JOWAY HEALTH INDUSTRIES GROUP INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements include the financial statements of Joway Health Industries Group Inc. (referred to herein as “Joway Health”), its subsidiaries, and variable interest entities (“VIEs”) where Joway Health is deemed the primary beneficiary. Joway Health, its subsidiaries and VIEs are collectively referred to herein as the “Company”, “we” and “us”.
Joway Health (formerly G2 Ventures, Inc.) was originally incorporated under the laws of the State of Texas on March 21, 2003. On September 21, 2010, Joway Health entered into a Share Exchange Agreement (the “Share Exchange”) with the sole stockholder of Dynamic Elite International Limited. As a result of the Share Exchange, Dynamic Elite became a wholly-owned subsidiary of Joway Health and the stockholders of Dynamic Elite acquired approximately 76.08% of the issued and outstanding stock of Joway Health. The share exchange transaction resulted in the shareholders of Dynamic Elite acquiring a majority voting interest in Joway Health. Generally accepted accounting principles in the United States of America require that the company whose shareholders retain the majority interest in the combined business be treated as the acquirer for accounting purposes. The reverse acquisition process utilizes the capital structure of Joway Health and the assets and liabilities of Dynamic Elite recorded at historical cost. On December 22, 2010, Joway Health changed its jurisdiction of incorporation from the State of Texas to the State of Nevada.
Dynamic Elite International Limited (referred to herein as “Dynamic Elite”) was incorporated under the laws of the British Virgin Islands on June 2, 2010 as a limited liability company (a BVI company). Dynamic Elite engages in manufacturing and distributing tourmaline products in China. Its wholly owned subsidiary, Tianjin Junhe Management Consulting Co., Ltd. was incorporated on September 15, 2010 in Tianjin, People’s Republic of China (“PRC”). Other than the equity interest in Junhe Consulting, Dynamic Elite does not own any assets or conduct any operations.
Tianjin Junhe Management Consulting Co., Ltd. (referred to herein as “Junhe Consulting”) conducts its business through Tianjin Joway Shengshi Group Co., Ltd. that is consolidated as a variable interest entity.
Tianjin Joway Shengshi Group Co., Ltd. (referred to herein as “Joway Shengshi”) was incorporated in PRC on May 17, 2007. Joway Shengshi is currently owned 99% by Jinghe Zhang, the Company’s current CEO and President and 1% by Song Baogang. Joway Shengshi engages in manufacturing and distributing tourmaline products in China. Shenyang Joway Electronic Technology Co., Ltd., Tianjin Joway Decoration Engineering Co., Ltd. and Tianjin Oriental Shengtang Trading Import & Export Trading Co., Ltd are subsidiaries of Joway Shengshi.
Shenyang Joway Electronic Technology Co., Ltd. (referred to herein as “Joway Technology”) was originally named Liaoning Joway Technology Engineering Co., Ltd. which was incorporated on March 28, 2007 in PRC. The name was changed on June 22, 2011. It engages in the distribution of Tourmaline Activated Water Machines and Tourmaline Wellness Houses. Prior to July 25, 2010, Joway Shengshi owned 90.91% of Joway Technology. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, another stockholder of Joway Technology on July 25, 2010 to acquire the remaining 9.09% of the share of Joway Technology. As a result of the share acquisition, Joway Technology became a wholly-owned subsidiary of Joway Shengshi.
Tianjin Joway Decoration Engineering Co., Ltd. (referred to herein as “Joway Decoration”) was incorporated on April 22, 2009 in PRC. It engages in the distribution of Tourmaline Activated Water Machines, Tourmaline Wellness House for family use and Tourmaline Wellness House materials. Prior to July 9, 2010, Joway Shengshi owned 90% of Joway Decoration. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, another stockholder of Joway Decoration on July 9, 2010 to acquire the remaining 10% of the shares of Joway Decoration. As a result of the share acquisition, Joway Decoration became a wholly-owned subsidiary of Joway Shengshi. Jingyun Chen is currently the General Manager of Joway Decoration.
Tianjin Oriental Shengtang Import & Export Trading Co., Ltd (referred to herein as “Shengtang Trading”) was incorporated on September 18, 2009 in the PRC. It engages in purchasing raw materials which it sells to other companies of the group. Prior to July 28, 2010, Joway Shengshi owned 95% of Shengtang Trading. Joway Shengshi entered into a share acquisition agreement with Wang Aiying, another stockholder of Shengtang Trading on July 28, 2010 to acquire the remaining 5% of the shares of Shengtang Trading. As a result of the share acquisition, Shengtang Trading became a wholly-owned subsidiary of Joway Shengshi.
