10-Q 1 f10q0616_jowayhealth.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One) 

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

 

For the quarterly period ended June 30, 2016

 

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 ☒   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 ☒   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  

 

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

 

The number of shares outstanding of the Issuer’s Common Stock as of August 15, 2016 was 20,054,000 shares.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION  3
   
Item 1. Financial Statements   3
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
   
Item 4. Controls and Procedures 31
   
PART II - OTHER INFORMATION 33
   
Item 1. Legal Proceedings 33
   
Item 1A. Risk Factors 33
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
   
Item 3. Defaults Upon Senior Securities 33
   
Item 4. Mine Safety Disclosures 33
   
Item 5. Other Information 33
   
Item 6. Exhibits 33
   
SIGNATURES 34

 

 2 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

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

 

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

  Page
   
Condensed Consolidated Balance Sheets as of June 30, 2016 (Unaudited) and December 31, 2015  4
   
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and the Six Months Ended June 30, 2016 and 2015 (Unaudited)  5
   
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (Unaudited)  6
   
Notes to Unaudited Condensed Consolidated Financial Statements  7-21

 

 3 

 

 

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2016   2015 
   (Unaudited)   (Audited) 
ASSETS        
         
CURRENT ASSETS:        
Cash  $393,680   $369,249 
Other receivables   134,290    100,298 
Inventories   780,765    830,623 
Advances to suppliers   71,818    90,542 
Prepaid taxes   73,262    64,789 
Prepaid expense   -    2,464 
Total current assets   1,453,815    1,457,965 
           
PROPERTY, PLANT AND EQUIPMENT, net   4,803,024    5,113,844 
           
OTHER ASSETS:          
Intangible assets, net   544,559    568,768 
Total other assets   544,559    568,768 
           
Total assets  $6,801,398   $7,140,577 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $96,306   $126,866 
Advances from customers   322,920    34,059 
Other payables   57,279    54,884 
Due to related parties   129,411    130,933 
Total current liabilities   605,916    346,742 
           
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, 2015 and December 31, 2014   20,054    20,054 
Additional paid-in-capital   7,361,665    7,361,665 
Statutory reserves   354,052    354,052 
Retained earnings   (2,240,760)   (1,790,669)
Accumulated other comprehensive income   700,471    848,733 
Total stockholders' equity   6,195,482    6,793,835 
Total liabilities and stockholders' equity  $6,801,398   $7,140,577 

 

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

 

 4 

 

 

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

   Three months ended
June 30,
   Six months ended
June 30,
 
   2016   2015   2016   2015 
                 
REVENUES  $792,007   $867,733   $1,625,066   $1,552,200 
                     
COST OF REVENUES   267,075    293,750    583,826    525,471 
                     
GROSS PROFIT   524,932    573,983    1,041,240    1,026,729 
                     
Selling expenses   356,770    189,914    646,527    446,352 
General and administrative expenses   403,941    471,830    838,251    1,014,761 
OPERATING EXPENSES   760,711    661,744    1,484,778    1,461,113 
                     
LOSS FROM OPERATIONS   (235,779)   (87,761)   (443,538)   (434,384)
                     
Interest income   80    198    161    341 
Other income   90    22,971    1,371    23,723 
Other expenses   (5,811)   (3,182)   (7,152)   (3,385)
OTHER (EXPENSE) INCOME, NET   (5,641)   19,987    (5,620)   20,679 
                     
LOSS BEFORE INCOME TAXES   (241,420)   (67,774)   (449,158)   (413,705)
                     
INCOME TAXES   822    16,045    933    17,483 
                     
NET LOSS   (242,242)   (83,819)   (450,091)   (431,188)
                     
OTHER COMPREHENSIVE INCOME (LOSS):                    
Foreign currency translation adjustment   (192,856)   54,471    (148,262)   80,297 
                     
COMPREHENSIVE LOSS  $(435,098)  $(29,348)  $(598,353)  $(350,891)
                     
NET LOSS PER COMMON SHARE, BASIC AND DILUTED  $(0.01)  $(0.00)  $(0.02)  $(0.02)
                     
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED   20,054,000    20,054,000    20,054,000    20,054,000 

 

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

 

 5 

 

 

