PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements.
In
the opinion of management, the accompanying unaudited condensed consolidated financial statements included in this Form 10-Q reflect
all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations
for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to
be expected for the full year.
INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
Page
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2016 (Unaudited) and December 31, 2015 (Audited)
|
4
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months Ended March 31, 2016 and
2015
(Unaudited)
|
5
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited)
|
6
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
7-20
|
JOWAY
HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
481,325
|
|
|
$
|
369,249
|
|
Accounts receivable
|
|
|
1,551
|
|
|
|
-
|
|
Other receivables
|
|
|
137,910
|
|
|
|
100,298
|
|
Inventories
|
|
|
782,130
|
|
|
|
830,623
|
|
Advances to suppliers
|
|
|
115,839
|
|
|
|
90,542
|
|
Prepaid taxes
|
|
|
35,884
|
|
|
|
64,789
|
|
Prepaid expense
|
|
|
1,241
|
|
|
|
2,464
|
|
Total current assets
|
|
|
1,555,880
|
|
|
|
1,457,965
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
5,064,365
|
|
|
|
5,113,844
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
566,893
|
|
|
|
568,768
|
|
Total other assets
|
|
|
566,893
|
|
|
|
568,768
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,187,138
|
|
|
$
|
7,140,577
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
83,896
|
|
|
$
|
126,866
|
|
Advances from customers
|
|
|
202,580
|
|
|
|
34,059
|
|
Other payables
|
|
|
60,945
|
|
|
|
54,884
|
|
Due to related parties
|
|
|
209,137
|
|
|
|
130,933
|
|
Total current liabilities
|
|
|
556,558
|
|
|
|
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 March 31, 2016 and December 31, 2015
|
|
|
20,054
|
|
|
|
20,054
|
|
Additional paid-in-capital
|
|
|
7,361,665
|
|
|
|
7,361,665
|
|
Statutory reserves
|
|
|
354,052
|
|
|
|
354,052
|
|
Retained earnings
|
|
|
(1,998,518
|
)
|
|
|
(1,790,669
|
)
|
Accumulated other comprehensive income
|
|
|
893,327
|
|
|
|
848,733
|
|
Total stockholders' equity
|
|
|
6,630,580
|
|
|
|
6,793,835
|
|
Total liabilities and stockholders' equity
|
|
$
|
7,187,138
|
|
|
$
|
7,140,577
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
JOWAY
HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
833,059
|
|
|
$
|
684,467
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
316,751
|
|
|
|
231,721
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
516,308
|
|
|
|
452,746
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
289,757
|
|
|
|
256,438
|
|
General and administrative expenses
|
|
|
434,310
|
|
|
|
542,931
|
|
OPERATING EXPENSES
|
|
|
724,067
|
|
|
|
799,369
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(207,759
|
)
|
|
|
(346,623
|
)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
81
|
|
|
|
143
|
|
Other income
|
|
|
1,281
|
|
|
|
752
|
|
Other expenses
|
|
|
(1,341
|
)
|
|
|
(203
|
)
|
OTHER INCOME, NET
|
|
|
21
|
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(207,738
|
)
|
|
|
(345,931
|
)
|
|
|
|
|
|
|
|
|
|
INCOME TAXES
|
|
|
111
|
|
|
|
1,438
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(207,849
|
)
|
|
|
(347,369
|
)
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
44,594
|
|
|
|
25,826
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS
|
|
$
|
(163,255
|
)
|
|
$
|
(321,543
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE, BASIC AND DILUTED
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
20,054,000
|
|
|
|
20,054,000
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
JOWAY
HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(207,849
|
)
|
|
$
|
(347,369
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
142,326
|
|
|
|
132,337
|
|
Amortization
|
|
|
6,858
|
|
|
|
6,588
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, trade
|
|
|
(1,551
|
)
|
|
|
-
|
|
Other receivables
|
|
|
(37,612
|
)
|
|
|
(20,260
|
)
|
Due from related party
|
|
|
0
|
|
|
|
(886
|
)
|
Inventories
|
|
|
47,606
|
|
|
|
78,171
|
|
Advances to suppliers
|
|
|
(25,297
|
)
|
|
|
28,302
|
|
Prepaid expense
|
|
|
1,223
|
|
|
|
811
|
|
Accounts payable
|
|
|
(42,970
|
)
|
|
|
47,829
|
|
Advances from customers
|
|
|
168,521
|
|
|
|
23,606
|
|
Other payable
|
|
|
2,652
|
|
|
|
959
|
|
Salary and welfare payable
|
|
|
3,409
|
|
|
|
1,257
|
|
Taxes payable
|
|
|
28,905
|
|
|
|
11,644
|
|
Net cash provided by (used in) operating activities
|
|
|
86,221
|
|
|
|
(37,011
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property plant and equipment
|
|
|
(38,949
|
)
|
|
|
(184,116
|
)
|
Investment
|
|
|
0
|
|
|
|
(65,231
|
)
|
Net cash used in investing activities
|
|
|
(38,949
|
)
|
|
|
(249,347
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayment of due to related parties
|
|
|
78,189
|
|
|
|
(6,073
|
)
|
Net cash provided by (used in) financing activities
|
|
|
78,189
|
|
|
|
(6,073
|
)
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(13,385
|
)
|
|
|
23,505
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
112,076
|
|
|
|
(268,926
|
)
|
|
|
|
|
|
|
|
|
|
CASH, beginning of period
|
|
|
369,249
|
|
|
|
542,672
|
|
|
|
|
|
|
|
|
|
|
CASH, end of period
|
|
$
|
481,325
|
|
|
$
|
273,746
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
1,932
|
|
|
$
|
2,856
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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.
