our operations in Tianjin City, China and distribute most of our products to more than 200 franchisees in China. Our franchisees, in turn, sell the products to their customers. All of our revenues to date have been generated by sales to customers located in the PRC.
 
Beginning in 2009, we began to develop a franchise network to distribute our healthcare knit goods, daily healthcare products and personal care products. Through these franchisees, we were able to significantly increase sales of our healthcare knit goods segment and daily healthcare and personal care segment. In 2010, we began distributing our wellness house and activated water machine products through our franchise network.
 
We are a holding company with no material operations of our own. All of our operations are conducted through Joway Shengshi and its three subsidiaries, Joway Technology, Joway Decoration and Shengtang Trading. Joway Shengshi engages in the manufacture and distribution of tourmaline health-related products such as knit goods, and daily healthcare and personal care products. Joway Technology and Joway Decoration engage in the manufacture and distribution of activated water machines and wellness houses. We utilize our Shengtang Trading subsidiary to purchase raw materials, which are then sold to Joway Shengshi and Joway Decoration.
 
 As a holding company, our ability to pay dividends and other cash distributions to our shareholders depends in part upon dividends and other distributions paid to us by our PRC subsidiaries. The amount of dividends paid by our PRC subsidiaries to us primarily depends on the service fees paid to our PRC subsidiaries from Joway Shengshi and its subsidiaries, and, to a lesser degree, our PRC subsidiaries’ retained earnings. Conducting our operations through contractual arrangements with Joway Shengshi and its subsidiaries has a risk that we may lose the power to direct the activities that most significantly affect the economic performance of Joway Shengshi and its subsidiaries, which may result in our being unable to consolidate their financial results with our results and may impair our access to their cash flow from operations and thereby reduce our liquidity.
 
Description of Selected Income Statement Items
 
Revenues. We generate revenue from sales of our Healthcare Knit goods Series, Daily Healthcare and Personal Care Series and Wellness House and Activated Water Machine Series.
 
Cost of goods sold.  Cost of goods sold consists of costs directly attributable to production, including the cost of raw materials, salaries for staff engaged in production activity, electricity, depreciation, packing materials, and related expenses.
 
Operating expenses.  Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Sales and marketing expenses consist primarily of salaries and traveling expenses of our marketing department employees, transportation expenses, and advertising expenses. General and administrative expenses consist primarily of salaries of our administrative department employees, payroll taxes and benefits, general office expenses and depreciation.
 
 
22

 
 
Other (expense) income.  Our other (expense) income consists primarily of interest income, investment income and bank service fee.
 
Income taxes.  According to the revised Enterprise Income Tax Law effective as of January 1, 2008, the income tax rate of our PRC subsidiaries is generally 25%. Joway Health Industries Group Inc. was established under the laws of the State of Nevada and is subject to U.S. federal income tax and Nevada annual reporting requirements.
 
Results of Operations
 
The following table sets forth certain information regarding our results of operations.
 
CONSOLIDATED STATEMENTS OF OPERATION
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2014 and 2013
                         
   
For the three months ended
June 30,
   
For the six months ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
REVENUES
  $ 316,880     $ 306,712     $ 500,417     $ 484,606  
COST OF REVENUES
    130,200       125,761       221,667       181,016  
GROSS PROFIT
    186,680       180,951       278,750       303,590  
OPERATING EXPENSES
    449,909       694,768       1,024,032       1,305,875  
LOSS FROM OPERATIONS
    (263,229 )     (513,817 )     (745,282 )     (1,002,285 )
OTHER (EXPENSE) INCOME, NET
    (466 )     (141,825 )     (1,397 )     (138,287 )
LOSS BEFORE INCOME TAXES
    (263,695 )     (655,642 )     (746,679 )     (1,140,572 )
INCOME TAXES
    1,488       78,870       1,699       80,248  
NET LOSS
  $ (265,183 )   $ (734,512 )   $ (748,378 )   $ (1,220,820 )
 
Business Segments

In 2014 and 2013, we operated in three reportable business segments: (1) Healthcare Knit Goods, (2) Daily Healthcare and Personal Care Products and (3) Wellness House and Activated Water Machine Products. The following table sets forth the contributions of each reportable business segment in dollars and as a percent of revenue:
 
