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 September 30, 2019

 

☐ 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 ☐

 

(Note: The registrant is a voluntary filer of reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed during the preceding 12 months all reports it would have been required to file by Section 13 or 15(d) of the Securities Exchange Act of 1934 if the registrant had been subject to one of such Sections.)

 

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, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐    Accelerated filer ☐ 
Non-accelerated filer ☐   Smaller reporting company ☒
      Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock par value $0.001 per share   GTVI   OTCQB marketplace of OTC Markets Inc.

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: The number of shares outstanding of the Issuer’s Common Stock as of November 14, 2019 was 20,054,000 shares.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION 1
   
Item 1. Financial Statements 1
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
   
Item 4. Controls and Procedures 29
   
PART II - OTHER INFORMATION 30
   
Item 1. Legal Proceedings 30
   
Item 1A. Risk Factors 30
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
   
Item 3. Defaults Upon Senior Securities 30
   
Item 4. Mine Safety Disclosures 30
   
Item 5. Other Information 30
   
Item 6. Exhibits 30
   
SIGNATURES 31

 

i

 

 

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 September 30, 2019 (Unaudited) and December 31, 2018 2
   
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and the Nine Months Ended September 30, 2019 and 2018 (Unaudited) 3
   
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited) 4
   
Notes to Unaudited Condensed Consolidated Financial Statements 5-18

 

1

 

 

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30,     December 31,  
    2019     2018  
    (Unaudited)     (Audited)  
ASSETS            
             
CURRENT ASSETS:            
Cash   $ 91,114     $ 118,996  
Other receivables     21,538       52,580  
Inventories     532,160       532,002  
Advances to suppliers     38,133       119,022  
Prepaid taxes     74,098       102,238  
Prepaid expense     -       1,309  
Total current assets     757,043       926,147  
                 
PROPERTY, PLANT AND EQUIPMENT, net     3,428,813       3,744,766  
                 
OTHER ASSETS:                
Intangible assets, net     446,535       473,594  
Total other assets     446,535       473,594  
                 
Total assets   $ 4,632,391     $ 5,144,507  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
CURRENT LIABILITIES:                
Accounts payable   $ 92,446     $ 98,241  
Advances from customers     5,601       116,260  
Other payables     59,583       40,966  
Due to related parties     1,226,294       643,986  
Total current liabilities     1,383,924       899,453  
                 
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 September 30, 2019 and December 31, 2018     20,054       20,054  
Additional paid-in-capital     7,361,665       7,361,665  
Statutory reserves     354,052       354,052  
Accumulated deficits     (4,930,408 )     (4,026,099 )
Accumulated other comprehensive income     443,104       535,382  
Total stockholders’ equity     3,248,467       4,245,054  
Total liabilities and stockholders’ equity   $ 4,632,391     $ 5,144,507  

 

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

 

2

 

  

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

    Three months ended
September 30, 		    Nine months ended
September 30, 		 
    2019     2018     2019     2018  
                         
REVENUES   $ 158,516     $ 390,465     $ 468,766     $ 1,477,385  
                                 
COST OF REVENUES     69,709       163,193       221,872       650,547  
                                 
GROSS PROFIT     88,807       227,272       246,894       826,838  
                                 
Selling expenses     53,831       167,921       222,764       663,437  
General and administrative expenses     223,603       370,827       855,613       1,258,832  
OPERATING EXPENSES     277,434       538,748       1,078,377       1,922,269  
                                 
LOSS FROM OPERATIONS     (188,627 )     (311,476 )     (831,483 )     (1,095,431 )
                                 
Interest income     36       76       124       282  
Other income     24       1,090       35       3,422  
Other expenses     (71,695 )     -       (72,985 )     (20,634 )
OTHER INCOME (EXPENSE), NET     (71,635 )     1,166       (72,826 )     (16,930 )
                                 
LOSS BEFORE INCOME TAXES     (260,262 )     (310,310 )     (904,309 )     (1,112,361 )
                                 
INCOME TAXES     -       -       -       -  
                                 
NET LOSS     (260,262 )     (310,310 )     (904,309 )     (1,112,361 )
                                 
OTHER COMPREHENSIVE LOSS:                                
Foreign currency translation adjustment     (105,948 )     (188,893 )     (92,278 )     (260,924 )
                                 
COMPREHENSIVE LOSS   $ (366,210 )   $ (499,203 )   $ (996,587 )   $ (1,373,285 )
                                 
NET LOSS PER COMMON SHARE, BASIC AND DILUTED   $ (0.01 )   $ (0.02 )   $ (0.05 )   $ (0.06 )
                                 
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

 

3

 

 

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Nine months ended
September 30, 		 
    2019     2018  
             