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
|
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 three month period ended March 31, 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.
Basis
of Consolidation
The
accompanying consolidated financial statements include Joway Health, its wholly owned subsidiaries, and controlled VIEs. All significant
inter-company accounts and transactions have been eliminated in the consolidation.
Pursuant
to Accounting Standards Codification Topic 810 “Consolidation” (“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 three months ended
March 31,
|
|
|
For the year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Period ended RMB: USD Exchange rate
|
|
|
6.4479
|
|
|
|
6.1321
|
|
|
|
6.4927
|
|
Average RMB: USD Exchange rate
|
|
|
6.5395
|
|
|
|
6.1529
|
|
|
|
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.
For
the three months ended March 31, 2016 and 2015 foreign currency translation adjustments of $44,594 and $25,826, respectively,
have been reported as comprehensive income in the unaudited condensed consolidated financial statements.
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.
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 March 31,
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 March 31, 2016 and December 31, 2015, the Company recorded $128,474 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 $115,839 and $90,542 as of March
31, 2016 and December 31, 2015, respectively.
Long-term
Investments
Investments
in which the Company has a 20% to 50% interest are accounted for by the equity method. Under the equity method the carrying value
of the investment is adjusted for the Company’s proportionate share of the investee’s income or loss.
Investments
in which the Company has less than a 20% interest are accounted for by the cost method. Under the cost method, investments are
carried at cost and income is recorded when dividends are received from those investments.
Property,
Plant, and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation, and include expenditures that substantially increase the
useful lives of existing assets.
Depreciation
is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:
Building
|
|
|
20
years
|
|
Operating
Equipment
|
|
|
10
years
|
|
Office
furniture and equipment
|
|
|
3
or 5 years
|
|
Vehicles
|
|
|
10
years
|
|
The
cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts, and any gain or
loss is included in the consolidated statements of operations. Maintenance, repairs and minor renewals are charged directly to
expenses as incurred. Significant renewals and betterment to buildings and equipment are capitalized. Leasehold improvements are
depreciated over the lesser of the useful life or the life of the lease.
Intangible
Assets
Intangible
assets mainly consist of land use rights. All land located in the PRC is owned by the government and cannot be sold to any individual
or company. The land use rights granted to the Company are being amortized using the straight-line method over the lease term
of 50 years. Other intangible assets are software programs that are amortized over their estimated useful life of 10 years.
Impairment
of Long-lived Assets
Long-lived
assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines
established in FASB ASC 360. The Company considers assets to be impaired if the carrying value exceeds the future projected cash
flows from the related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives. The Company did not record any impairment loss
for the three months ended March 31, 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 $38,447 and $18,878 for the three months ended March 31, 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.
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 three months periods ended March 31, 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 three months ended March 31, 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
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Summary and Amendments
That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs–Contracts with Customers
(Subtopic 340-40). The amendments in ASU 2014-09 supersede most current revenue recognition requirements. The core principal of
the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company can apply the amendments using one of the following two methods: (i) retrospectively to each prior reporting period
presented, or (ii) retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial
application. In July 2015, the FASB issued ASU No. 2015-4, Revenue from Contracts with Customers (Topic 606): Deferral of the
Effective Date, which deferred the effective date of ASU 2014-09 by one year for all entities. Accordingly, ASU 2014-09 is effective
for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early
application is permitted only for annual reporting periods beginning after December 15, 2016, including interim periods within
that reporting period. The Company is currently assessing the timing of its adoption and the impact of adopting this guidance
on its consolidated financial statements and the implementation approach to be used.