For the three months ended June 30, 2014
 
   
Healthcare
Knitgoods
Series
   
% of
Total
   
Daily
Healthcare and
Personal
Care Series
   
% of
Total
   
Wellness House
and Activated
Water Machine
Series
   
% of
Total
   
Total
 
REVENUES
  $ 84,130       26.5 %   $ 91,896       29.0 %   $ 140,854       44.5 %   $ 316,880  
COST OF REVENUES
    33,611       25.8 %     41,177       31.6 %     55,412       42.6 %     130,200  
GROSS PROFIT
    50,519       27.1 %     50,719       27.2 %     85,442       45.8 %     186,680  
GROSS MARGIN
    60.0 %             55.2 %             60.7 %             58.9 %
OPERATING EXPENSES
    104,357       23.2 %     124,011       27.6 %     221,541       49.2 %     449,909  
LOSS FROM OPERATIONS
  $ (53,838 )     20.5 %   $ (73,292 )     27.8 %   $ (136,099 )     51.7 %   $ (263,229 )
 
 
23

 
 
For the three months ended June 30, 2013
 
   
Healthcare
Knitgoods
Series
   
% of
Total
   
Daily
Healthcare and
Personal
Care Series
   
% of
Total
   
Wellness House
and Activated
Water Machine
Series
   
% of
Total
   
Total
 
REVENUES
  $ 65,704       21.4 %   $ 112,399       36.6 %   $ 128,609       41.9 %   $ 306,712  
COST OF REVENUES
    17,831       14.2 %     40,198       32.0 %     67,732       53.9 %     125,761  
GROSS PROFIT
    47,873       26.5 %     72,201       39.9 %     60,877       33.6 %     180,951  
GROSS MARGIN
    72.9 %             64.2 %             47.3 %             59.0 %
OPERATING EXPENSES
    151,735       21.8 %     255,890       36.8 %     287,143       41.3 %     694,768  
LOSS FROM OPERATIONS
  $ (103,862 )     20.2 %   $ (183,689 )     35.7 %   $ (226,266 )     44.0 %   $ (513,817 )
 
For the six months ended June 30, 2014
 
   
Healthcare
Knitgoods
Series
   
% of
Total
   
Daily Healthcare
and Personal
Care Series
   
% of
Total
   
Wellness House
and Activated
Water Machine
Series
   
% of
Total
   
Total
 
REVENUES
  $ 146,808       29.3 %   $ 151,093       30.2 %   $ 202,516       40.5 %   $ 500,417  
COST OF REVENUES
    70,473       31.8 %     70,270       31.7 %     80,924       36.5 %     221,667  
GROSS PROFIT
    76,335       27.4 %     80,823       29.0 %     121,592       43.6 %     278,750  
GROSS MARGIN
    52.0 %             53.5 %             60.0 %             55.7 %
OPERATING EXPENSES
    300,420       29.3 %     309,187       30.2 %     414,425       40.5 %     1,024,032  
LOSS FROM OPERATIONS
  $ (224,085 )     30.1 %   $ (228,364 )     30.6 %   $ (292,833 )     39.3 %   $ (745,282 )
 
For the six months ended June 30, 2013
 
   
Healthcare
Knitgoods
Series
   
% of
Total
   
Daily Healthcare
and Personal
Care Series
   
% of
Total
   
Wellness House
and Activated
Water Machine
Series
   
% of
Total
   
Total
 
REVENUES
  $ 99,892       20.6 %   $ 175,863       36.3 %   $ 208,851       43.1 %   $ 484,606  
COST OF REVENUES
    28,847       15.9 %     57,997       32.0 %     94,172       52.0 %     181,016  
GROSS PROFIT
    71,045       23.4 %     117,866       38.8 %     114,679       37.8 %     303,590  
GROSS MARGIN
    71.1 %             67.0 %             54.9 %             62.6 %
OPERATING EXPENSES
    269,178       20.6 %     473,905       36.3 %     562,792       43.1 %     1,305,875  
LOSS FROM OPERATIONS
  $ (198,133 )     19.8 %   $ (356,039 )     35.5 %   $ (448,113 )     44.7 %   $ (1,002,285 )
 
For The Three Months Ended June 30, 2014 Compared to June 30, 2013
 
Revenue. For the three months ended June 30, 2014, revenue was $316,880 compared to $306,712 for the three months ended June 30, 2013, an increase of $10,168 or 3.3%. This increase was mainly due to the increase in revenue from healthcare knit goods segment and wellness houses and activated water machines segment.
 