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss   $ (904,309 )   $ (1,112,361 )
Adjustments to reconcile net loss to net cash used in operating activities                
Depreciation     308,065       321,283  
Amortization     14,359       15,666  
Allowance for doubtful accounts     -       1,316  
Loss on sale of assets     13       6,175  
Changes in operating assets and liabilities:                
Accounts receivable, trade     -       145  
Other receivables     31,042       28,127  
Inventories     1,985       72,433  
Advances to suppliers     80,889       61,626  
Prepaid expense     1,309       616  
Accounts payable     (5,795 )     16,028  
Advances from customers     (110,659 )     (6,763 )
Other payable     29,558       194  
Salary and welfare payable     (10,941 )     (9,149 )
Taxes payable     28,140       11,003  
Net cash used in operating activities     (536,344 )     (593,661 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of property plant and equipment     (89,219 )     (7,303 )
Proceeds from sale of equipment     -       344  
Net cash used in investing activities     (89,219 )     (6,959 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds of due to related parties     582,308       219,415  
Net cash provided by financing activities     582,308       219,415  
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     15,373       (21,691 )
                 
NET DECREASE IN CASH     (27,882 )     (402,896 )
                 
CASH, beginning of period     118,996       518,535  
                 
CASH, end of period   $ 91,114     $ 115,639  
                 
SUPPLEMENTAL DISCLOSURES:                
                 
Income taxes paid   $ -     $ -  
Interest paid   $ -     $ -  

 

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

 

4

 

 

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.

 

5

 

 

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

 

6

 

 

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, Jingshe Zhang and Baogang Song, the shareholders of Joway Shengshi (the “Grantees”), entered into a Call Option Agreement, dated July 20,2010 with Lionel Evan Liu (the “Grantor”), the sole shareholder of Crystal Globe Limited (the controlling shareholder of Dynamic Elite), a British Virgin Islands company (“CGL”) (the “Call Option Agreement”), pursuant to which the Grantees had the right to purchase up to 100% of the shares of CGL (the “Call Option”) at an exercise price of $2.00 per share (the “Exercise Price”) for a period of five years. The Call Option vested as to 34% of the shares of CGL on April 2, 2011 and as to 33% on each of April 2, 2012 and 2013(the respective “Call Option Effective Date”). On March 28, 2015, the Grantor and Grantees amended the Call Option Agreement, to (i) reduce the Exercise Price to $0.00 per share and (ii) extend the Grantees’ rights to exercise their call option within ten years from the respective Option Effective Date.

 

On November 13, 2016, Jinghe Zhang exercised his Call Option as to 99% of the shares of CGL and Baogang Song exercised his Call Option as to 1% of the shares of CGL. As a result of exercising his Call Option, Jinghe Zhang became the controlling shareholder of CGL and in turn, the controlling shareholder of the Company. Jinghe Zhang now controls 17,233,920 shares, or 85.9%, of the issued and outstanding shares of the Company’s common stock.

 

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 nine month period ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. 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, 2018 which was filed on April 1, 2019.

 

7

 

 

Use of Estimates

 

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

 

Basis of Consolidation

 

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

 

Pursuant to Accounting Standards Codification Topic 810 “Consolidation” (“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 nine months ended
September 30, 		    For the year ended December 31,  
    2019     2018     2018  
Period ended RMB: USD Exchange rate     7.0729       6.86654       6.87644  
Average RMB: USD Exchange rate     6.84922       6.51368       6.61464  

 

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.

 

Foreign currency translation adjustments have been reported as comprehensive loss in the consolidated financial statements and totaled $105,948 and $188,893 for the three months ended September 30, 2019 and 2018, respectively, and $92,278 and $260,924 for the nine months ended September 30, 2019 and 2018, respectively.

 

8

 

 

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.

 

9

 

 

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 September 30, 2019 and December 31, 2018, the Company allowance $2,555 and $2,628 for doubtful accounts, 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 September 30, 2019 and December 31, 2018, the Company recorded $75,006 and $77,149 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 $38,133 and $119,022 as of September 30, 2019 and December 31, 2018, 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.

 

10

 

 

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 nine months ended September 30, 2019 and 2018.

 

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 $11,942 and $25,410 for the three months ended September 30, 2019 and 2018, respectively, and $40,913 and $93,698 for the nine months ended September 30, 2019 and 2018, 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.

 

11

 

 

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 nine month periods ended September 30, 2019 and 2018.

 

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 nine months ended September 30, 2019 and the year ended December 31, 2018, 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 January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, “Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to nonemployees with the requirements for share-based payments granted to employees. ASU 2018-07 becomes effective for the Company on January 1, 2019. Early adoption is permitted. The adoption of this accounting pronouncement is not expected to have an impact on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

 

12

 

 

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. The Company does not expect the impact on its consolidated financial statements to be material.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

NOTE 3 – ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following:

 

    September 30,     December 31,  
    2019     2018  
Accounts receivable   $ 2,555     $ 2,628  
Less: allowance for bad debt     (2,555 )     (2,628 )
    $ -     $ -  

 

As of the periods presented, the Company allowance $2,555 and $2,628 for doubtful accounts, respectively.