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Six months ended
June 30,
 
   2016   2015 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(450,091)  $(431,188)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities          
Depreciation   226,740    277,575 
Amortization   11,498    13,745 
Loss on sale of assets   5,278    - 
Changes in operating assets and liabilities:          
Accounts receivable, trade   -    24,891 
Other receivables   (33,992)   14,863 
Inventories   52,751    83,170 
Advances to suppliers   18,724    37,979 
Prepaid expense   2,464    (4,173)
Accounts payable   (30,560)   86,719 
Advances from customers   288,861    5,649 
Other payable   1,875    1,866 
Salary and welfare payable   520    1,074 
Taxes payable   (8,473)   7,584 
Net cash provided by (used in) operating activities   85,595    119,754 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property plant and equipment   (46,646)   (252,286)
Proceeds from sale of equipment   153    - 
Net cash provided by (used in) investing activities   (46,493)   (252,286)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayment of due to related parties   (1,522)   (3,677)
Net cash used in financing activities   (1,522)   (3,677)
           
EFFECT OF EXCHANGE RATE CHANGES ON CASH   (13,149)   73,765 
           
NET DECREASE IN CASH   24,431    (62,444)
           
CASH, beginning of period   369,249    542,672 
           
CASH, end of period  $393,680   $480,228 
           
SUPPLEMENTAL DISCLOSURES:          
           
Income taxes paid  $2,047   $16,213 
Interest paid  $-   $- 

 

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

 

 6 

 

 

JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

 7 

 

 

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, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016. 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, 2015 which was filed on March 30, 2016.

 

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,
 
   2016   2015   2015 
Period ended RMB: USD Exchange rate   6.64335    6.0888    6.4927 
Average RMB: USD Exchange rate   6.53536    6.1128    6.2401 

 

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 (loss) in the consolidated financial statements and totaled ($192,856) and $54,471 for the three months ended June 30, 2016 and 2015, respectively, and ($148,262) and $80,297 for the six months ended June 30, 2016 and 2015, 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

 

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, 2016 and December 31, 2015, 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, 2016 and December 31, 2015, the Company recorded $124,694 and $127,587 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 $71,818 and $90,542 as of June 30, 2016 and December 31, 2015, respectively.

 

Property, Plant, and Equipment

 

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

 

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

 

Building  20 years
Operating Equipment  10 years
Office furniture and equipment  3 or 5 years
Vehicles  10 years

 

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

 

Intangible Assets

 

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

 

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Impairment of Long-lived Assets

 

Long-lived assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in FASB ASC 360. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. The Company did not record any impairment loss for the six months ended June 30, 2016 and 2015.

 

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 $46,408 and $27,029 for the three months ended June 30, 2016 and 2015, respectively, and $84,855 and $45,907 for the six months ended June 30, 2016 and 2015, respectively.

 

Income Taxes

 

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

 

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

 

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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, 2016 and 2015.

 

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, 2016 and the year ended December 31, 2015, 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 September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Entities are currently required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to measurement period adjustments that occur after the effective date of the guidance with earlier application permitted for financial statements that have not been issued. The Company elected to adopt ASU 2015-16 early, effective in the year ended December 31, 2015.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Thestandard requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. Entities are currently required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The amendments, which require non-current presentation only (by jurisdiction), are effective for financial statements issued for annual periods beginning after December 15, 2016 with earlier application permitted as of the beginning of an interim or annual reporting period. The guidance is to be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company elected to early adopt this standard, effective as of December 31, 2015. There was no impact from this adoption.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard requires several targeted changes including that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The new guidance also changes certain disclosure requirements and other aspects of current US GAAP. Amendments are to be applied as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This standard is effective for fiscal years starting after December 15, 2017, including interim periods within those fiscal years. The standard does not permit early adoption with the exception of certain targeted provisions. The Company is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.

 

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In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We anticipate this standard will have a material impact on our consolidated balance sheets, and we are currently evaluating its impact.

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows us to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The Company is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.

 

In April 2016, the FASB issued ASU 2016- 10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”. The amendments add further guidance on identifying performance obligations and also to improve the operability and understandability of the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

In May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting”, The amendments rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force (EITF) meeting. Specifically, registrants should not rely on the following SEC Staff Observer comments upon adoption of Topic 606: 1) Revenue and Expense Recognition for Freight Services in Process, which is codified in paragraph 605-20-S99-2; 2) Accounting for Shipping and Handling Fees and Costs, which is codified in paragraph 605-45-S99-1; 3) Accounting for Consideration Given by a Vendor to a Customer (including Reseller of the Vendor's Products), which is codified in paragraph 605-50-S99-1; 4) Accounting for Gas-Balancing Arrangements (i.e., use of the "entitlements method"), which is codified in paragraph 932-10-S99-5, which is effective upon adoption of ASU 2014-09. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients". The amendments, among other things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments is at the same date that Topic 606 is effective. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