Revenue from healthcare knit goods segment increased by $18,426 or 28% to $84,130 for the three months ended June 30, 2014 from $65,704 for the three months ended June 30, 2013. This increase was mainly due to increase in sales of our mattress products. In 2014, we offered more discount for our franchisees in our mattress products to promote their sales.
 
 
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Revenue from daily healthcare and personal care products decreased by $20,503 or 18.2% to $91,896 for the three months ended June 30, 2014 from $112,399 for the three months ended June 30, 2013. This was primarily due to the decrease in sales of Tourmaline Soap and diet health products.
 
Revenue from wellness houses and activated water machines increased by $12,245 or 9.5% to $140,854 for the three months ended June 30, 2014 from $128,609 for the three months ended June 30, 2013. This increase was mainly due to the increase in construction of wellness house.
 
Cost of Goods Sold.  For the three months ended June 30, 2014, cost of goods sold was $130,200 compared to $125,761 for the three months ended June 30, 2013, an increase of $4,439 or 3.5%. This increase was mainly due to healthcare knit goods segment.
 
Cost of goods sold for healthcare knit goods segment increased to $33,611 for the three months ended June 30, 2014 from $17,831for the three months ended June 30, 2013, an increase of $15,780 or 88.5%. This increase was due to the increase in the cost of Mattress products.
 
Cost of goods sold for the daily healthcare and personal care segment increased to $41,177 for the three months ended June 30, 2014 from $40,198 for the three months ended June 30, 2013, a slight increase of $979 or 2.4%.
 
Cost of goods sold for our wellness house and activated water machine segment decreased to $55,412 for the three months ended June 30, 2014 from $67,732 for the three months ended June 30, 2013, a decrease of $12,320 or 18.2%. This decrease was mainly due to the increase in the cost of our wellness house for family use as a result of the decrease in sales.
 
Gross profit. Our gross profit increased by $5,729 or 3.2% to $186,680 for the three months ended June 30, 2014, compared to $180,951 for the three months ended June 30, 2013. This increase was mainly due to the increase in gross profit for wellness houses and activated water machines segment. Our gross margin slightly decreased from 59% for the three months ended June 30, 2013 to 58.9% for the three months ended June 30, 2014.
 
Gross profit for the healthcare knit goods segment increased by $2,646 or 5.5% to $50,519 for the three months ended June 30, 2014 compared to $47,873 for the three months ended June 30, 2013. This increase was mainly due to increase in sales. The gross margins of healthcare knit goods segment decreased from 72.9% for the three months ended June 30, 2013 to 60% for the three months ended June 30, 2014. In 2014, we gave our franchisees much more discount for our mattress product than in 2013, as a result, the gross margin decreased.
 
Gross profit of daily healthcare and personal care segment decreased by $21,482 or 29.8% to $50,719 for the three months ended June 30, 2014, compared to $72,201 for the three months ended June 30, 2013. This decrease was mainly due to the decrease in sales. The gross margin of daily healthcare and personal care segment decreased from 64.2% for the three months ended June 30, 2013 to 55.2% for the three months ended June 30, 2014. This decrease was mainly due to the decrease in sales of our Tourmaline Soap, which have higher gross profit margin.
 
Gross profit of the wellness house and activated water machine segments increased by $24,565 or 40.4% to $85,442 for the three months ended June 30, 2014, compared to $60,877 for the three months ended June 30, 2013. This increase was mainly due to the increase in gross profit of construction of wellness house. The gross margin of our wellness house and activated water machine segments increased from 47.3% for the three months ended June 30, 2013 to 60.7% for the three months ended June 30, 2014. This increase was mainly due to the fact that we gave some more discounts to our franchisees in 2013 and stopped  this policy in the first half of 2014.
 
Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $244,859, or 35.2%, from $694,768 for the three months ended June 30, 2013 to $449,909 for the three months ended June 30, 2014. This decrease was mainly due to the decrease of salary and conference expenses. Operating expenses for healthcare knit goods segment decreased by $47,378 or 31.2% to $104,357 for the three months ended June 30, 2014 from $151,735 for the three months ended June 30, 2013. Operating expenses for daily healthcare and personal care segment decreased by $131,879 or 51.5% to $124,011 for the three months ended June 30, 2014 from $255,890 for the three months ended June 30, 2013. Operating expenses for our wellness house and activated water machine segment decreased by $65,602 or 22.8% to $221,541 for the three months ended June 30, 2014 from $287,143 for the three months ended June 30, 2013.
 
 
25

 
 
Loss from operations. As a result of the foregoing, our loss from operations was $263,229 for the three months ended June 30, 2014, compared to $513,817 for the three months ended June 30, 2013, a decrease of $250,588. This decrease was mainly due to the decrease in operating expenses.
 
Income taxes. Our income tax expenses were $1,488 for the three months ended June 30, 2014, compared to $78,870 for the three months ended June 30, 2013.This decrease was due to the fact that we paid an additional income tax for the year of 2012 requested by PRC tax authority after a review of our 2012 Corporate Income Tax Filing in 2013.
 
Net loss. For the three months ended June 30, 2014, our net loss was $265,183 compared to $734,512 for the three months ended June 30, 2013. This decrease was mainly due to decrease in operating expenses and other expenses.
 
For the six months Ended June 30, 2014 Compared to June 30, 2013
 
Revenue. For the six months ended June 30, 2014, revenue was $500,417 compared to $484,606 for the six months ended June 30, 2013, an increase of $15,811 or 3.3%. This increase was mainly due to the decrease in revenue from healthcare knit goods segment.
 
Revenue from healthcare knit goods segment increased by $46,916, or 47% to $146,808 for the six months ended June 30, 2014 from $99,892 for the six months ended June 30, 2013. This increase was mainly due to the increase in sales of our mattress products.
 
Revenue from daily healthcare and personal care products decreased by $24,770 or 14.1% to $151,093 for the six months ended June 30, 2014 from $175,863 for the six months ended June 30, 2013. This was primarily due to the decrease in sales of our Tourmaline Soap.
 
Revenue from wellness houses and activated water machines decreased by $6,335 or 3% to $202,516 for the six months ended June 30, 2014 from $208,851 for the six months ended June 30, 2013. This decrease was mainly due to the decrease in sales of wellness house for family use.
 
Cost of Goods Sold.  For the six months ended June 30, 2014, cost of goods sold was $221,667 compared to $181,016 for the six months ended June 30, 2013, an increase of $40,651, or 22.5%. This increase was mainly due to the increase in sales.
 
Cost of goods sold for healthcare knit goods segment increased to $70,473 for the six months ended June 30, 2014 from $28,847 for the six months ended June 30, 2013, an increase of $41,626 or 144.3%. This increase was mainly due to the increase in the cost of our mattress products.
 
Cost of goods sold for the daily healthcare and personal care segment increased to $70,270 for the six months ended June 30, 2014 from $57,997 for the six months ended June 30, 2013, an increase of $12,273 or 21.2%. This increase was mainly due to the increase in the cost of our Tourmaline Waist Protector and Tourmaline Scarf.
 
Cost of goods sold for our wellness house and activated water machine segment decreased to $80,924 for the six months ended June 30, 2014 from $94,172 for the six months ended June 30, 2013, a decrease of $13,248 or 14.1%. This decrease was mainly due to the decrease in the cost of wellness house for family use.
 
Gross profit. Our gross profit decreased by $24,840 or 8.2% to $278,750 for the six months ended June 30, 2014, compared to $303,590 for the six months ended June 30, 2013. This decrease was primarily due to the decrease in gross profit for daily healthcare and personal care segment. In addition, our gross margin decreased from 62.6% for the six months ended June 30, 2013 to 55.7% for the six months ended June 30, 2014. This decrease was mainly due to healthcare knit goods segment and wellness house and activated water machine segment.
 