The following table lists the Company and its subsidiaries:
| Name | | Domicile and Date of Incorporation | | Paid in Capital | | Percentage of Effective Ownership | | Principal Activities |
| Joway Health Industries Group Inc. | | March 21, 2003, Nevada | | USD 20,054 | | 86.8% owned by Crystal Globe Limited 13.2%owned by other institutional and individual investors | | Investment Holding |
| Dynamic Elite International Limited | | June 2, 2010, British Virgin Islands | | USD 10,000 | | 100% owned by Joway Health Industries Group Inc. | | Investment Holding |
| Tianjin Junhe Management Consulting Co., Ltd. | | September 15, 2010, PRC | | USD 20,000 | | 100% owned by Dynamic Elite International Limited | | Advisory |
| Tianjin Joway Shengshi Group Co., Ltd. | | May 17, 2007, PRC | | USD 7,216,140.72 | | 99% owned by Jinghe Zhang, and 1% owned by Baogang Song | | Production and distribution of Healthcare Knit Goods and Daily Healthcare and Personal Care products |
| Shenyang Joway Electronic Technology Co., Ltd. | | March 28, 2007, PRC | | USD 142,072.97 | | 100% owned by Tianjin Joway Shengshi Group Co., Ltd | | Distribution of Tourmaline Activated Water Machine and construction of Tourmaline Wellness House |
| Tianjin Joway Decoration Engineering Co., Ltd. | | April 22, 2009, PRC | | USD 292,367.74 | | 100% owned by Tianjin Joway Shengshi Group Co., Ltd | | Distribution of Wellness House for family use and Activated Water Machine and construction of Tourmaline Wellness House |
| Tianjin Oriental Shengtang Import & Export Trading Co., Ltd. | | September 18, 2009, PRC | | USD 292,463.75 | | 100% owned by Tianjin Joway Shengshi Group Co., Ltd | | Distribution of tourmaline products |
On September 16, 2010, prior to the share exchange, Junhe Consulting entered into a series of contractual agreements (the “Contractual Agreements”) with Joway Shengshi and Joway Shengshi’s owners. The following is a brief description of the Contractual Agreements entered into between Junhe Consulting and Joway Shengshi or Joway Shengshi’s owners：
1. Consulting Services Agreement. Pursuant to the consulting services agreement between Junhe Consulting and Joway Shengshi, Junhe Consulting has the right to advise, consult, manage and operate Joway Shengshi, and collect and own all of the net profits of the Operating Entities.
2. Operating Agreement. Under the operating agreement between Junhe Consulting and Joway Shengshi, Junhe Consulting has the right to recommend director candidates and appoint the senior executives of Joway Shengshi, approve any transactions that may materially affect the assets, liabilities, rights or operations of Joway Shengshi, and guarantee the contractual performance by Joway Shengshi of any agreements with third parties, in exchange for a pledge by Joway Shengshi of its accounts receivable and assets.
3. Voting Rights Proxy Agreement. Under the voting rights proxy agreement between Joway Shengshi’s owners and Junhe Consulting, the owners of Joway Shengshi have vested their collective voting control over Joway Shengshi to Junhe Consulting and will only transfer their respective equity interests in Joway Shengshi to Junhe Consulting or its designee.
4. Option Agreement. Under the option agreement between Joway Shengshi’s owners and Junhe Consulting, the owners of Joway Shengshi have granted Junhe Consulting the irrevocable right and option to acquire all of their equity interests in Joway Shengshi.
5. Equity Pledge Agreement. Under the equity pledge agreement between Joway Shengshi’s owners and Junhe Consulting, the owners of Joway Shengshi have pledged all of their rights, titles and interests in Joway Shengshi to Junhe Consulting to guarantee Joway Shengshi’s performance of its obligations under the Consulting Services Agreement.
As a result of the Contractual Agreements, Joway Shengshi is effectively a variable interest entity of Junhe Consulting. Accordingly, the Company through its wholly-owned subsidiary Junhe Consulting, consolidates Joway Shengshi’s results of operation, assets and liabilities in its financial statements.