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NOTE 3 – INVENTORIES

 

Inventories consisted of the following:

 

   June 30,   December 31, 
   2016   2015 
Raw materials  $241,515   $209,120 
Finished goods   625,585    709,841 
Low value consumables   38,359    39,249 
Total   905,459    958,210 
Less: impairment loss   (124,694)   (127,587)
Inventory, net  $780,765   $830,623 

 

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, 2016 and December 31, 2015, the Company recognized $124,694 and $127,587, respectively, as a reserve for impairment loss from inventory.

 

NOTE  4 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

   June 30,   December 31, 
   2016   2015 
Building  $5,975,031   $6,097,106 
Operating Equipment   359,358    367,696 
Office furniture and equipment   343,230    339,666 
Vehicles   1,107,704    1,133,406 
Total   7,785,323    7,937,874 
Less: accumulated depreciation   (2,982,299)   (2,824,030)
Property, plant and equipment, net  $4,803,024   $5,113,844 

 

Depreciation expense for the three months ended June 30, 2016 and 2015 amounted to $84,414 and $145,238, respectively, and for the six months ended June 30, 2016 and 2015 amounted to $226,740 and $277,575, respectively.

 

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NOTE 5 – INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

   June 30,   December 31, 
   2016   2015 
Land use rights  $621,382   $635,800 
Other intangible assets   79,503    81,348 
Total   700,885    717,148 
Less: accumulated amortization   (156,326)   (148,380)
Intangible assets, net  $544,559   $568,768 

 

Amortization expense of intangible assets for the three months ended June 30, 2016 and 2015 was $4,640 and $7,157, respectively, and for the six months ended June 30, 2016 and 2015 amounted to $11,498 and $13,745, respectively.

 

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

 

Estimated amortization expense for the year ending December 31,  Amount 
2016  $16,244 
2017  $16,244 
2018  $16,244 
2019  $16,244 
2020  $16,244 
Thereafter  $487,548 

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

Payables due to related parties consist of the following:

 

   June 30,   December 31, 
   2016   2015 
Shenyang Joway Industrial Development Co., Ltd.  $2,193   $2,244 
Jinghe Zhang   127,218    128,689 
Total  $129,411   $130,933 

 

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 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.

 

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  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 $789,508 has been repaid. For the six months ended June 30, 2016 and 2015, the Company repaid $51 and $3,677 of these advances, respectively. As of June 30, 2016, the total unpaid principal balance due Shenyang Joway for advances was $2,193.
     
  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 March 31, 2016, Joway Shengshi received cash advances in the aggregate principal amount of $4,736,754 from Jinghe Zhang of which $4,609,536 has been repaid. For the six months ended June 30, 2016 and 2015, the Company repaid $1,471 and $0 of these advances, respectively. As of June 30, 2016, the total unpaid principal balance due Jinghe Zhang for advances was $127,218.

 

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

 

NOTE 7 – 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,
 
   2016   2015 
Tax computed at China statutory rates   25%   25%
Effect of losses   (25%)   (25%)
Effective rate   0%   0%

 

NOTE 8 – 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, 2016, the Company had allocated $354,052 to statutory reserves.

 

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NOTE 9 – SEGMENTS

 

In 2016 and 2015, 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, 2016

 

   Sales   COGS   Gross profit   Income
(Loss) from operations
   Depreciation and amortization   Assets 
Healthcare Knit Goods Series  $130,534   $23,906   $106,628   $(26,610)  $14,677   $187,179 
Daily Healthcare and Personal Care Series   173,814    60,763    113,051    (51,898)   19,544    184,748 
Wellness House and Activated Water Machine Series   487,659    182,406    305,253    (157,271)   54,833    426,567 
Segment Totals  $792,007   $267,075   $524,932    (235,779)  $89,054    798,494 
Other Expense, net                  (5,641)          
Income Tax                  822           
Unallocated Assets                            6,002,904 
Net Loss                 $(242,242)          
Total Assets                           $6,801,398 

 

For the three months ended June 30, 2015

 