 
26

 
 
Gross profit for the healthcare knit goods segment increased by $5,290 or 7.4% to $76,335 for the six months ended June 30, 2014 compared to $71,045 for the six months ended June 30, 2013. This increase was mainly due to the increase in gross profit for our mattress products. The gross margins of healthcare knit goods segment decreased from 71.1% for the six months ended June 30, 2013 to 52% for the six months ended June 30, 2014. This decrease was mainly due to the more discount to franchisees for our mattress product in 2014.
 
Gross profit of daily healthcare and personal care segment decreased by $37,043 or 31.4% to $80,823 for the six months ended June 30, 2014, compared to $117,866 for the six months ended June 30, 2013. This decrease was primarily due to the decrease in gross profit of Tourmaline Soap. Our gross margin of daily healthcare and personal care segment decreased from 67% for the six months ended June 30, 2013 to 53.5% for the six months ended June 30, 2014. This decrease was mainly due to the decrease in sales of our Tourmaline Soap., which have higher gross margins.
 
Gross profit of the wellness house and activated water machine segments increased by $6,913 or 6% to $121,592 for the six months ended June 30, 2014, compared to $114,679 for the six months ended June 30, 2013. This increase was mainly due to the increase in gross profit of construction of wellness house. The gross margin of our wellness house and activated water machine segments increased from 54.9% for the six months ended June 30, 2013 to 60% for the six months ended June 30, 2014. This increase was mainly due to the fact that we offered less discounts to our franchisees in 2014.
 
Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $281,843, or 21.6%, from $1,305,875 for the six months ended June 30, 2013 to $1,024,032 for the six months ended June 30, 2014. This decrease was mainly due to the decrease of salary and conference expenses. Operating expenses for healthcare knit goods segment increased by $31,242 or 11.6% to $300,420 for the six months ended June 30, 2014 from $269,178 for the six months ended June 30, 2013. Operating expenses for daily healthcare and personal care segment decreased by $164,718 or 34.8% to $309,187 for the six months ended June 30, 2014 from $473,905 for the six months ended June 30, 2013. Operating expenses for our wellness house and activated water machine segment decreased by $148,367 or 26.4% to $414,425 for the six months ended June 30, 2014 from $562,792 for the six months ended June 30, 2013.
 
Loss from operations. As a result of the foregoing, our loss from operations was $745,282 for the six months ended June 30, 2014, compared to negative $1,002,285 for the six months ended June 30, 2013, a decrease of $257,003. This decrease was mainly due to the decrease in operating expenses.
 
Income taxes. Our income tax expenses were $1,699 for the six months ended June 30, 2014, compared to $80,248 for the six months ended June 30, 2013. The decrease was due to the additional income tax paid in 2013 for the year of 2012 requested by PRC tax authority.
 
Net loss. Our net loss was $748,378 for the six months ended June 30, 2014, compared to $1,220,820 for the six months ended June 30, 2013. This decrease was mainly due to the decrease in operating expenses and other expenses.
 
Franchising
 
We enter into franchise agreements to develop retail outlets for our products. These agreements provide that franchisees will sell our products exclusively. In exchange, we provide them with geographic exclusivity, discounted products, training, and support. The agreements also require franchisees to adhere to certain standards of product merchandising, promotion, and presentment. The agreements do not require the franchisees to purchase any minimum levels of product, but do require that they make at least one purchase during each year. The agreements are generally for terms of three years and are renewable at the mutual agreement of both parties. The Agreements are cancelable at our discretion if franchisees violate the terms of the agreements.
 
 
27

 
 
The following is a breakdown of revenue between franchise and non-franchise customers:
 
 
For the three months ended
 June 30,
   
For the six months ended
 June 30,
 
 
2014
   
2013
   
2014
   
2013
 
                       
Sales to franchise customers
$ 217,498     $ 302,666     $ 392,191     $ 446,764  
Sales to non-franchise customers
  99,382       4,046       108,226       37,842  
                               
Total sales
$ 316,880     $ 306,712     $ 500,417     $ 484,606  
 
Liquidity and Capital Resources
 
Our cash at the beginning of the six months ended June 30, 2014 was $477,642 and decreased to $456,055 by the end of June 30, 2014, a decrease of $21,587. This decrease was mainly due to the cash flow out from our operating activities. On June 30, 2014, we had net working capital of $1,498,634, a decrease of $288,536 from $1,787,170 on December 31, 2013.
 