In
April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs. The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability
be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt
discounts. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted
on a retrospective basis. The Company elected to adopt ASU 2015-03 early, effective in the year ended December 31, 2015.
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.
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
NOTE
3 – ACCOUNTS RECEIVABLE
Accounts
receivable consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accounts receivable
|
|
$
|
1,551
|
|
|
$
|
-
|
|
Less: Allowance for bad debt
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
1,551
|
|
|
$
|
-
|
|
As
of the periods presented, the Company has no allowance for bad debts, because the Management, based on their analysis, considers
all the accounts receivable to be collectible.
NOTE
4 – INVENTORIES
Inventories
consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
250,250
|
|
|
$
|
209,120
|
|
Finished goods
|
|
|
620,833
|
|
|
|
709,841
|
|
Low value consumables
|
|
|
39,521
|
|
|
|
39,249
|
|
Total
|
|
|
910,604
|
|
|
|
958,210
|
|
Less: impairment loss
|
|
|
(128,474
|
)
|
|
|
(127,587
|
)
|
Inventory, net
|
|
$
|
782,130
|
|
|
$
|
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 March 31, 2016 and December 31, 2015, the Company recognized $128,474 and $127,587, respectively, as a reserve for impairment
loss from inventory.
NOTE
5 –
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Building
|
|
$
|
6,175,140
|
|
|
$
|
6,097,106
|
|
Operating equipment
|
|
|
371,324
|
|
|
|
367,696
|
|
Office furniture and equipment
|
|
|
342,976
|
|
|
|
339,666
|
|
Vehicles
|
|
|
1,141,281
|
|
|
|
1,133,406
|
|
Total
|
|
|
8,030,721
|
|
|
|
7,937,874
|
|
Less: accumulated depreciation
|
|
|
(2,966,356
|
)
|
|
|
(2,824,030
|
)
|
Property, plant and equipment, net
|
|
$
|
5,064,365
|
|
|
$
|
5,113,844
|
|
Depreciation
expense for the three months ended March 31, 2016 and 2015 amounted to $142,326 and $132,337, respectively.
NOTE
6 – INTANGIBLE ASSETS
Intangible
assets consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land use rights
|
|
$
|
640,218
|
|
|
$
|
635,800
|
|
Other intangible assets
|
|
|
81,913
|
|
|
|
81,348
|
|
Total
|
|
|
722,131
|
|
|
|
717,148
|
|
Less: accumulated amortization
|
|
|
(155,238
|
)
|
|
|
(148,380
|
)
|
Intangible assets, net
|
|
$
|
566,893
|
|
|
$
|
568,768
|
|
Amortization
expense of intangible assets for the three months ended March 31, 2016 and 2015 was $6,858 and $6,588, 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
7 – RELATED PARTY TRANSACTIONS
Payables
due to related parties consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Shenyang Joway Industrial Development Co., Ltd.
|
|
$
|
2,259
|
|
|
$
|
2,244
|
|
Jinghe Zhang
|
|
|
206,878
|
|
|
|
128,689
|
|
Total
|
|
$
|
209,137
|
|
|
$
|
130,933
|
|
Transactions
with Shenyang Joway
Shenyang
Joway was formed in 2005 in Shenyang, China by Mr. Jinghe Zhang and three other individuals. Mr. Zhang holds more than 50% of
the equity in Shenyang Joway. Shenyang Joway was in the business of marketing and distributing clothing and related products to
other companies. In 2009, Mr. Zhang decided to shut down the operations of Shenyang Joway in order to focus his attention on 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.
|
|
●
|
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. For the three months ended March 31, 2016 and 2015, the Company
repaid $0 and $6,073 of these advances, respectively. As of March 31, 2016, the total
unpaid principal balance due Shenyang Joway for advances was $2,259.
|
|
●
|
Shenyang
Joway ceased operations at the end of 2009, although it still exists as a legal entity.