In connection with the Share Exchange and as consideration for entering into the VIE Agreements the shareholders of Joway Shengshi, entered into a Call Option Agreement with the sole shareholder of Crystal Globe (the controlling shareholder of Dynamic Elite), pursuant to which the shareholders of Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an aggregate price equal to $20,000 over the next three years. The Call Option vests as to 34% of the shares of Crystal Globe on April 2, 2011 and as to 33% on April 2 of 2012 and 2013. As a result, the shareholders of Joway Shengshi are now the indirect beneficial owners of the shares of the Company held by Crystal Globe.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). Accordingly, they do not include all of the information and the footnotes required by generally accepted accounting principles for complete financial statements. The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the accompanying unaudited condensed consolidated financial statements have been translated and presented in United States Dollars (“USD”). All significant inter-company transactions and balances have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary to make the financial statements not misleading.
Operating results for the three month period ended March 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s form 10-K for the fiscal year ended December 31, 2013 which was filed on March 31, 2014.
Use of Estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. Actual results could differ from those estimates.
Basis of Consolidation
The accompanying consolidated financial statements include Joway Health, its wholly owned subsidiaries, and controlled VIEs. All significant inter-company accounts and transactions have been eliminated in the consolidation.
Pursuant to Accounting Standards Codification Topic 810 “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.
Based on the various Contractual Agreements, the Company is able to exercise control over the VIEs, and to obtain the full economic benefits. The terms of the exclusive option agreement are currently exercisable and legally enforceable under PRC laws and regulations. The minimum amount of consideration permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for the Company to exercise its rights under the exclusive option agreement. A simple majority vote of the Company’s board of directors is required to pass a resolution to exercise its rights under the exclusive option agreement, for which consent of the shareholder of VIEs is not required. Therefore, this gives the Company the power to direct the activities that most significantly impact VIEs’ economic performance. The Company’s ability to exercise effective control, together with the consulting service agreements and the equity pledge agreements, give the Company the rights to receive substantially all of the economic benefits from VIEs in consideration for the services provided by its wholly owned subsidiaries in China. Accordingly, as the primary beneficiary of VIEs and in accordance with U.S. GAAP, Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading, as VIEs of Junhe Consulting, has been consolidated in the Company’s financial statements. Sales from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading are included in the Company’s total sales, their incomes or losses from operations are consolidated with the Company’s, and the Company’s net income or loss includes net income or loss from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading.
Foreign Currency Translation
The accompanying consolidated financial statements are presented in USD. The functional currency of the Company is RMB. The consolidated financial statements are translated into United States dollars from RMB at period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Equity accounts are translated at their historical exchange rates when the equity transactions occurred. The resulting transaction adjustments are recorded as a component of stockholders’ equity. Gains and losses from foreign currency transactions are included in net income.
| | | For the three months ended March 31, | | | For the year ended December 31, | |
| | | 2014 | | | 2013 | | | 2013 | |
| Period ended RMB: USD Exchange rate | | | 6.1644 | | | | 6.2816 | | | | 6.114 | |
| Average RMB: USD Exchange rate | | | 6.11985 | | | | 6.28582 | | | | 6.19817 | |
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
For the three months ended March 31, 2014 and 2013 foreign currency translation adjustments of ($70,294) and $59,565, respectively, have been reported as comprehensive income in the unaudited condensed consolidated financial statements.
Other Comprehensive Income
Other comprehensive income is defined as the change in equity during the period from transactions and other events, excluding the changes resulting from investments by owners and distributions to owners, and is not included in the computation of income tax expense or benefit. Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.
Concentrations of Credit Risk
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
Fair Value of Financial Instruments
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| | ● Level 1—defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; |
| | ● Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
| | ● Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
The carrying amounts reported in the balance sheets for cash, accounts receivable, other receivable, accounts payable, other payable, and amounts due from related parties generally approximate their fair market values based on the short-term maturity of these instruments. ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
Cash and Cash Equivalents
For financial reporting purposes, the Company considers all highly liquid financial instruments with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at any point during the period of the financial statements presented. Balances at financial institutions or state-owned banks within the PRC are not covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
Accounts Receivable
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. On a periodic basis, the Company reviews the composition of the accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these allowances. Accounts are written off after exhaustive efforts at collection. As of March 31, 2014 and December 31, 2013, based on a review of its outstanding balances, the Company allowance for doubtful accounts had a zero balance, respectively.