 

NOTE 4 – INVENTORIES

 

Inventories consisted of the following:

 

    September 30,     December 31,  
    2019     2018  
Raw materials   $ 109,969     $ 132,185  
Finished goods     461,168       439,908  
Low value consumables     36,029       37,058  
Total     607,166       609,151  
Less: impairment loss     (75,006 )     (77,149 )
Inventory, net   $ 532,160     $ 532,002  

 

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 September 30, 2019 and December 31, 2018, the Company recognized $75,006 and $77,149, respectively, as a reserve for impairment loss from inventory.

 

13

 

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

    September 30,     December 31,  
    2019     2018  
Building   $ 5,629,472     $ 5,790,305  
Operating Equipment     412,446       336,667  
Office furniture and equipment     334,510       343,200  
Vehicles     967,045       994,674  
Total     7,343,473       7,464,846  
Less: accumulated depreciation     (3,914,660 )     (3,720,080 )
Property, plant and equipment, net   $ 3,428,813     $ 3,744,766  

 

Depreciation expense for the three months ended September 30, 2019 and 2018 amounted to $99,916 and $109,826, respectively, and for the nine months ended September 30, 2019 and 2018 amounted to $308,065 and $321,283, respectively.

 

NOTE 6 – INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

    September 30,     December 31,  
    2019     2018  
Land use rights   $ 583,644     $ 600,319  
Other intangible assets     74,675       76,808  
Total     658,319       677,127  
Less: accumulated amortization     (211,784 )     (203,533 )
Intangible assets, net   $ 446,535     $ 473,594  

 

Amortization expense of intangible assets for the three months ended September 30, 2019 and 2018 was $4,687 and $4,911, respectively, and for the nine months ended September 30, 2019 and 2018 amounted to $14,359 and $15,666, respectively.

 

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

 

Estimated amortization expense for      
the year ending December 31,   Amount  
2019   $ 20,503  
2020   $ 20,503  
2021   $ 20,503  
2022   $ 20,503  
2023   $ 20,503  
Thereafter   $ 371,079  

 

14

 

 

NOTE 7 – RELATED PARTY TRANSACTIONS

 

Payables due to related parties consist of the following:

 

    September 30,     December 31,  
    2019     2018  
Shenyang Joway Industrial Development Co., Ltd.   $ -     $ 118,458  
Jinghe Zhang     1,226,294       525,528  
Total   $ 1,226,294     $ 643,986  

 

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.
     
● Through December 31, 2010, Shenyang Joway advanced an aggregate of $912,645 to Joway Shengshi and Joway Technology, which was paid off by 2019. For the nine months ended September 30, 2019 and 2018, the Company repaid $118,458 and $0 of these advances, respectively. As of September 30, 2019, the total unpaid principal balance due Shenyang Joway for advances was $0.
     
● 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 June 30, 2019, Joway Shengshi received cash advances in the aggregate principal amount of $5,821,695 from Jinghe Zhang of which $4,595,401 has been repaid. For the nine months ended September 30, 2019 and 2018, the Company received $700,766 and $219,533 of these advances, respectively. As of September 30, 2019, the total unpaid principal balance due Jinghe Zhang for advances was $1,226,294.

 

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

 

15

 

 

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 nine months ended
September 30, 		 
    2019     2018  
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 September 30, 2019, the Company had allocated $354,052 to statutory reserves.

 

NOTE 10 – SEGMENTS

 

In 2018 and 2017, 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 September 30, 2019

 

    Sales     COGS     Gross profit     Loss from operations     Depreciation and amortization     Assets  
Healthcare Knit Goods Series   $ 14,546     $ 4,800     $ 9,746     $ (10,449 )   $ 9,599     $ 139,577  
Daily Healthcare and Personal Care Series     74,313       29,910       44,403       (103,530 )     49,038       219,620  
Wellness House and Activated Water Machine Series     69,657       34,999       34,658       (74,648 )     45,966       176,048  
Segment Totals   $ 158,516     $ 69,709     $ 88,807       (188,627 )   $ 104,603       535,245  
Other Loss, net                             (71,635 )                
Income Tax                             -                  
Unallocated Assets                                             4,097,146  
Net Loss                           $ (260,262 )                
Total Assets                                           $ 4,632,391  

 

16

 

 

For the three months ended September 30, 2018

 