   Sales   COGS   Gross profit   Income
(Loss) from operations
   Depreciation and amortization   Assets 
Healthcare Knit Goods Series  $268,272   $69,857   $198,415   $2,675   $47,115   $273,635 
Daily Healthcare and Personal Care Series   178,016    59,148    118,868    (27,132)   31,264    221,479 
Wellness House and Activated Water Machine Series   421,445    164,745    256,700    (63,304)   74,016    242,223 
Segment Totals  $867,733   $293,750   $573,983    (87,761)  $152,395    737,337 
Other Income, net                  19,987           
Income Tax                  16,045           
Unallocated Assets                            6,959,197 
Net Loss                 $(83,819)          
Total Assets                           $7,696,534 

 

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For the six months ended June 30, 2016

 

   Sales   COGS   Gross profit   Loss from operations   Depreciation and amortization   Assets 
Healthcare Knit Goods Series  $444,498   $137,688   $306,810   $(99,314)  $65,164   $187,179 
Daily Healthcare and Personal Care Series   311,786    112,601    199,185    (85,686)   45,708    184,748 
Wellness House and Activated Water Machine Series   868,782    333,537    535,245    (258,538)   127,366    426,567 
Segment Totals  $1,625,066   $583,826   $1,041,240    (443,538)  $238,238    798,494 
Other Expense, net                  (5,620)          
Income Tax                  933           
Unallocated Assets                            6,002,904 
Net Loss                 $(450,091)          
Total Assets                           $6,801,398 

 

For the six months ended June 30, 2015

 

   Sales   COGS   Gross profit   Loss from operations   Depreciation and amortization   Assets 
Healthcare Knit Goods Series  $518,931   $131,428   $387,503   $(100,975)  $97,394   $273,635 
Daily Healthcare and Personal Care Series   273,231    93,103    180,128    (77,071)   51,281    221,479 
Wellness House and Activated Water Machine Series   760,038    300,940    459,098    (256,338)   142,645    242,223 
Segment Totals  $1,552,200   $525,471   $1,026,729    (434,384)  $291,320    737,337 
Other Income, net                  20,679           
Income Tax                  17,483           
Unallocated Assets                            6,959,197 
Net Loss                 $(431,188)          
Total Assets                           $7,696,534 

 

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NOTE 10 - 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,
 
   2016   2015   2016   2015 
                 
Sales to franchise customers  $444,350   $652,051   $1,094,347   $1,146,340 
Sales to non-franchise customers   347,657    215,682    530,719    405,860 
                     
Total sales  $792,007   $867,733   $1,625,066   $1,552,200 

 

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

 

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2016.

 

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.

 

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.

 

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Results of Operations

 

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

 

   For the three months ended
June 30,
   For the six months ended
June 30,
 
   2016   2015   2016   2015 
REVENUES  $792,007   $867,733   $1,625,066   $1,552,200 
COST OF REVENUES   267,075    293,750    583,826    525,471 
GROSS PROFIT   524,932    573,983    1,041,240    1,026,729 
OPERATING EXPENSES   760,711    661,744    1,484,778    1,461,113 
LOSS FROM OPERATIONS   (235,779)   (87,761)   (443,538)   (434,384)
OTHER (EXPENSE) INCOME, NET   (5,641)   19,987    (5,620)   20,679 
LOSS BEFORE INCOME TAXES   (241,420)   (67,774)   (449,158)   (413,705)
INCOME TAXES   822    16,045    933    17,483 
NET LOSS  $(242,242)  $(83,819)  $(450,091)  $(431,188)

 

Business Segments

 

In 2015 and 2016, 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, 2016

 

   Healthcare Knitgoods Series   % of
Total
   Daily Healthcare and Personal Care Series   % of
Total
   Wellness House and Activated Water Machine Series   % of
Total
   Total 
REVENUES  $130,534    16.5%  $173,814    21.9%  $487,659    61.6%  $792,007 
COST OF REVENUES   23,906    9.0%   60,763    22.8%   182,406    68.3%   267,075 
GROSS PROFIT   106,628    20.3%   113,051    21.5%   305,253    58.2%   524,932 
GROSS MARGIN   81.7%        65.0%        62.6%        66.3%
OPERATING EXPENSES   133,238    17.5%   164,949    21.7%   462,524    60.8%   760,711 
LOSS FROM OPERATIONS  $(26,610)   11.3%  $(51,898)   22.0%  $(157,271)   66.7%  $(235,779)

 

For the three months ended June 30, 2015

 