Inventories
Inventories are stated at the lower of cost, as determined by the specific identification method on contract level (for each individual contract, inventories cost flow are determined by weighted-average method), or the net realizable value, which is determined on selling prices less any further costs expected to be incurred for completion and disposal. The Company regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether a valuation allowance is required. As of March 31, 2014 and December 31, 2013, the Company recorded $148,595 and $149,819 for inventory valuation allowance, respectively.
Advances to suppliers
Advances to suppliers represent the cash paid in advance for inventory items or construction in progress. The advance payments are meant to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $73,423 and $180,968 as of March 31, 2014 and December 31, 2013, respectively.
Long-term Investments
Investments in which the Company has a 20% to 50% interest are accounted for by the equity method. Under the equity method the carrying value of the investment is adjusted for the Company’s proportionate share of the investee’s income or loss.
Investments in which the Company has less than a 20% interest are accounted for by the cost method. Under the cost method, investments are carried at cost and income is recorded when dividends are received from those investments.
Property, Plant, and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation, and include expenditures that substantially increase the useful lives of existing assets.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:
| Building | 20 years |
| Operating Equipment | 10 years |
| Office furniture and equipment | 3 or 5 years |
| Vehicles | 10 years |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts, and any gain or loss is included in the consolidated statements of operations. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Significant renewals and betterment to buildings and equipment are capitalized. Leasehold improvements are depreciated over the lesser of the useful life or the life of the lease.
Intangible Assets
Intangible assets mainly consist of land use rights. All land located in the PRC is owned by the government and cannot be sold to any individual or company. The land use rights granted to the Company are being amortized using the straight-line method over the lease term of 50 years. Other intangible assets are software programs that are amortized over their estimated useful life of 10 years.
Impairment of Long-lived Assets
Long-lived assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in FASB ASC 360. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. The Company did not record any impairment loss for the three months ended March 31, 2014 and 2013.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured.
With respect to sales of product to both franchisee and non-franchisee customers, the Company prepares product shipments upon the receipt of a customer’s purchase order. Sales prices are based on fixed price lists that are different depending on whether the price list is for a franchisee customer or for non-franchisee customers. The Company recognizes revenue when the product is shipped. The Company does not sell product to any customers with a right of return as defined in ASC 605-15-25-4. Sales are presented net of value added tax (VAT).
For Tourmaline Wellness House sales, the Company recognizes revenue under the completed contract method. Customers contact the Company with requests to construct a Wellness House. The Company and the customer enter into a contract, at which time the customer pays a deposit of at least one-half of the sales price. A contract is considered completed when all significant costs have been incurred and the project has been accepted by the customer. The contracts have a place for the customer to sign indicating their acceptance of the completed Wellness House. At this time the customer will also pay any remaining balance on the contract. The Company recognizes the full contract revenue at this point. Contract costs consist primarily of materials and labor costs. The construction period of a Wellness House generally does not exceed five days.
Shipping Costs
Shipping costs are included in selling expenses and totaled $4,174 and $4,569 for the three months ended March 31, 2014 and 2013, respectively.
Income Taxes
The Company is governed by the Income Tax Law and associated legislations of the PRC. The Company accounts for income taxes in accordance with FASB ASC 740 “Income Taxes”, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets is dependent upon future earnings, if any, of which the timing and amount are uncertain.
According to ASC 740, the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition.
Basic and Diluted Earnings per Share
The Company reports earnings per share in accordance with FASB ASC 260 “Earnings per share”. The Company’s basic earnings per share are computed using the weighted average number of shares outstanding for the periods presented. Diluted earnings per share are computed based on the assumption that any dilutive options or warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, the Company’s outstanding stock warrants are assumed to be exercised, and funds thus obtained were assumed to be used to purchase common stock at the average market price during the period. There were no dilutive instruments outstanding during the three months periods ended March 31, 2014 and 2013.
Segment Information
The Company follows FASB ASC 280-Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance.
For the three months ended March 31, 2014 and the year ended December 31, 2013, management has determined that the Company is operating in three reportable business segments, (1) Healthcare Knit Goods Series, (2) Daily Healthcare and Personal Care Series, and (3) Wellness House and Activated Water Machine Series. The Company's reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations.
Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard that raises the threshold for disposals to qualify as discontinued operations and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The standard revised the definition of a discontinued operation to cover only asset disposals that are considered to be a strategic shift with a major impact on an entity's operations and finances, such as the disposal of a major geographic area or a significant line of business. Application of the standard, which is to be applied prospectively, is required for fiscal years beginning on or after December 15, 2014, and for interim periods within that year. The Company currently plans to adopt the standard in January 2015.
NOTE 3– ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
| | March 31, | | December 31, | |
| | 2014 | | 2013 | |
| Accounts receivable | | $ | 1,474 | | | $ | 1,486 | |
| Less: Allowance for bad debt | | | - | | | | - | |
| | | $ | 1,474 | | | $ | 1,486 | |
As of the periods presented, the Company has no allowance for bad debts, because the Management, based on their analysis, considers all the accounts receivable to be collectible.
NOTE 4– INVENTORIES
Inventories consisted of the following:
| | | March 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| Raw materials | | $ | 301,526 | | | $ | 326,245 | |
| Packages | | | 5,693 | | | | 5,878 | |
| Finished goods | | | 1,004,799 | | | | 974,382 | |
| Low value consumables | | | 40,749 | | | | 40,954 | |
| Total | | | 1,352,767 | | | | 1,347,459 | |
| Less: impairment loss | | | (148,595 | ) | | | (149,819 | ) |
| Inventory, net | | $ | 1,204,172 | | | $ | 1,197,640 | |
Low value consumables represent low priced and easily worn articles and are amortized on equal-split amortization method. Pursuant to this method, half value of the low value consumable should be amortized once used and the remaining half value should be amortized when disposed of.
As of March 31, 2014 and December 31, 2013, the Company recognized $148,595 and $149,819, respectively, as a reserve for impairment loss from inventory.
NOTE 5– PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| | | March 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| Building | | $ | 6,421,823 | | | $ | 6,442,048 | |
| Operating Equipment | | | 387,278 | | | | 390,119 | |
| Office furniture and equipment | | | 342,517 | | | | 343,809 | |
| Vehicles | | | 1,104,749 | | | | 1,113,856 | |
| Total | | | 8,256,367 | | | | 8,289,832 | |
| Less: accumulated depreciation | | | (2,142,287 | ) | | | (2,031,496 | ) |
| Property, plant and equipment, net | | $ | 6,114,080 | | | $ | 6,258,336 | |
Depreciation expense for the three months ended March 31, 2014 and 2013 amounted to $110,791 and $130,400, respectively.
NOTE 6– INTANGIBLE ASSETS
Intangible assets consisted of the following:
| | | March 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| Land use rights | | $ | 669,661 | | | $ | 675,182 | |
| Other intangible assets | | | 85,680 | | | | 86,386 | |
| Total | | | 755,341 | | | | 761,568 | |
| Less: accumulated amortization | | | (113,618 | ) | | | (108,247 | ) |
| Intangible assets, net | | $ | 641,723 | | | $ | 653,321 | |
Amortization expense of intangible assets for the three months ended March 31, 2014 and 2013 was $5,371and $6,426, respectively.
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense for the year ending December 31, | | Amount | |
| 2014 | | $ | 24,581 | |
| 2015 | | $ | 24,581 | |
| 2016 | | $ | 24,581 | |
| 2017 | | $ | 24,581 | |
| 2018 | | $ | 24,581 | |
| Thereafter | | $ | 530,416 | |
NOTE 7– RELATED PARTY TRANSACTIONS
Payables due to related parties consist of the following:
| | March 31, | | December 31, | |
| | 2014 | | 2013 | |
| Shenyang Joway Industrial Development Co., Ltd. | | $ | 17,746 | | | $ | 30,915 | |
| Jinghe Zhang | | | 40,235 | | | | 40,253 | |
| Total | | $ | 57,981 | | | $ | 71,168 | |
Transactions with Shenyang Joway
Shenyang Joway Industrial Development Co., Ltd. (“Shenyang Joway”) was formed in 2005 in Shenyang, China by Mr. Jinghe Zhang and three other individuals. Mr. Zhang holds more than 50% of the equity in Shenyang Joway. Shenyang Joway was in the business of marketing and distributing clothing and related products to other companies. In 2009, Mr. Zhang decided to shut down the operations of Shenyang Joway in order to focus his attention on Joway Shengshi’s business. Shenyang Joway has ceased operations, although it still exists as a legal entity, and Joway Shengshi was able to find new suppliers with no material adverse impact to the Company.