Our cash flow information summary is as follows:
 
   
  For the six months ended
June 30,
 
   
2014
   
2013
 
Net cash provided by (used in)
       
Operating activities
  $ (97,766 )     (1,195,052 )
Investing activities
    162,687       1,266,604  
Financing activities
  $ (21,531 )     (16,600 )
 
Net Cash Used In Operating Activities
 
Net cash used in operating activities was $97,766 for the six months ended June 30, 2014 compared to $1,195,052 for the six months ended June 30, 2013. This was primarily due to the less loss of $472,442, less expenditures of $248,517 in tax payable and more advances from customer of $206,724.
 
For the six months ended June 30, 2014, cash was mainly used to cover the loss of $748,378, which was primarily offset by an add-back of $235,455 of depreciation for non-cash expense, the increase in advances from customer of $192,396 and the decrease in advances to suppliers of $152,657.
 
For the six months ended June 30, 2013, cash was mainly used to cover the loss of $1,220,820 and pay taxes of 234,404, which were primarily offset by an add-back of $278,158 of depreciation for non-cash expense.
 
Net Cash Provided by Investing Activities
 
Net cash provided by investing activities was $162,687 for the six months ended June 30, 2014, compared to $1,266,604 for the six months ended June 30, 2013. For the six months ended June 30, 2013, we took back our short-term wealth-management product, a kind of Marketable Security in Industrial and Commercial Bank of China in the amount of $1,266,604, which was invested in 2012. For the six months ended June 30, 2014, we invested the same short-term wealth-management product of $81,199. In addition, we withdraw our investment from Joway Hezhi in the amount of RMB 1,500,000 or $245,339 on June 26. 2014.
 
 
28

 
 
Net Cash Used In Financing Activities
 
Net cash used in financing activities was $21,531 for the six months ended June 30, 2014, compared to $16,600 for the six months ended June 30, 2013. The cash was used to repay Jinghe Zhang and Shenyang Joway for advances made in prior periods.
 
On May 10, 2007, our operating subsidiaries, Joway Shengshi entered into a cash advance agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the agreements, Jinghe Zhang agreed to advance operating capital to Joway Shengshi. These advances are interest free, unsecured and are repayable upon demand. During the period beginning May 17, 2007 (inception of Joway Shengshi) through December 31, 2010, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang. We repaid $3,276 and $1,559 of these advances for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, the total unpaid principal balance due Jinghe Zhang for advances made to Joway Shengshi was $36,977.
 
On May 7, 2007, our operating subsidiary, Joway Shengshi entered into an agreement with Shenyang Joway pursuant to which Joway Shengshi and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital.  On May 10, 2007, our subsidiary, Joway Technology and Shenyang Joway entered into an agreement pursuant to which Joway Technology and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital.  Pursuant to these agreements, Shenyang Joway advanced an aggregate of $791,701 to Joway Shengshi and Joway Technology through December 31, 2010. We repaid $18,255 and $15,041 of these advances for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, the total unpaid principal balance due Shenyang Joway for advances was $12,660.  Shenyang Joway ceased operations at the end of 2009, although it still exists as a legal entity.
 
The Company has sufficient liquidity from internal and external sources to meet the Company’s operating cash needs over the next 12 months even if Mr. Zhang and Shenyang Joway were to demand immediate repayment of the remaining balance under these loans and no longer wish to provide future loans to any of our operating units.
 
STATUTORY RESERVES
 
Pursuant to the laws and regulations of the PRC, the Company’s PRC subsidiaries are required to allocate a portion of their after-tax income to statutory reserves funds. The minimum statutory reserves allocation is 10% of after-tax income until the reserves reach 50% of the entities’ registered capital or members’ equity. The reserve funds are not transferable to the Company in the form of cash dividends, loans or advances. Thus, the reserve funds are not available for distribution except in liquidation. As of June 30, 2014, the Company had allocated $354,052 to statutory reserves.
 