    Sales     COGS     Gross profit     Loss from operations     Depreciation and amortization     Assets  
Healthcare Knit Goods Series   $ 56,159     $ 15,306     $ 40,853     $ (36,571 )   $ 16,502     $ 131,356  
Daily Healthcare and Personal Care Series     130,115       53,697       76,418       (101,319 )     38,234       253,988  
Wellness House and Activated Water Machine Series     204,191       94,190       110,001       (173,586 )     60,001       158,548  
Segment Totals   $ 390,465     $ 163,193     $ 227,272       (311,476 )   $ 114,737       543,892  
Other Income, net                             1,166                  
Income Tax                             -                  
Unallocated Assets                                             4,601,678  
Net Loss                           $ (310,310 )                
Total Assets                                           $ 5,145,570  

 

For the nine months ended September 30, 2019

 

    Sales     COGS     Gross profit     Loss from operations     Depreciation and amortization     Assets  
Healthcare Knit Goods Series   $ 61,733     $ 28,307     $ 33,426     $ (108,588 )   $ 42,461     $ 139,577  
Daily Healthcare and Personal Care Series     156,208       68,315       87,893       (271,461 )     107,442       219,620  
Wellness House and Activated Water Machine Series     250,825       125,250       125,575       (451,434 )     172,521       176,048  
Segment Totals   $ 468,766     $ 221,872     $ 246,894       (831,483 )   $ 322,424       535,245  
Other Loss, net                             (72,826 )                
Income Tax                             -                  
Unallocated Assets                                             4,097,146  
Net Loss                           $ (904,309 )                
Total Assets                                           $ 4,632,391  

 

17

 

 

For the nine months ended September 30, 2018

 

    Sales     COGS     Gross profit     Loss from operations     Depreciation and amortization     Assets  
Healthcare Knit Goods Series   $ 210,259     $ 70,480     $ 139,779     $ (133,796 )   $ 47,954     $ 131,356  
Daily Healthcare and Personal Care Series     428,935       186,541       242,394       (315,706 )     97,828       253,988  
Wellness House and Activated Water Machine Series     838,191       393,526       444,665       (645,929 )     191,167       158,548  
Segment Totals   $ 1,477,385     $ 650,547     $ 826,838       (1,095,431 )   $ 336,949       543,892  
Other Expenses, net                             (16,930 )                
Income Tax                             -                  
Unallocated Assets                                             4,601,678  
Net Loss                           $ (1,112,361 )                
Total Assets                                           $ 5,145,570  

 

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 September 30,     For the nine months ended September 30,  
    2019     2018     2019     2018  
                         
Sales to franchise customers   $ 129,211     $ 292,306     $ 354,687     $ 1,038,238  
Sales to non-franchise customers     29,305       98,159       114,079       439,147  
                                 
Total sales   $ 158,516     $ 390,465     $ 468,766     $ 1,477,385  

 

NOTE 12 – LITIGATION AND CONTINGENCY

 

Joway Decoration, one of the Company’s consolidated subsidiaries, is a defendant in 2 lawsuits filed by individual plaintiffs who alleged that the Company’s wiring circuit design for the wellness house is the main reason for two house fires. In August and November 2019, following mediations, Joway Decoration reached settlement agreements with the court approvals to pay $70,617.53 or RMB 490,000 in total to individual plaintiffs. As the date of this report, the Company had paid $42,340.59 or RMB 290,000 to one of the individual plaintiffs. The remaining balance of $28,276.94 or RMB 200,000 is due on December 5, 2019.

 

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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 April 1, 2019.

 

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 100 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.

 

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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. Our other expense 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 September 30,     For the nine months ended September 30,  
    2019     2018     2019     2018  
REVENUES   $ 158,516     $ 390,465     $ 468,766     $ 1,477,385  
COST OF REVENUES     69,709       163,193       221,872       650,547  
GROSS PROFIT     88,807       227,272       246,894       826,838  
OPERATING EXPENSES     277,434       538,748       1,078,377       1,922,269  
LOSS FROM OPERATIONS     (188,627 )     (311,476 )     (831,483 )     (1,095,431 )
OTHER INCOME (EXPENSE), NET     (71,635 )     1,166       (1,191 )     (18,096 )
LOSS BEFORE INCOME TAXES     (260,262 )     (310,310 )     (644,047 )     (802,051 )
INCOME TAXES     -       -       -       -  
NET LOSS   $ (260,262 )     (310,310 )     (644,047 )     (802,051 )

 

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Business Segments

 

In 2019 and 2018, 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 September 30, 2019

 

    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   $ 14,546       9.2 %   $ 74,313       46.9 %   $ 69,657       43.9 %   $ 158,516  
COST OF REVENUES     4,800       6.9 %     29,910       42.9 %     34,999       50.2 %     69,709  
GROSS PROFIT     9,746       11.0 %     44,403       50.0 %     34,658       39.0 %     88,807  
GROSS MARGIN     67.0 %             59.8 %             49.8 %             56.0 %
OPERATING EXPENSES     20,195       7.3 %     147,933       53.3 %     109,306       39.4 %     277,434  
LOSS FROM OPERATIONS   $ (10,449 )     5.5 %   $ (103,530 )     54.9 %   $ (74,648 )     39.6 %   $ (188,627 )