● | On December 1, 2009, the Company, through its subsidiary Joway Shengshi, entered into a royalty-free license agreement with Shenyang Joway. Pursuant to the license agreement, the Company is authorized to use the trademark “Xi” for a term of nine years. |
● | On May 7, 2007, the Company’s subsidiary Joway Shengshi entered into an agreement with Shenyang Joway pursuant to which Joway Shengshi and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. On May 10, 2007, the Company’s subsidiary Joway Technology and Shenyang Joway entered into an agreement pursuant to which Joway Technology and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital. Through December 31, 2008, Joway Technology advanced $58,568 to Shenyang Joway, which was paid off by Shenyang Joway to Joway Technology in 2009. Through December 31, 2010, Shenyang Joway advanced an aggregate of $791,701 to Joway Shengshi and Joway Technology of which $773,955 has been repaid. For the three months ended March 31, 2014 and 2013, the Company repaid $13,187 and $7,604 of these advances, respectively. As of March 31, 2014, the total unpaid principal balance due Shenyang Joway for advances was $17,746. 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, our President, Chief Executive Officer and director. Pursuant to the agreement, Jinghe Zhang agreed to advance operating capital to Joway Shengshi. The advances are interest free, unsecured, and have no specified repayment terms. The agreement is valid throughout Joway Shengshi’s term of operation. During the period beginning May 17, 2007 (inception of Joway Shengshi) through December 31, 2009, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang of which $4,597,162 has been repaid. As of March 31, 2014, the total unpaid principal balance due Jinghe Zhang for advances was $40,235. |
The amounts owed to related parties are non-interest bearing and have no specified repayment terms.
The Company operations in the People’s Republic of China are subject to the Income Tax Law of the People’s Republic of China. Pursuant to the PRC Income Tax Laws, the Company is subject to the Enterprise Income Tax (“EIT”) which is generally a statutory rate of 25% beginning January 2008, on income as reported in its statutory financial statements after appropriate tax adjustments.
The table below summarizes the differences between the PRC statutory federal rate and the Company’s effective tax rate:
| | | For the three months ended March 31, | |
| | | 2014 | | | 2013 | |
| Tax computed at China statutory rates | | | 25 | % | | | 25 | % |
| Effect of losses | | | (25 | %) | | | (25 | %) |
| Effective rate | | | 0 | % | | | 0 | % |
NOTE 9– STATUTORY RESERVES
Pursuant to the laws and regulations of the PRC, annual income of the Company’s subsidiaries is required to be partly allocated to the statutory reserves funds after the payment of the PRC income taxes. The allocation to the statutory reserves funds should be at least 10% of income after tax until the reserves reaches 50% of the entities’ registered capital or members’ equity. The reserve funds are not transferable to the Company in the form of cash dividends, loans or advances. Thus the reserve funds are not available for distribution except in liquidation. As of March 31, 2014, the Company had allocated $354,052 to statutory reserves.