|
Transactions
with Jinghe Zhang
|
●
|
On
December 1, 2009, the Company, through its subsidiary Joway Shengshi, entered into a
royalty-free license agreement with Jinghe Zhang, our President, Chief Executive Officer
and director. Pursuant to the license agreement, we are authorized to use the trademark
“Joway” for a term of nine years and five patents from December 1, 2009 till
the expiration dates of the patents.
|
|
●
|
On
May 10, 2007, Joway Shengshi entered into a cash advance agreement with Jinghe Zhang,
our President, Chief Executive Officer and director. Pursuant to the agreement, Jinghe
Zhang agreed to advance operating capital to Joway Shengshi. The advances are interest
free, unsecured, and have no specified repayment terms. The agreement is valid throughout
Joway Shengshi’s term of operation. During the period beginning May 17, 2007 (inception
of Joway Shengshi) through March 31, 2016, Joway Shengshi received cash advances in the
aggregate principal amount of $4,736,754 from Jinghe Zhang of which $4,529,876 has been
repaid. For the three months ended March 31, 2016 and 2015, the Company received $78,189
and $0 of advances, respectively. As of March 31, 2016, the total unpaid principal balance
due Jinghe Zhang for advances was $206,878.
|
The
amounts owed to related parties are non-interest bearing and have no specified repayment terms.
NOTE
8 – INCOME TAXES
The
Company operations in the People’s Republic of China are subject to the Income Tax Law of the People’s Republic of
China. Pursuant to the PRC Income Tax Laws, the Company is subject to the Enterprise Income Tax (“EIT”) which is generally
a statutory rate of 25% beginning January 2008, on income as reported in its statutory financial statements after appropriate
tax adjustments.
The
table below summarizes the differences between the PRC statutory federal rate and the Company’s effective tax rate:
|
|
For the three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Tax computed at China statutory rates
|
|
|
25
|
%
|
|
|
25
|
%
|
Effect of losses
|
|
|
(25
|
%)
|
|
|
(25
|
%)
|
Effective rate
|
|
|
0
|
%
|
|
|
0
|
%
|
NOTE
9 – STATUTORY RESERVES
Pursuant
to the laws and regulations of the PRC, annual income of the Company’s subsidiaries is required to be partly allocated to
the statutory reserves funds after the payment of the PRC income taxes. The allocation to the statutory reserves funds should
be at least 10% of income after tax until the reserves reaches 50% of the entities’ registered capital or members’
equity. The reserve funds are not transferable to the Company in the form of cash dividends, loans or advances. Thus the reserve
funds are not available for distribution except in liquidation. As of March 31, 2016, the Company had allocated $354,052 to statutory
reserves.
NOTE
10 – 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 March 31, 2016
|
|
Sales
|
|
|
COGS
|
|
|
Gross profit
|
|
|
Loss from operations
|
|
|
Depreciation and amortization
|
|
|
Assets
|
|
Healthcare Knit Goods Series
|
|
$
|
313,964
|
|
|
$
|
113,782
|
|
|
$
|
200,182
|
|
|
$
|
(72,704
|
)
|
|
$
|
56,225
|
|
|
$
|
221,706
|
|
Daily Healthcare and Personal Care Series
|
|
|
137,972
|
|
|
|
51,838
|
|
|
|
86,134
|
|
|
|
(33,788
|
)
|
|
|
24,708
|
|
|
|
159,761
|
|
Wellness House and Activated Water Machine Series
|
|
|
381,123
|
|
|
|
151,131
|
|
|
|
229,992
|
|
|
|
(101,267
|
)
|
|
|
68,251
|
|
|
|
459,749
|
|
Segment Totals
|
|
$
|
833,059
|
|
|
$
|
316,751
|
|
|
$
|
516,308
|
|
|
|
(207,759
|
)
|
|
$
|
149,184
|
|
|
|
841,216
|
|
Other Income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
Income Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
Unallocated Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,345,922
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(207,849
|
)
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,187,138
|
|
For