 

For the three months ended September 30, 2018

 

    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   $ 56,159       14.4 %   $ 130,115       33.3 %   $ 204,191       52.3 %   $ 390,465  
COST OF REVENUES     15,306       9.4 %     53,697       32.9 %     94,190       57.7 %     163,193  
GROSS PROFIT     40,853       18.0 %     76,418       33.6 %     110,001       48.4 %     227,272  
GROSS MARGIN     72.7 %             58.7 %             53.9 %             58.2 %
OPERATING EXPENSES     77,424       14.4 %     177,737       33.0 %     283,587       52.6 %     538,748  
LOSS FROM OPERATIONS   $ (36,571 )     11.7 %   $ (101,319 )     32.5 %   $ (173,586 )     55.7 %   $ (311,476 )

 

For the nine months ended September 30, 2019

 

    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   $ 61,733       13.2 %   $ 156,208       33.3 %   $ 250,825       53.5 %   $ 468,766  
COST OF REVENUES     28,307       12.8 %     68,315       30.8 %     125,250       56.5 %     221,872  
GROSS PROFIT     33,426       13.5 %     87,893       35.6 %     125,575       50.9 %     246,894  
GROSS MARGIN     54.1 %             56.3 %             50.1 %             52.7 %
OPERATING EXPENSES     142,014       13.2 %     359,354       33.3 %     577,009       53.5 %     1,078,377  
LOSS FROM OPERATIONS   $ (108,588 )     13.1 %   $ (271,461 )     32.6 %   $ (451,434 )     54.3 %   $ (831,483 )

  

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For the nine months ended September 30, 2018

 

    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   $ 210,259       14.2 %   $ 428,935       29.0 %   $ 838,191       56.7 %   $ 1,477,385  
COST OF REVENUES     70,480       10.8 %     186,541       28.7 %     393,526       60.5 %     650,547  
GROSS PROFIT     139,779       16.9 %     242,394       29.3 %     444,665       53.8 %     826,838  
GROSS MARGIN     66.5 %             56.5 %             53.1 %             56.0 %
OPERATING EXPENSES     273,575       14.2 %     558,100       29.0 %     1,090,594       56.7 %     1,922,269  
LOSS FROM OPERATIONS   $ (133,796 )     12.2 %   $ (315,706 )     28.8 %   $ (645,929 )     59.0 %   $ (1,095,431 )

 

For The Three Months Ended September 30, 2019 Compared to September 30, 2018

 

Revenue. For the three months ended September 30, 2019, revenue was $158,516 compared to $390,465 for the three months ended September 30, 2018, a decrease of $231,949 or 59.4%. This decrease was mainly due to the downturn of the health care industry in China.

 

Revenue from healthcare knit goods segment decreased by $41,613 or 74.1% to $14,546 for the three months ended September 30, 2019 from $56,159 for the three months ended September 30, 2018. This decrease was mainly due to the decrease in sales of our mattress products. Our mattress products are our best-selling products and were most affected by market fluctuations.

 

Revenue from daily healthcare and personal care products decreased by $55,802 or 42.9% to $74,313 for the three months ended September 30, 2019 from $130,115 for the three months ended September 30, 2018. This was primarily due to the decrease in sales of Xin-Nao-Ling Fish Oil Soft Gel.

 

Revenue from wellness houses and activated water machines decreased by $134,534 or 65.9% to $69,657 for the three months ended September 30, 2019 from $204,191 for the three months ended September 30, 2018. This decrease was mainly due to the decrease in sales of our wellness house.

 

Cost of Goods Sold. For the three months ended September 30, 2019, cost of goods sold was $69,709 compared to $163,193 for the three months ended September 30, 2018, a decrease of $93,484 or 57.3%. This decrease was mainly due to the decrease in sales.

 

Cost of goods sold for healthcare knit goods segment decreased to $4,800 for the three months ended September 30, 2019 from $15,306 for the three months ended September 30, 2018, a decrease of $10,506 or 68.6%. This decrease was due to the decrease in sales.

 

Cost of goods sold for the daily healthcare and personal care segment decreased to $29,910 for the three months ended September 30, 2019 from $53,697 for the three months ended September 30, 2018, a decrease of $23,787 or 44.3%. This decrease was due to the decrease in sales.

 

Cost of goods sold for our wellness house and activated water machine segment decreased to $34,999 for the three months ended September 30, 2019 from $94,190 for the three months ended September 30, 2018, a decrease of $59,191 or 62.8%. This decrease was mainly due to the decrease in sales.

 

Gross profit. Our gross profit decreased by $138,465 or 60.9% to $88,807 for the three months ended September 30, 2019, compared to $227,272 for the three months ended September 30, 2018. This decrease was mainly due to the decrease in sales. Our gross margin slightly decreased slightly from 58.2% for the three months ended September 30, 2018 to 56% for the three months ended September 30, 2019.