   Healthcare Knitgoods Series   % of
Total
   Daily Healthcare and Personal Care Series   % of
Total
   Wellness House and Activated Water Machine Series   % of
Total
   Total 
REVENUES  $268,272    30.9%  $178,016    20.5%  $421,445    48.6%  $867,733 
COST OF REVENUES   69,857    23.8%   59,148    20.1%   164,745    56.1%   293,750 
GROSS PROFIT   198,415    34.6%   118,868    20.7%   256,700    44.7%   573,983 
GROSS MARGIN   74.0%        66.8%        60.9%        66.1%
OPERATING EXPENSES   195,740    29.6%   146,000    22.1%   320,004    48.4%   661,744 
LOSS FROM OPERATIONS  $2,675    -3.0%  $(27,132)   30.9%  $(63,304)   72.1%  $(87,761)

  

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For the six months ended June 30, 2016

 

   Healthcare Knitgoods Series   % of
Total
   Daily Healthcare and Personal Care Series   % of
Total
   Wellness House and Activated Water Machine Series   % of
Total
   Total 
REVENUES  $444,498    27.4%  $311,786    19.2%  $868,782    53.5%  $1,625,066 
COST OF REVENUES   137,688    23.6%   112,601    19.3%   333,537    57.1%   583,826 
GROSS PROFIT   306,810    29.5%   199,185    19.1%   535,245    51.4%   1,041,240 
GROSS MARGIN   69.0%        63.9%        61.6%        64.1%
OPERATING EXPENSES   406,124    27.4%   284,871    19.2%   793,783    53.5%   1,484,778 
LOSS FROM OPERATIONS  $(99,314)   22.4%  $(85,686)   19.3%  $(258,538)   58.3%  $(443,538)

 

For the six months ended June 30, 2015

 

   Healthcare Knitgoods Series   % of
Total
   Daily Healthcare and Personal Care Series   % of
Total
   Wellness House and Activated Water Machine Series   % of
Total
   Total 
REVENUES  $518,931    33.4%  $273,231    17.6%  $760,038    49.0%  $1,552,200 
COST OF REVENUES   131,428    25.0%   93,103    17.7%   300,940    57.3%   525,471 
GROSS PROFIT   387,503    37.7%   180,128    17.5%   459,098    44.7%   1,026,729 
GROSS MARGIN   74.7%        65.9%        60.4%        66.1%
OPERATING EXPENSES   488,478    33.4%   257,199    17.6%   715,436    49.0%   1,461,113 
LOSS FROM OPERATIONS  $(100,975)   23.2%  $(77,071)   17.7%  $(256,338)   59.0%  $(434,384)

 

For The Three Months Ended June 30, 2016 Compared to June 30, 2015

 

Revenue. For the three months ended June 30, 2016, revenue was $792,007 compared to $867,733 for the three months ended June 30, 2015, a decrease of $75,726 or 8.7%. This decrease was mainly due to RMB’s depreciation against USD. Excluding the effect of exchange rate fluctuation, revenue declined only 2%.

 

Revenue from healthcare knit goods segment decreased by $137,738 or 51.3% to $130,534 for the three months ended June 30, 2016 from $268,272 for the three months ended June 30, 2015. This decrease was mainly due to the decrease in sales of our mattress products. During the second quarter of 2015, we offered more discounts to our franchisees for our mattress products and brought out bigger sales.

 

Revenue from daily healthcare and personal care products decreased by $4,202 or 2.4% to $173,814 for the three months ended June 30, 2016 from $178,016 for the three months ended June 30, 2015. This was mainly due to RMB’s depreciation against US dollar. In fact revenue from daily healthcare and personal care products increased by 4.7% for the three months ended June 30, 2016, compared with the same period of 2015, excluding the effect of exchange rate fluctuation.

 

Revenue from wellness houses and activated water machines increased by $66,214 or 15.7% to $487,659 for the three months ended June 30, 2016 from $421,445 for the three months ended June 30, 2015. This increase was mainly due to the increase in construction of wellness house. Since we put more effort on promotion of our wellness house beginning from 2014, revenue from construction of wellness house rose steadily.

 

Cost of Goods Sold. For the three months ended June 30, 2016, cost of goods sold was $267,075 compared to $293,750 for the three months ended June 30, 2015, a decrease of $26,675 or 9.1%. This decrease was mainly due to the decreased cost in healthcare knit goods segment.

 

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Cost of goods sold for healthcare knit goods segment decreased to $23,906 for the three months ended June 30, 2016 from $69,857 for the three months ended June 30, 2015, a decrease of $45,951 or 65.8%. This decrease was mainly due to the decrease in the cost of mattress products.