the three months ended March 31, 2015
|
|
Sales
|
|
|
COGS
|
|
|
Gross profit
|
|
|
Loss from operations
|
|
|
Depreciation and amortization
|
|
|
Assets
|
|
Healthcare Knit Goods Series
|
|
$
|
250,659
|
|
|
$
|
61,571
|
|
|
$
|
189,088
|
|
|
$
|
(103,650
|
)
|
|
$
|
50,876
|
|
|
$
|
303,706
|
|
Daily Healthcare and Personal Care Series
|
|
|
95,215
|
|
|
|
33,955
|
|
|
|
61,260
|
|
|
|
(49,939
|
)
|
|
|
19,326
|
|
|
|
200,682
|
|
Wellness House and Activated Water Machine Series
|
|
|
338,593
|
|
|
|
136,195
|
|
|
|
202,398
|
|
|
|
(193,034
|
)
|
|
|
68,725
|
|
|
|
227,748
|
|
Segment Totals
|
|
$
|
684,467
|
|
|
$
|
231,721
|
|
|
$
|
452,746
|
|
|
|
(346,623
|
)
|
|
$
|
138,925
|
|
|
|
732,136
|
|
Other Income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
692
|
|
|
|
|
|
|
|
|
|
Income Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,438
|
|
|
|
|
|
|
|
|
|
Unallocated Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,969,699
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(347,369
|
)
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,701,835
|
|
NOTE
11 -
FRANCHISE REVENUES
The
Company enters into franchising agreements to develop retail outlets for the Company's products. The agreements provide that franchisees
will sell Company products exclusively at a predetermined retail price. In exchange the Company provides them with geographic
exclusivity, discounted products, training and support. The agreements also require franchisees to adhere to certain standards
of product merchandising, promotion and presentment. The agreements also prohibit franchisees from selling competitor’s
products. The agreements do not require any initial franchise fees from the franchisees, nor do they require the franchisees to
pay continuing royalties. The agreements do not require the franchisees to purchase any minimum levels of product, but do require
that they make at least one purchase during each year. The Company does not act to manage the franchisees’ levels of product.
Franchisees hold periodic conferences, assisted by the Company’s marketing department, to promote product awareness and
the introduction of new products. The franchising agreements are generally for terms of three years and are renewable at the mutual
agreement of both parties. The franchising agreements are cancelable at the Company’s discretion if franchisees violate
the terms of the agreements.
The
following is a breakdown of revenue between franchise and non-franchise customers:
|
|
For the three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Sales to franchise customers
|
|
$
|
649,997
|
|
|
$
|
494,289
|
|
Sales to non-franchise customers
|
|
|
183,062
|
|
|
|
190,178
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
833,059
|
|
|
$
|
684,467
|
|
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
income.
Our other income consists primarily of interest income, investment income and bank service fee.
Income
taxes.
According to the revised Enterprise Income Tax Law effective as of January 1, 2008, the income tax rate of our PRC
subsidiaries is generally 25%. Joway Health Industries Group Inc. was established under the laws of the State of Nevada and is
subject to U.S. federal income tax and Nevada annual reporting requirements.
Results
of Operations
The
following table sets forth certain information regarding our results of operations.
|
|
For the three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
REVENUES
|
|
$
|
833,059
|
|
|
$
|
684,467
|
|
COST OF REVENUES
|
|
|
316,751
|
|
|
|
231,721
|
|
GROSS PROFIT
|
|
|
516,308
|
|
|
|
452,746
|
|
OPERATING EXPENSES
|
|
|
724,067
|
|
|
|
799,369
|
|
LOSS FROM OPERATIONS
|
|
|
(207,759
|
)
|
|
|
(346,623
|
)
|
OTHER INCOME, NET
|
|
|
21
|
|
|
|
692
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(207,738
|
)
|
|
|
(345,931
|
)
|
INCOME TAXES
|
|
|
111
|
|
|
|
1,438
|
|
NET LOSS
|
|
$
|