Off Balance Sheet Items
 
Under SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:
 
 
any obligation under certain guarantee contracts,
 
 
any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,
 
 
any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in shareholder equity in our statement of financial position, and
 
 
any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.
 
We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.
 
 
29

 
 
Critical Accounting Policies
 
Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.
 
Basis of Consolidation
 
The accompanying consolidated financial statements include Joway Health and its wholly owned subsidiaries and controlled VIEs. All significant inter-company accounts and transactions have been eliminated in the consolidation.
 
 Pursuant to Accounting Standards Codification Topic 810 “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.
 
 Based on the various Contractual Agreements, we believe we are able to exercise control over the VIEs, and to obtain the full economic benefits. We believe that the terms of the exclusive option agreement are currently exercisable and legally enforceable under PRC laws and regulations. We also believe that the minimum amount of consideration permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for us to exercise our rights under the exclusive option agreement. A simple majority vote of our board of directors is required to pass a resolution to exercise our rights under the exclusive option agreement, for which consent of the shareholder of VIEs is not required. Therefore, we believe this gives us the power to direct the activities that most significantly impact VIEs’ economic performance. T We believe that our ability to exercise effective control, together with the consulting service agreements and the equity pledge agreements, give us the rights to receive substantially all of the economic benefits from VIEs in consideration for the services provided by its wholly owned subsidiaries in China. Accordingly, as the primary beneficiary of VIEs and in accordance with U.S. GAAP, Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading, as VIEs of Junhe Consulting, has been consolidated in the Company’s financial statements. Sales from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading are included in our total sales, their incomes or losses from operations are consolidated with ours, and our net income or loss includes net income or loss from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading.
 
Revenue Recognition
 
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured.
 
With respect to sales of product to both franchisee and non-franchisee customers, we prepare product shipment upon the receipt of a customer’s purchase order. Sales prices are based on fixed price lists that are different depending on whether the price list is for franchisee customers or for non-franchisee customers. We recognize revenue when the product is shipped. We do not sell product to any customers with a right of return as defined in ASC 605-15-25-4. Sales are presented net of value added tax (VAT).
 
We recognize revenue on the sale of our wellness houses under the completed contract method. At the time when we enter into a contract with a customer to build a wellness house, the customer pays a deposit of at least one-half of the sales price. We consider the contract to be completed when all significant costs have been incurred and the customer accepts the project in writing by signing in the appropriate place on the contract. At this time the customer will also pay any remaining balance on the contract. We recognize the full contract revenue at this point. Contract costs consist primarily of materials and labor costs. The construction period of a wellness house generally does not exceed five days.
 
 
30

 
 
Accounts Receivable
 
Accounts receivable are carried at net realizable value. We provide reserves for potential credit losses on accounts receivable. Management reviews the composition of the accounts receivable and analyzes historical bad debts, customer concentrations, customers’ credit worthiness, current economic trends, and changes in customer’s payment patterns to evaluate the adequacy of these reserves.
 
Inventories
 
Inventories are stated at the lower of cost, as determined by the specific identification method on contract level (for each individual contract, inventories cost flow is determined by weighted-average method), or the net realizable value, which is determined on selling prices less any further costs expected to be incurred for completion and disposal. Management regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether a valuation allowance is required.
 
Property, Plant, and Equipment
 
Property, plant and equipment are stated at cost less accumulated depreciation, and include expenditures that substantially increase the useful lives of existing assets.
 
Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:
 
Building
 
20 years
Operating Equipment
 
10 years
Office furniture and equipment
 
3 or 5 years
Vehicles
 
10 years
 
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts, and any gain or loss is included in the consolidated statements of income and other comprehensive income. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Significant renewals and betterment to buildings and equipment are capitalized. Leasehold improvements are depreciated over the lesser of the useful life or the life of the lease.
 
Recent Accounting Pronouncements
 
We do not anticipate that the adoption of recently issued accounting pronouncements to have a material effect on our condensed consolidated financial statements.
 
 
Not applicable.
 