 

Cost of goods sold for the daily healthcare and personal care segment increased to $60,763 for the three months ended June 30, 2016 from $59,148 for the three months ended June 30, 2015, a slightly increase of $1,615 or 2.7%.

 

Cost of goods sold for our wellness house and activated water machine segment increased to $182,406 for the three months ended June 30, 2016 from $164,745 for the three months ended June 30, 2015, an increase of $17,661 or 10.7%. This increase was mainly due to the increase in the cost of the construction of our wellness house.

 

Gross profit. Our gross profit decreased by $49,051 or 8.5% to $524,932 for the three months ended June 30, 2016, compared to $573,983 for the three months ended June 30, 2015. This decrease was mainly due to the decrease in gross profit for healthcare knit goods segment. Our gross margin increased from 66.1% for the three months ended June 30, 2015 to 66.3% for the three months ended June 30, 2016.

 

Gross profit for the healthcare knit goods segment decreased by $91,787 or 46.3% to $106,628 for the three months ended June 30, 2016 compared to $198,415 for the three months ended June 30, 2015. This decrease was mainly due to the decrease in sales. The gross margins of healthcare knit goods segment increased from 74% for the three months ended June 30, 2015 to 81.7% for the three months ended June 30, 2016. It was mainly due to the fewer discounts for our mattress products for the second quarter of 2016, compared with the same period of 2015.

 

Gross profit of daily healthcare and personal care segment decreased by $5,817 or 4.9% to $113,051 for the three months ended June 30, 2016, compared to $118,868 for the three months ended June 30, 2015. This decrease was mainly due to the decrease in sales. The gross margin of daily healthcare and personal care segment decreased slightly from 66.8% for the three months ended June 30, 2015 to 65% for the three months ended June 30, 2016.

 

Gross profit of the wellness house and activated water machine segments increased by $48,553 or 18.9% to $305,253 for the three months ended June 30, 2016, compared to $256,700 for the three months ended June 30, 2015. This increase was mainly due to the increase in sales. The gross margin of our wellness house and activated water machine segments increased from 60.9% for the three months ended June 30, 2015 to 62.6% for the three months ended June 30, 2016. It was mainly due to the fewer discounts for our activated water machine and foot sauna bucket for the second quarter of 2016, compared with the same period of 2015.

 

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses increased by $98,967 or 15%, from $661,744 for the three months ended June 30, 2015 to $760,711 for the three months ended June 30, 2016. This increase was mainly due to the increase of conference expenses. In June 2016, we hold a conference abroad to extend our marketing, for which we spent $112,398. Operating expenses for healthcare knit goods segment decreased by $62,502 or 31.9% to $133,238 for the three months ended June 30, 2016 from $195,740 for the three months ended June 30, 2015. Operating expenses for daily healthcare and personal care segment increased by $18,949 or 13% to $164,949 for the three months ended June 30, 2016 from $146,000 for the three months ended June 30, 2015. Operating expenses for our wellness house and activated water machine segment increased by $142,520 or 44.5% to $462,524 for the three months ended June 30, 2016 from $320,004 for the three months ended June 30, 2015.

 

Loss from operations. As a result of the foregoing, our loss from operations was $235,779 for the three months ended June 30, 2016, compared to $87,761 for the three months ended June 30, 2015, an increase of $148,018. This increase was mainly due to the increase in marketing expenses.

 

Income taxes. Our income tax expenses were $822 for the three months ended June 30, 2016, compared to $16,045 for the three months ended June 30, 2015.This decrease was mainly due to the decreased income tax of Joway Decoration.

 

Net loss. For the three months ended June 30, 2016, our net loss was $242,242 compared to $83,819 for the three months ended June 30, 2015. This increase was mainly due to the increase in operating expenses.

 

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For the six months Ended June 30, 2016 Compared to June 30, 2015

 

Revenue. For the six months ended June 30, 2016, revenue was $1,625,066 compared to $1,552,200 for the six months ended June 30, 2015, an increase of $72,866 or 4.7%. This increase was mainly due to the increase in revenue from wellness house and activated water machine segment.

 

Revenue from healthcare knit goods segment decreased by $74,433, or 14.3% to $444,498 for the six months ended June 30, 2016 from $518,931 for the six months ended June 30, 2015. This decrease was mainly due to the decrease in sales of our mattress products.