(207,849
|
)
|
|
$
|
(347,369
|
)
|
Business
Segments
In
2016 and 2015, 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 March 31, 2016
|
|
Healthcare Knit goods Series
|
|
|
% of
Total
|
|
|
Daily Healthcare and Personal Care Series
|
|
|
% of
Total
|
|
|
Wellness House and Activated Water Machine Series
|
|
|
% of
Total
|
|
|
Total
|
|
REVENUES
|
|
$
|
313,964
|
|
|
|
37.7
|
%
|
|
$
|
137,972
|
|
|
|
16.6
|
%
|
|
$
|
381,123
|
|
|
|
45.7
|
%
|
|
$
|
833,059
|
|
COST OF REVENUES
|
|
|
113,782
|
|
|
|
35.9
|
%
|
|
|
51,838
|
|
|
|
16.4
|
%
|
|
|
151,131
|
|
|
|
47.7
|
%
|
|
|
316,751
|
|
GROSS PROFIT
|
|
|
200,182
|
|
|
|
38.8
|
%
|
|
|
86,134
|
|
|
|
16.7
|
%
|
|
|
229,992
|
|
|
|
44.5
|
%
|
|
|
516,308
|
|
GROSS MARGIN
|
|
|
63.8
|
%
|
|
|
|
|
|
|
62.4
|
%
|
|
|
|
|
|
|
60.3
|
%
|
|
|
|
|
|
|
62.0
|
%
|
OPERATING EXPENSES
|
|
|
272,886
|
|
|
|
37.7
|
%
|
|
|
119,922
|
|
|
|
16.6
|
%
|
|
|
331,259
|
|
|
|
45.7
|
%
|
|
|
724,067
|
|
LOSS FROM OPERATIONS
|
|
$
|
(72,704
|
)
|
|
|
35.0
|
%
|
|
$
|
(33,788
|
)
|
|
|
16.3
|
%
|
|
$
|
(101,267
|
)
|
|
|
48.7
|
%
|
|
$
|
(207,759
|
)
|
For
the three months ended March 31, 2015
|
|
Healthcare Knit goods Series
|
|
|
% of
Total
|
|
|
Daily Healthcare and Personal Care Series
|
|
|
% of
Total
|
|
|
Wellness House and Activated Water Machine Series
|
|
|
% of
Total
|
|
|
Total
|
|
REVENUES
|
|
$
|
250,659
|
|
|
|
36.6
|
%
|
|
$
|
95,215
|
|
|
|
13.9
|
%
|
|
$
|
338,593
|
|
|
|
49.5
|
%
|
|
$
|
684,467
|
|
COST OF REVENUES
|
|
|
61,571
|
|
|
|
26.6
|
%
|
|
|
33,955
|
|
|
|
14.7
|
%
|
|
|
136,195
|
|
|
|
58.8
|
%
|
|
|
231,721
|
|
GROSS PROFIT
|
|
|
189,088
|
|
|
|
41.8
|
%
|
|
|
61,260
|
|
|
|
13.5
|
%
|
|
|
202,398
|
|
|
|
44.7
|
%
|
|
|
452,746
|
|
GROSS MARGIN
|
|
|
75.4
|
%
|
|
|
|
|
|
|
64.3
|
%
|
|
|
|
|
|
|
59.8
|
%
|
|
|
|
|
|
|
66.1
|
%
|
OPERATING EXPENSES
|
|
|
292,738
|
|
|
|
36.6
|
%
|
|
|
111,199
|
|
|
|
13.9
|
%
|
|
|
395,432
|
|
|
|
49.5
|
%
|
|
|
799,369
|
|
LOSS FROM OPERATIONS
|
|
$
|
(103,650
|
)
|
|
|
29.9
|
%
|
|
$
|
(49,939
|
)
|
|
|
14.4
|
%
|
|
$
|
(193,034
|
)
|
|
|
55.7
|
%
|
|
$
|
(346,623
|
)
|
For
The Three Months Ended March 31, 2016 Compared to March 31, 2015
Revenue.
For the three months ended March 31, 2016, revenue was $833,059 compared to $684,467 for the three months ended March 31,
2015, an increase of $148,592 or 21.7%. In our annual conference in January, we launched some meeting products and gave more discounts
to our franchisees on some products, which brought out a significant increase in sales.
Revenue
from healthcare knit goods segment increased by $63,305 or 25.3% to $313,964 for the three months ended March 31, 2016 from $250,659
for the three months ended March 31, 2015. This increase was mainly due to increase in sales of our mattress products. In January,
we launched a new style of mattress special for our annual conference with sales reaching $0.11 million.
Revenue
from daily healthcare and personal care products increased by $42,757 or 44.9% to $137,972 for the three months ended March 31,
2016 from $95,215 for the three months ended March 31, 2015. This was primarily due to the increase in sales of our
tourmaline knee protector and a new style of tourmaline shawl special for our annual conference.
Revenue
from
wellness houses and activated water machines increased by $42,530 or 12.6%
to $381,123 for the three months ended March 31, 2016 from $338,593 for the three months ended March 31, 2015. This increase was
mainly due to the increase in sale of our wellness house for family use. In our annual conference, we gave our franchisees more
discounts on our wellness house for family use.
Cost
of Goods Sold.
For the three months ended March 31, 2016, cost of goods sold was $316,751 compared to $231,721 for the three
months ended March 31, 2015, an increase of $85,030, or 36.7%. This increase was mainly due to the increase in sales.