 

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Gross profit for the healthcare knit goods segment decreased by $31,107 or 76.1% to $9,746 for the three months ended September 30, 2019 compared to $40,853 for the three months ended September 30, 2018. This decrease was mainly due to the decreased gross profit of our mattress products. The gross margins of healthcare knit goods segment decreased from 72.7% for the three months ended September 30, 2018 to 67% for the three months ended September 30, 2019. It was mainly due to that the lower output of our healthcare knit goods caused the higher cost rate and lower gross margin.

 

Gross profit of daily healthcare and personal care segment decreased by $32,015 or 41.9% to $44,403 for the three months ended September 30, 2019, compared to $76,418 for the three months ended September 30, 2018. This decrease was mainly due to the decreased sales. The gross margin of daily healthcare and personal care segment increased slightly from 58.7% for the three months ended September 30, 2018 to 59.8% for the three months ended September 30, 2019.

 

Gross profit of the wellness house and activated water machine segments decreased by $75,343 or 68.5% to $34,658 for the three months ended September 30, 2019, compared to $110,001 for the three months ended September 30, 2018. This decrease was mainly due to the decrease in gross profit from our wellness houses. The gross margin of our wellness house and activated water machine segments decreased slightly from 53.9% for the three months ended September 30, 2018 to 49.8% for the three months ended September 30, 2019.

 

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $261,314 or 48.5%, from $538,748 for the three months ended September 30, 2018 to $277,434 for the three months ended September 30, 2019. This decrease was mainly due to the decrease of salary and conference expenses. Operating expenses for healthcare knit goods segment decreased by $57,229 or 73.9% to $20,195 for the three months ended September 30, 2019 from $77,424 for the three months ended September 30, 2018. Operating expenses for daily healthcare and personal care segment decreased by $29,804 or 16.8% to $147,933 for the three months ended September 30, 2019 from $177,737 for the three months ended September 30, 2018. Operating expenses for our wellness house and activated water machine segment decreased by $174,281 or 61.5% to $109,306 for the three months ended September 30, 2019 from $283,587 for the three months ended September 30, 2018.

 

Loss from operations. As a result of the foregoing, our loss from operations was $188,627 for the three months ended September 30, 2019, compared to $311,476 for the three months ended September 30, 2018, a decrease of $122,849. The decreased loss was mainly due to the decrease in operating expenses.

 

Income taxes. Our income tax expenses did not incur for the three months ended September 30, 2019 and 2018.

 

Net loss. For the three months ended September 30, 2019, our net loss was $260,262 compared to $310,310 for the three months ended September 30, 2018. The decreased loss was mainly due to decrease in operating expenses.

 

For the Nine Months Ended September 30, 2019 Compared to September 30, 2018

 

Revenue. For the nine months ended September 30, 2019, revenue was $468,766 compared to $1,477,385 for the nine months ended September 30, 2018, a decrease of $1,008,619 or 68.3%. This decrease was mainly due to the downturn of the health care industry in China.

 

Revenue from healthcare knit goods segment decreased by $148,526, or 70.6% to $61,733 for the nine months ended September 30, 2019 from $210,259 for the nine months ended September 30, 2018. This decrease was mainly due to the decrease in sales of our mattress products. Our mattress products are our best-selling products and were most affected by market fluctuations.

 

Revenue from daily healthcare and personal care products decreased by $272,727 or 63.6% to $156,208 for the nine months ended September 30, 2019 from $428,935 for the nine months ended September 30, 2018. This was primarily due to the decrease in sales of most of our daily healthcare and personal care products affected by industry downturn.

 

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Revenue from wellness houses and activated water machines decreased by $587,366 or 70.1% to $250,825 for the nine months ended September 30, 2019 from $838,191 for the nine months ended September 30, 2018. This decrease was mainly due to the decrease of our wellness houses.

 

Cost of Goods Sold. For the nine months ended September 30, 2019, cost of goods sold was $221,872 compared to $650,547 for the nine months ended September 30, 2018, a decrease of $428,675, or 65.9%. This decrease was mainly due to the decrease in sales.

 

Cost of goods sold for healthcare knit goods segment decreased to $28,307 for the nine months ended September 30, 2019 from $70,480 for the nine months ended September 30, 2018, a decrease of $42,173 or 59.8%. This decrease was mainly due to the decrease in the cost of our mattress products, as a result of decrease in sales.

 

Cost of goods sold for the daily healthcare and personal care segment decreased to $68,315 for the nine months ended September 30, 2019 from $186,541 for the nine months ended September 30, 2018, a decrease of $118,226 or 63.4%. This decrease was mainly due to the decrease in sales.