 

Revenue from daily healthcare and personal care products increased by $38,555 or 14.1% to $311,786 for the six months ended June 30, 2016 from $273,231 for the six months ended June 30, 2015. This was primarily due to the increase in sales of our tourmaline waist protector and tourmaline knee protector.

 

Revenue from wellness houses and activated water machines increased by $108,744 or 14.3% to $868,782 for the six months ended June 30, 2016 from $760,038 for the six months ended June 30, 2015. This increase was mainly due to the increase in construction of wellness house. Starting from the second quarter of 2014, we strengthened our promotion on wellness house which increased the sales.

 

Cost of Goods Sold. For the six months ended June 30, 2016, cost of goods sold was $583,826 compared to $525,471 for the six months ended June 30, 2015, an increase of $58,355, or 11.1%. This increase was mainly due to the increase in sales.

 

Cost of goods sold for healthcare knit goods segment increased to $137,688 for the six months ended June 30, 2016 from $131,428 for the six months ended June 30, 2015, an increase of $6,260 or 4.8%. This increase was mainly due to the increase in the cost of our latex mattress.

 

Cost of goods sold for the daily healthcare and personal care segment increased to $112,601 for the six months ended June 30, 2016 from $93,103 for the six months ended June 30, 2015, an increase of $19,498 or 20.9%. This increase was mainly due to the increase in the cost of our new tourmaline shawl special for our annual conference as a result of the larger sales with higher cost rate.

 

Cost of goods sold for our wellness house and activated water machine segment increased to $333,537 for the six months ended June 30, 2016 from $300,940 for the six months ended June 30, 2015, an increase of $32,597 or 10.8%. This increase was due to the increase in the cost of construction of wellness house.

 

Gross profit. Our gross profit increased by $14,511 or 1.4% to $1,041,240 for the six months ended June 30, 2016, compared to $1,026,729 for the six months ended June 30, 2015. This increase was primarily due to the increase in gross profit from wellness house and activated water machine segment. In addition, our gross margin decreased from 66.1% for the six months ended June 30, 2015 to 64.1% for the six months ended June 30, 2016. This decrease was mainly due to the decrease in gross margin in our healthcare knit goods segment.

 

Gross profit for the healthcare knit goods segment decreased by $80,693 or 20.8% to $306,810 for the six months ended June 30, 2016 compared to $387,503 for the six months ended June 30, 2015. This decrease was mainly due to the decrease in gross profit from our mattress products. The gross margins of healthcare knit goods segment decreased from 74.7% for the six months ended June 30, 2015 to 69% for the six months ended June 30, 2016. It was mainly due to more discounts offered to our franchisees on our latex mattress in January’s annual conference.

 

Gross profit of daily healthcare and personal care segment increased by $19,057 or 10.6% to $199,185 for the six months ended June 30, 2016, compared to $180,128 for the six months ended June 30, 2015. This increase was primarily due to the increase in sales. Our gross margin of daily healthcare and personal care segment slightly decreased from 65.9% for the six months ended June 30, 2015 to 63.9% for the six months ended June 30, 2016.

 

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Gross profit of the wellness house and activated water machine segment increased by $76,147 or 16.6% to $535,245 for the six months ended June 30, 2016, compared to $459,098 for the six months ended June 30, 2015. 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 60.4% for the six months ended June 30, 2015 to 61.6% for the six months ended June 30, 2016.

 

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses increased by $23,665, or 1.6%, from $1,461,113 for the six months ended June 30, 2015 to $1,484,778 for the six months ended June 30, 2016. This increase was mainly due to the increased conference expenses. Operating expenses for healthcare knit goods segment decreased by $82,354 or 16.9% to $406,124 for the six months ended June 30, 2016 from $488,478 for the six months ended June 30, 2015. Operating expenses for daily healthcare and personal care segment increased by $27,672 or 10.8% to $284,871 for the six months ended June 30, 2016 from $257,199 for the six months ended June 30, 2015. Operating expenses for our wellness house and activated water machine segment increased by $78,347 or 11% to $793,783 for the six months ended June 30, 2016 from $715,436 for the six months ended June 30, 2015.

 

Loss from operations. As a result of the foregoing, our loss from operations was $443,538 for the six months ended June 30, 2016, compared to $434,384 for the six months ended June 30, 2015, an increase of $9,154.

 

Income taxes. Our income tax expenses were $933 for the six months ended June 30, 2016, compared to $17,483 for the six months ended June 30, 2015. This decrease was due to the decreased income of Joway Decoration.