Cost
of goods sold for healthcare knit goods segment increased to $113,782 for the three months ended March 31, 2016 from $61,571 for
the three months ended March 31, 2015, an increase of $52,211 or 84.8%. This increase was mainly due to the increase in the cost
of Mattress products as a result of the increase in sales.
Cost
of goods sold for the daily healthcare and personal care segment increased to $51,838 for the three months ended March 31, 2016
from $33,955 for the three months ended March 31, 2015, an increase of $17,883 or 52.7%. This increase was primarily due to the
increase in the cost of our new tourmaline shawl special for our annual conference as a result of the larger sale with higher
cost rate.
Cost
of goods sold for our wellness house and activated water machine segment increased to $151,131 for the three months ended March
31, 2016 from $136,195 for the three months ended March 31, 2015, an increase of $14,936 or 11%. This increase was mainly due
to the increase in the cost of wellness house for family use as a result of the increase in sales.
Gross
profit.
Our gross profit increased by $63,562 or 14% to $516,308 for the three months ended March 31, 2016, compared to $452,746
for the three months ended March 31, 2015. This increase was mainly due to the increase in sales. Our gross margin decreased from
66.1% for the three months ended March 31, 2015 to 62% for the three months ended March 31, 2016. This decrease was mainly due
to our healthcare knit goods segment.
Gross
profit for the healthcare knit goods segment increased by $11,094 or 5.9% to $200,182 for the three months ended March 31, 2016
compared to $189,088 for the three months ended March 31, 2015. This increase was mainly due to increased sales of our mattress
products. The gross margins of healthcare knit goods segment decreased from 75.4% for the three months ended March 31, 2015 to
63.8% for the three months ended March 31, 2016. It was mainly due to more discounts to our franchisees on our latex mattress
in January’s annual conference.
Gross
profit of daily healthcare and personal care segment increased by $24,874 or 40.6% to $86,134 for the three months ended March
31, 2016, compared to $61,260 for the three months ended March 31, 2015. This increase was primarily due to increased sales of
our tourmaline knee protector and our tourmaline waist protector. The gross margin of daily healthcare and personal care segment
slightly decreased from 64.3% for the three months ended March 31, 2015 to 62.4% for the three months ended March 31, 2016.
Gross
profit of the wellness house and activated water machine segments increased by $27,594 or 13.6% to $229,992 for the three months
ended March 31, 2016, compared to $202,398 for the three months ended March 31, 2015. This increase was mainly due to the increase
in the gross profit of wellness house for family use. The gross margin of our wellness house and activated water machine segments
slightly increased from 59.8% for the three months ended March 31, 2015 to 60.3% for the three months ended March 31, 2016.
Operating
expenses.
Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our
total operating expenses decreased by $75,302, or 9.4%, from $799,369 for the three months ended March 31, 2015 to $724,067 for
the three months ended March 31, 2016. This decrease was mainly due to the decrease in building maintenance expense and travel
expense. Operating expenses for healthcare knit goods segment decreased by $19,852 or 6.8% to $272,886 for the three months ended
March 31, 2016 from $292,738 for the three months ended March 31, 2015. Operating expenses for daily healthcare and personal care
segment increased by $8,723 or 7.8% to $119,922 for the three months ended March 31, 2016 from $111,199 for the three months ended
March 31, 2015. Operating expenses for our wellness house and activated water machine segment decreased by $64,173 or 16.2% to
$331,259 for the three months ended March 31, 2016 from $395,432 for the three months ended March 31, 2015.
Loss
from operations.
As a result of the foregoing, our loss from operations was $207,759 for the three months ended March 31,
2016, compared to $346,623 for the three months ended March 31, 2015, a decrease of $138,864. This decrease was mainly due to
the increase in revenues and the decrease in operating expenses.
Income
taxes.
Our income tax expense was $111 for the three months ended March 31, 2016, compared to $1,438 for the three months
ended March 31, 2015.
Net
Loss.
For the three months ended March 31, 2016, our net loss was $207,849 compared to $347,369 for the three months ended
March 31, 2015. This decrease was primarily due to the increase in our sales.
Franchising
We
enter into franchise agreements to develop retail outlets for our products. These agreements provide that franchisees will sell
our products exclusively. In exchange, we provide them with geographic exclusivity, discounted products, training, and support.
The agreements also require franchisees to adhere to certain standards of product merchandising, promotion, and presentment. The
agreements do not require the franchisees to purchase any minimum levels of product, but do require that they make at least one
purchase during each year. The agreements are generally for terms of three years and are renewable at the mutual agreement of
both parties. The Agreements are cancelable at our discretion if franchisees violate the terms of the agreements.