 

Cost of goods sold for our wellness house and activated water machine segment decreased to $125,250 for the nine months ended September 30, 2019 from $393,526 for the nine months ended September 30, 2018, a decrease of $268,276 or 68.2%. This decrease was mainly due to the decrease in sales.

 

Gross profit. Our gross profit decreased by $579,944 or 70.1% to $246,894 for the nine months ended September 30, 2019, compared to $826,838 for the nine months ended September 30, 2018. This decrease was due to the decrease in sales. Our gross margin decreased slightly from 56% for the nine months ended September 30, 2018 to 52.7% for the nine months ended September 30, 2019.

 

Gross profit for the healthcare knit goods segment decreased by $106,353 or 76.1% to $33,426 for the nine months ended September 30, 2019 compared to $139,779 for the nine months ended September 30, 2018. This decrease was mainly due to the decrease in gross profit for our mattress products. The gross margins of healthcare knit goods segment decreased from 66.5% for the nine months ended September 30, 2018 to 54.1% for the nine months ended September 30, 2019. t was mainly due to that the lower output of our healthcare knit goods caused the higher cost rate and lower gross margin.

 

Gross profit of daily healthcare and personal care segment decreased by $154,501 or 63.7% to $87,893 for the nine months ended September 30, 2019, compared to $242,394 for the nine months ended September 30, 2018. This decrease was primarily due to the decrease in sales. Our gross margin of daily healthcare and personal care segment decreased slightly from 56.5% for the nine months ended September 30, 2018 to 56.3% for the nine months ended September 30, 2019.

 

Gross profit of the wellness house and activated water machine segments decreased by $319,090 or 71.8% to $125,575 for the nine months ended September 30, 2019, compared to $444,665 for the nine months ended September 30, 2018. This decrease was mainly due to the decrease in sales. The gross margin of our wellness house and activated water machine segments decreased slightly from 53.1% for the nine months ended September 30, 2018 to 50.1% for the nine months ended September 30, 2019.

 

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $843,892 or 43.9%, from $1,922,269 for the nine months ended September 30, 2018 to $1,078,377 for the nine months ended September 30, 2019. This decrease was mainly due to the decrease of conference expenses, travel expenses and salary. Operating expenses for healthcare knit goods segment decreased by $131,561 or 48.1% to $142,014 for the nine months ended September 30, 2019 from $273,575 for the nine months ended September 30, 2018. Operating expenses for daily healthcare and personal care segment decreased by $198,746 or 35.6% to $359,354 for the nine months ended September 30, 2019 from $558,100 for the nine months ended September 30, 2018. Operating expenses for our wellness house and activated water machine segment decreased by $513,585 or 47.1% to $577,009 for the nine months ended September 30, 2019 from $1,090,594 for the nine months ended September 30, 2018.

 

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Loss from operations. As a result of the foregoing, our loss from operations was $831,483 for the nine months ended September 30, 2019, compared to $1,095,431 for the nine months ended September 30, 2018, a decrease of $263,948. The decreased loss from operations was mainly due to the decrease in operating expenses.

 

Income taxes. Our income tax expenses did not incur for the nine months ended September 30, 2019 and 2018.

 

Net loss. Our net loss was $904,309 for the nine months ended September 30, 2019, compared to $1,112,361 for the nine months ended September 30, 2018. The decreased loss was mainly due to the decrease in 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 September 30,     For the nine months ended September 30,  
    2019     2018     2019     2018  
                         
Sales to franchise customers   $ 129,211     $ 292,306     $ 354,687     $ 1,038,238  
Sales to non-franchise customers     29,305       98,159       114,079       439,147  
                                 
Total sales   $ 158,516     $ 390,465     $ 468,766     $ 1,477,385  

 

Liquidity and Capital Resources

 

Our cash at December 31, 2018 was $118,996 and decreased to $91,114 at September 30, 2019, a decrease of $27,882. This decrease was mainly due to our deteriorated operating results. On September 30, 2019, we had negative working capital of $ 626,881, a decrease of $653,575 from $26,694 on December 31, 2018.

 

Our cash flow information summary is as follows:

 

    For the nine months ended September 30,  
    2019     2018  
Net cash provided by (used in):      
Operating activities   $ (536,344 )   $ (593,661 )
Investing activities   $ (89,219 )   $ (6,959 )
Financing activities   $ 582,308     $ 219,415  

 

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Net Cash Used in Operating Activities

 

Net cash used in operating activities was $536,344 for the nine months ended September 30, 2019, compared to $593,661 for the nine months ended September 30, 2018. This decrease was primarily due to a decrease of $208,052 in net loss.

 

For the nine months ended September 30, 2019, cash was mainly used to cover the loss of $904,309, which was primarily offset by an add-back of depreciation of $308,065.

 

For the nine months ended September 30, 2018, cash was mainly used to cover the loss of $1,112,361, which was primarily offset by an add-back of depreciation of $321,283, a decrease in inventories of $72,433 and a decrease in advances to suppliers of $61,626.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities was $89,219 for the nine months ended September 30, 2019, compared to $6,959 for the nine months ended September 30, 2018.