 

Net loss. Our net loss was $450,091 for the six months ended June 30, 2016, compared to $431,188 for the six months ended June 30, 2015. This increase was mainly due to the increase of operating 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.

 

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,
 
   2016   2015   2016   2015 
                 
Sales to franchise customers  $444,350   $652,051   $1,094,347   $1,146,340 
Sales to non-franchise customers   347,657    215,682    530,719    405,860 
                     
Total sales  $792,007   $867,733   $1,625,066   $1,552,200 

 

Liquidity and Capital Resources

 

Our cash at the beginning of the six months ended June 30, 2016 was $369,249 and increased to $393,680 by the end of June 30, 2016, an increase of $24,431. This increase was mainly due to our operating activities. On June 30, 2016, we had net working capital of $847,899, a decrease of $263,324 from $1,111,223 on December 31, 2015.

 

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Our cash flow information summary is as follows:

 

   For the six months ended
June 30,
 
   2016   2015 
Net cash provided by (used in):        
Operating activities   $85,595    119,754 
Investing activities    (46,493)   (252,286)
Financing activities   $(1,522)   (3,677)

  

Net Cash Provided By Operating Activities

 

For the six months ended June 30, 2016, $85,595 of net cash was provided by operating activities, compared to $119,754 of net cash provided by operating activities for the six months ended June 30, 2015. This was primarily due to the less loss.

 

For the six months ended June 30, 2016, cash was mainly provided by an add-back of $226,740 of depreciation for non-cash expense, an increase in advances from customer of $288,861, which were primarily offset by our loss of $450,091.

 

For the six months ended June 30, 2015, cash was mainly provided by an add-back of $277,575 of depreciation for non-cash expense, an increase in accounts payable of $86,719 and a decrease in inventory purchase of $83,170, which were primarily offset by our loss of $431,188.

 

Net Cash Used In Investing Activities

 

Net cash used in investing activities was $46,493 for the six months ended June 30, 2016, compared to $252,286 of cash used in for the six months ended June 30, 2015. For the six months ended June 30, 2016, the cash expenditure of $46,646 was used in purchase of office equipment. For the six months ended June 30, 2015, we expended $252,286 on purchase of vehicles and office equipment. 

 

Net Cash Used In Financing Activities

 

Net cash used in financing activities was $1,522 for the six months ended June 30, 2016, compared to $3,677 for the six months ended June 30, 2015. The cash was used to repay Jinghe Zhang and Shenyang Joway for advances made in prior periods.

 

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 $51 and $3,677 of these advances for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, the total unpaid principal balance due Shenyang Joway for advances was $2,193. Shenyang Joway ceased operations at the end of 2009, although it still exists as a legal entity.

 

On May 10, 2007, one of our operating subsidiaries, Joway Shengshi entered into a cash advance agreement with Mr. Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the agreement, Mr. Jinghe Zhang agreed to advance operating capital to Joway Shengshi. These advances are interest free, unsecured and are repayable upon demand. During the period beginning May 17, 2007 (inception of Joway Shengshi) through March 31, 2016, Joway Shengshi received cash advances in the aggregate principal amount of $4,736,754 from Jinghe Zhang of which $4,609,536 has been repaid. For the three months ended June 30, 2016 and 2015, we repaid $1,471 and $0 of advance, respectively. As of June 30, 2016, the total unpaid principal balance due to Mr. Jinghe Zhang for advances made to Joway Shengshi was $127,218.

 

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STATUTORY RESERVES

 

Pursuant to the laws and regulations of the PRC, our 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 us 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, 2016, we 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.

 

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.

 

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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.

 

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.

 

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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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2016, 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.

 

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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, 2016 that materially affected, or were reasonably likely to materially affect our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

As of the date of this filing, there have been no material changes from the risk factors disclosed in Part I, Item 1A (Risk Factors) contained in our Annual Report on Form 10-K for the year ended December 31, 2015. 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, 2015 may cause our actual results, performances and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occurs, our business, financial condition or results of operations may be adversely affected.

 

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

 

None.

 

Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

  

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

  

EXHIBIT INDEX

 

Exhibit

No.

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

 

* Filed herewith

 

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SIGNATURES

 

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

  

DATE: August 15, 2016 Joway Health Industries Group Inc.
     
  By:  /s/ Jinghe Zhang
    Jinghe Zhang
    President and Chief Executive Officer
     
  By: /s/ Yuan Huang
    Yuan Huang
    Chief Financial Officer

 

 

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