The
following is a breakdown of revenue between franchise and non-franchise customers:
|
|
For the three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Sales to franchise customers
|
|
$
|
649,997
|
|
|
$
|
494,289
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|
Sales to non-franchise customers
|
|
|
183,062
|
|
|
|
190,178
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
833,059
|
|
|
$
|
684,467
|
|
Liquidity
and Capital Resources
Our
cash at the beginning of the three months ended March 31, 2016 was $369,249 and increased to $481,325 by the end of March 2016,
an increase of $112,076. This increase was mainly due to cash flow in for our operating activities and financing activities.
On
March 31, 2016, we had net working capital of $999,322, a decrease of $111,901 from $1,111,223 on December 31, 2015.
Our
cash flow information summary is as follows:
|
|
For the three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash provided by (used in):
|
|
|
|
Operating activities
|
|
$
|
86,221
|
|
|
$
|
(37,011
|
)
|
Investing activities
|
|
$
|
(38,949
|
)
|
|
$
|
(249,347
|
)
|
Financing activities
|
|
$
|
78,189
|
|
|
$
|
(6,073
|
)
|
Net
Cash
Provided By (Used In) Operating Activities
Net
cash provided by operating activities was $86,221 for the three months ended March 31, 2016 compared to $37,011 used in for the
three months ended March 31, 2015. This was mainly due to improvement from our operations which reduced our net loss of $139,520
to $207,849 for the three months ended March 31, 2016.
For
the three months ended March 31, 2016, cash was mainly provided by the increase in advances from customers of $168,521 and an
add-back of $142,326 of depreciation for non-cash expense, which was primarily offset by the loss of $207,849.
For
the three months ended March 31, 2015, cash was mainly used to cover the loss of $347,369, which was primarily offset by an add-back
of $132,337 of depreciation for non-cash expense and the decrease in inventory purchase of $78,171.
Net
Cash Used In Investing Activities
Net
cash used in investing activities was $38,949 for the three months ended March 31, 2016, compared to $249,347 for the three months
ended March 31, 2015. During the first quarter of 2016, the cash expenditure of $38,949 was used in purchase of equipment. During
the first quarter of 2015, we expended $184,116 on purchase of vehicles and office equipment and $65,231 on a short-term wealth-management
certificate with Industrial and Commercial Bank of China.
Net
Cash Provided By (Used In) Financing Activities
Net
cash provided by financing activities was $78,189 for the three months ended March 31, 2016, compared to $6,073 used in for the
three months ended March 31, 2015.
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. 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. For the three months ended March 31,
2016 and 2015, we repaid $0 and $6,073 of these advances, respectively. As of March 31, 2016, the total unpaid principal balance
due Shenyang Joway for advances was $2,259. 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 $4,529,876 has been repaid. For the three months ended March 31, 2016 and 2015,
we received $78,189 and $0 of advance, respectively. As of March 31, 2016, the total unpaid principal balance due to Mr. Jinghe
Zhang for advances made to Joway Shengshi was $206,878.
STATUTORY
RESERVES
Pursuant
to the laws and regulations of the PRC, the Company’s PRC subsidiaries are required to allocate a portion of their after-tax
income to statutory reserves funds. The minimum statutory reserves allocation is 10% of after-tax income until the reserves reach
50% of the entities’ registered capital or members’ equity. The reserve funds are not transferable to the Company
in the form of cash dividends, loans or advances. Thus, the reserve funds are not available for distribution except in liquidation.
As of March 31, 2016, the Company had allocated $354,052 to statutory reserves.
Off
Balance Sheet Items
Under
SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a
transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which
we have:
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any
obligation under certain guarantee contracts,
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●
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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
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|
●
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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.
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.
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 March 31, 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.
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.
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|
|
|
|
●
|
We
are in the process of designing a program to provide ongoing company-wide training regarding the Company’s internal
controls, with particular emphasis on our finance and accounting staff.
|
|
|
|
|
●
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We
have implemented an internal review process over financial reporting to review all recent accounting pronouncements and to
verify that the accounting treatment identified in such report have been fully implemented and confirmed by our internal control
department.
|
We
believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor
the effectiveness of these steps and make any changes that our management deems appropriate.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems,
no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting for the three months ended March 31, 2016 that materially affected,
or are reasonably likely to materially affect our internal control over financial reporting.