 
31

 
 
 
Evaluation of Disclosure Controls and Procedures
 
Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures as defined in SEC Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this quarterly report. The purpose of this evaluation is to determine if, as of Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2014, our disclosure controls and procedures were not effective, based on the material weakness described below:
 
We did not have sufficient skilled accounting personnel that are either qualified as Certified Public Accountants in the U.S. or that have received education from U.S. institutions or other educational programs that would provide enough relevant education relating to U.S. GAAP. The Company’s CFO and Financial Manager have worked for U.S. listed companies but have limited experience with U.S. GAAP and are not U.S. Certified Public Accountants. Further, our operating subsidiaries are based in China, and in accordance with PRC laws and regulations, are required to comply with PRC GAAP, rather than U.S. GAAP. Thus, the accounting skills and understanding necessary to fulfill the requirements of U.S. GAAP-based reporting, including the preparation of financial statements and consolidation, are inadequate, and determined to be a material weakness.
 
Remediation Initiative
 
 
We have started a training program in the principles and rules of U.S. GAAP, SEC reporting requirements and the application thereof. The program is provided by an independent training institution, for our finance and accounting personnel, including our Chief Financial Officer, Financial Manager and others.
 
 
We are in the process of designing a program to provide ongoing company-wide training regarding the Company’s internal controls, with particular emphasis on our finance and accounting staff.
 
 
In 2011 we established the position of internal audit manager. From September 2011 to July 2012, we hired an internal audit manager who implemented an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatments identified in such report have been fully implemented and confirmed by our internal control department. Currently, we are still in the process of seeking for a proper candidate to perform as our internal audit manager.
 
We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting for the six months ended June 30, 2014 that materially affected, or were reasonably likely to materially affect our internal control over financial reporting.
 
 
32

 
 
 
 
None.
 
 
As of the date of this filing, there have been no material changes from the risk factors disclosed in Part I, Item 1A (Risk Factors) contained in our Annual Report on Form 10-K for the year ended December 31, 2013. We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. The risks, uncertainties and other factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2013 may cause our actual results, performances and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occurs, our business, financial condition or results of operations may be adversely affected.
 
 
None.
 
 
None.

 
Not applicable.
 
 
None.
 
 
33

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

 * Filed herewith
 
 
34

 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
DATE: August 14, 2014
 
 
Joway Health Industries Group Inc.
     
 
By:
/s/ Jinghe Zhang
   
     Jinghe Zhang
   
     President and Chief Executive Officer
     
 
By:
/s/ Yuan Huang
   
     Yuan Huang
   
     Chief Financial Officer
 
35

EX-31.1 2 f10q0614ex31i_jowayhealth.htm CERTIFICATION f10q0614ex31i_jowayhealth.htm
EXHIBIT 31.1
 
CERTIFICATION
 
I, Jinghe Zhang, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q for the six months ended June 30, 2014 of Joway Health Industries Group Inc.;
 
2. Based on my knowledge, 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;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: August 14, 2014
 
 
/s/ Jinghe Zhang
 
Jinghe Zhang
 
Chief Executive Officer
 
(Principal Executive Officer)

EX-31.2 3 f10q0614ex31ii_jowayhealth.htm CERTIFICATION f10q0614ex31ii_jowayhealth.htm
EXHIBIT 31.2
 
CERTIFICATION
 
I, Yuan Huang, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q for the six months ended June 30, 2014 of Joway Health Industries Group Inc.;
 
2. Based on my knowledge, 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;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: August 14, 2014
 
 
/s/ Yuan Huang
 
Yuan Huang
 
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
EX-32.1 4 f10q0614ex32i_jowayhealth.htm CERTIFICATION f10q0614ex32i_jowayhealth.htm
EXHIBIT 32.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Jinghe Zhang, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Joway Health Industries Group Inc. for the six months ended June 30, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Joway Health Industries Group Inc.
 
Date: August 14, 2014
 
 
By:
/s/ Jinghe Zhang
   
Jinghe Zhang
   
Chief Executive Officer

 
EX-32.2 5 f10q0614ex32ii_jowayhealth.htm CERTIFICATION f10q0614ex32ii_jowayhealth.htm
EXHIBIT 32.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Yuan Huang, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Joway Health Industries Group Inc. for the six months ended June 30, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Joway Health Industries Group Inc.
 
Date: August 14, 2014
 
 
By:
/s/ Yuan Huang
   
Yuan Huang
   
Chief Financial Officer

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