 

For the nine months ended September 30, 2019, we expended $89,219 on purchase of an advanced production equipment and office equipment. For the nine months ended September 30, 2018, we expended $7,303 on purchase of office equipment.

 

Net Cash Provided by Financing Activities

 

For the nine months ended September 30, 2019, $582,308 of cash was provided by financing activities, compared to $219,415 for the nine months ended September 30, 2018. The cash was provided by and used to repay advances from Jinghe Zhang and Shenyang Joway.

 

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 $912,645 to Joway Shengshi and Joway Technology through December 31, 2010. We repaid $118,458 and $0 of these advances for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, the total unpaid principal balance due Shenyang Joway for advances was $0. Shenyang Joway ceased operations at the end of 2009, although it still exists as a legal entity.

 

On May 10, 2007, our operating subsidiaries, Joway Shengshi entered into a cash advance agreement with Jinghe Zhang, our President, Chief Executive Officer and director. Pursuant to the agreements, Jinghe Zhang agreed to advance operating capital to Joway Shengshi. These advances are interest free, unsecured and are repayable upon demand. During the period beginning May 17, 2007 (inception of Joway Shengshi) through June 30, 2019, Joway Shengshi received cash advances in the aggregate principal amount of $5,821,695 from Jinghe Zhang. We received $700,766 and $219,533 of advances for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, the total unpaid principal balance due Jinghe Zhang was $1,226,294.

 

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 September 30, 2019, the Company had allocated $354,052 to statutory reserves.

 

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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.

 

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.

 

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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.

 

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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 September 30, 2019, our disclosure controls and procedures were not effective, based on the material weakness described below:

 

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

 

Remediation Initiative

 

  ● We have started a training program in the principles and rules of U.S. GAAP, SEC reporting requirements and the application thereof. The program is provided by an independent training institution, for our finance and accounting personnel, including our Chief Financial Officer, Financial Manager and others.
     
  ● We are in the process of designing a program to provide ongoing company-wide training regarding the Company’s internal controls, with particular emphasis on our finance and accounting staff.
     
  ● In 2011 we established the position of internal audit manager. From September 2011 to July 2012, we hired an internal audit manager who implemented an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatments identified in such report have been fully implemented and confirmed by our internal control department. Currently, we are still in the process of seeking for a proper candidate to perform as our internal audit manager.

 

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

 

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

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting for the nine months ended September 30, 2019 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.

 

On August 5, 2019, Joway Decoration and Chong Zhao reached a settlement agreement after the court’s mediation. At the settlement, Chong Zhao was to receive $42,340.59 or RMB 290,000 from Joway Decoration, but the court also requested Chong Zhao to pay the case acceptance fees. On January 3, 2019, Chong Zhao brought a suit against Joway Decoration for the fire damage of his wellness house incurred on March 8, 2018, alleging that the local fire department judged that the arson, lightning and outside fire can be ruled out for the cause, but the wiring circuits in the wellness house cannot be, thus, claimed compensation from Joway Decoration for the fire damage. Joway Decoration refuted Chong Zhao’s allegation based on two reasons. One is that the local fire department did not confirm that the wire circuits in the wellness house was the cause for the fire. And the wiring circuits in the wellness house were provided by not only Joway Decoration, but also other suppliers of the building that the wellness house was built in. Two, Chong Zhao’s wellness house’s warranty period expired many years ago. As of today, Joway Decoration paid the full settlement amount to Chong Zhao.

 

On November 5, 2019, Joway Decoration and Jianjun Feng reached a settlement agreement after the court’s mediation. At the settlement, Jianjun Feng was to receive $28,276.94 or RMB 200,000 from Joway Decoration, but the court also requested Jianjun Feng to pay the case acceptance fees. On April 26, 2019, Jianjun Feng brought a suit against Joway Decoration and Joway Shengshi, as the parent company of Joway Decoration for the fire damage of his wellness house incurred on December 10, 2018, alleging that the local fire department judged that the wiring circuits of the wellness house is the cause of the fire. Joway Shengshi protested that it is not responsible for the Jianjun Feng’s fire damage because it had never sold any products to him. Joway Decoration refuted that the local fire department is not the certificated authentication institution and it did not effectively identify the wiring circuits of the wellness house. So it is not certain that the problem of the wiring circuits is the design defect or the misused by Jianjun Feng for three years. Finally, our wellness house’s warranty period is one year. Jianjun Feng’s wellness house has passed the warranty period for 2 years. As of today, Joway Decoration has yet to pay the settlement amount to Jianjun Feng which is due on December 5, 2019.

 

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, 2018. 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, 2018 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

 

30

 

 

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: November 14, 2019

 

  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

 

 

31

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