In 2014 and 2013, the Company operated in three reportable business segments: (1) Healthcare Knit Goods Series, (2) Daily Healthcare and Personal Care Series and (3) Wellness House and Activated Water Machine Series. The Company's reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. Information with respect to these reportable business segments is as follows:
For the three months ended March 31, 2014
| | | Sales | | | COGS | | | Gross profit | | | Loss from operations | | | Depreciation and amortization | | | Assets | |
| Healthcare Knitgoods Series | | $ | 62,678 | | | $ | 36,862 | | | $ | 25,816 | | | $ | (170,247 | ) | | $ | 39,669 | | | $ | 397,755 | |
| Daily Healthcare and Personal Care Series | | | 59,197 | | | | 29,093 | | | | 30,104 | | | | (155,072 | ) | | | 37,466 | | | | 342,531 | |
| Wellness House and Activated Water Machine Series | | | 61,662 | | | | 25,512 | | | | 36,150 | | | | (156,734 | ) | | | 39,027 | | | | 491,168 | |
| Segment Totals | | $ | 183,537 | | | $ | 91,467 | | | $ | 92,070 | | | | (482,053 | ) | | $ | 116,162 | | | | 1,231,454 | |
| Other Expenses, net | | | | | | | | | | | | | | | (931 | ) | | | | | | | | |
| Income Tax | | | | | | | | | | | | | | | 211 | | | | | | | | | |
| Unallocated Assets | | | | | | | | | | | | | | | | | | | | | | | 7,394,509 | |
| Net Loss | | | | | | | | | | | | | | $ | (483,195 | ) | | | | | | | | |
| Total Assets | | | | | | | | | | | | | | | | | | | | | | $ | 8,625,963 | |
For the three months ended March 31, 2013
| | | Sales | | | COGS | | | Gross profit | | | Loss from operations | | | Depreciation and amortization | | | Assets | |
| Healthcare Knitgoods Series | | $ | 34,188 | | | $ | 11,016 | | | $ | 23,172 | | | $ | (94,271 | ) | | $ | 26,295 | | | $ | 533,698 | |
| Daily Healthcare and Personal Care Series | | | 63,464 | | | | 17,799 | | | | 45,665 | | | | (172,350 | ) | | | 48,813 | | | | 253,184 | |
| Wellness House and Activated Water Machine Series | | | 80,242 | | | | 26,440 | | | | 53,802 | | | | (221,847 | ) | | | 61,718 | | | | 697,305 | |
| Segment Totals | | $ | 177,894 | | | $ | 55,255 | | | $ | 122,639 | | | | (488,468 | ) | | $ | 136,826 | | | | 1,484,187 | |
| Other Income, net | | | | | | | | | | | | | | | 3,538 | | | | | | | | | |
| Income Tax | | | | | | | | | | | | | | | 1,378 | | | | | | | | | |
| Unallocated Assets | | | | | | | | | | | | | | | | | | | | | | | 9,129,718 | |
| Net Loss | | | | | | | | | | | | | | $ | (486,308 | ) | | | | | | | | |
| Total Assets | | | | | | | | | | | | | | | | | | | | | | $ | 10,613,905 | |
NOTE 11- FRANCHISE REVENUES
The Company enters into franchising agreements to develop retail outlets for the Company's products. The agreements provide that franchisees will sell Company products exclusively at a predetermined retail price. In exchange the Company provides them with geographic exclusivity, discounted products, training and support. The agreements also require franchisees to adhere to certain standards of product merchandising, promotion and presentment. The agreements also prohibit franchisees from selling competitor’s products. The agreements do not require any initial franchise fees from the franchisees, nor do they require the franchisees to pay continuing royalties. The agreements do not require the franchisees to purchase any minimum levels of product, but do require that they make at least one purchase during each year. The Company does not act to manage the franchisees’ levels of product. Franchisees hold periodic conferences, assisted by the Company’s marketing department, to promote product awareness and the introduction of new products. The franchising agreements are generally for terms of three years and are renewable at the mutual agreement of both parties. The franchising agreements are cancelable at the Company’s discretion if franchisees violate the terms of the agreements.
The following is a breakdown of revenue between franchise and non-franchise customers:
| | For the three months ended March 31, | |
| | | 2014 | | | 2013 | |
| | | | | | | |
| Sales to franchise customers | | $ | 174,693 | | | $ | 144,098 | |
| Sales to non-franchise customers | | | 8,844 | | | | 33,796 | |
| | | | | | | | | |
| Total sales | | $ | 183,537 | | | $ | 177,894 | |
Long-Term Investment:
On August 28, 2011, Joway Shengshi and Tianjin Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Tianjin Hezhi”) entered a cooperative contract, pursuant to which Joway Shengshi and Tianjin Hezhi established a new company named Tianjin Joway Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Joway Hezhi”) with registered capital of RMB 20,000,000. Joway Hezhi was incorporated on October 21, 2011 with initial registered capital of RMB5,000,000. It will engage in the production and distribution of Chinese-Western preparations, health food, healthcare products, medical instruments and plain food. On October 11, 2011, Joway Shengshi contributed RMB 1,500,000 and owned 30% of Joway Hezhi. As of the date of this Report, Joway Hezhi is in the early preparatory period and has no operations.
Short-Term Investment:
At December 31, 2012, the Company had a short-term wealth-management certificate of $1,266,604 with Industrial and Commercial Bank of China. This is classified as a level 2 investment within the fair value hierarchy. During the first quarter of 2013, this short-term investment of $1,266,604 were redeemed in full and returned to the Company. As of March 31, 2014, the balances of short- term investment were $0
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
