Idaho Copper Corp: Form 10-Q for the period ended Sep 30, 2020

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2020.

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.

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.

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Business Segments

In 2020 and 2019, 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, 2020

For the three months ended September 30, 2019

For the nine months ended September 30, 2020

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For the nine months ended September 30, 2019

For The Three Months Ended September 30, 2020 Compared to September 30, 2019

Revenue. For the three months ended September 30, 2020, revenue was $77,289 compared to $158,516 for the three months ended September 30, 2019, a decrease of $81,227 or 51.2%. In 2020, the impact of COVID-19 on the Chinese economy seriously affected our business with implementation of restrictions at business operations and city lockdowns.

Revenue from healthcare knit goods segment increased by $885 or 6.1% to $15,431 for the three months ended September 30, 2020 from $14,546 for the three months ended September 30, 2019. This increase was mainly due to the increase in sales of our mattress products.

Revenue from daily healthcare and personal care products decreased by $60,940 or 82% to $13,373 for the three months ended September 30, 2020 from $74,313 for the three months ended September 30, 2019. This was primarily due to the decrease in sales of most of our daily healthcare and personal care products affected by industry downturn and almost of all cities under lockdown as COVID-19 swept China.

Revenue from wellness houses and activated water machines decreased by $21,172 or 30.4% to $48,485 for the three months ended September 30, 2020 from $69,657 for the three months ended September 30, 2019. 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, 2020, cost of goods sold was $37,517 compared to $69,709 for the three months ended September 30, 2019, a decrease of $32,192 or 46.2%. This decrease was mainly due to the decrease in sales.

Cost of goods sold for healthcare knit goods segment decreased to $2,897 for the three months ended September 30, 2020 from $4,800 for the three months ended September 30, 2019, a decrease of $1,903 or 39.6%. This decrease was due to the decrease in cost of our mattress products.

Cost of goods sold for the daily healthcare and personal care segment decreased to $11,461 for the three months ended September 30, 2020 from $29,910 for the three months ended September 30, 2019, a decrease of $18,449 or 61.7%. This decrease was due to the decrease in sales.

Cost of goods sold for our wellness house and activated water machine segment decreased to $23,159 for the three months ended September 30, 2020 from $34,999 for the three months ended September 30, 2019, a decrease of $11,840 or 33.8%. This decrease was mainly due to the decrease in sales.

Gross profit. Our gross profit decreased by $49,035 or 55.2% to $39,772 for the three months ended September 30, 2020, compared to $88,807 for the three months ended September 30, 2019. This decrease was mainly due to the decrease in sales. Our gross margin slightly decreased slightly from 56% for the three months ended September 30, 2019 to 51.5% for the three months ended September 30, 2020.

Gross profit for the healthcare knit goods segment increased by $2,788 or 28.6% to $12,534 for the three months ended September 30, 2020 compared to $9,746 for the three months ended September 30, 2019. The gross margins of healthcare knit goods segment increased from 67% for the three months ended September 30, 2019 to 81.2% for the three months ended September 30, 2020. This increase was mainly due to the less discounts on the healthcare knit goods to our franchisees during the third quarter of 2020.

Gross profit of daily healthcare and personal care segment decreased by $42,491 or 95.7% to $1,912 for the three months ended September 30, 2020, compared to $44,403 for the three months ended September 30, 2019. This decrease was mainly due to the decreased sales. The gross margin of daily healthcare and personal care segment decreased from 59.8% for the three months ended September 30, 2019 to 14.3% for the three months ended September 30, 2020. This decrease was mainly due to the more discounts on the daily healthcare and personal care products to our franchisees during the third quarter of 2020.

Gross profit of the wellness house and activated water machine segments decreased by $9,332 or 26.9% to $25,326 for the three months ended September 30, 2020, compared to $34,658 for the three months ended September 30, 2019. 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 increased slightly from 49.8% for the three months ended September 30, 2019 to 52.2% for the three months ended September 30, 2020.

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $43,045 or 15.5%, from $277,434 for the three months ended September 30, 2019 to $234,389 for the three months ended September 30, 2020. This decrease was mainly due to the decrease of salary. Operating expenses for healthcare knit goods segment increased by $22,961 or 113.7% to $43,156 for the three months ended September 30, 2020 from $20,195 for the three months ended September 30, 2019. Operating expenses for daily healthcare and personal care segment decreased by $131,658 or 89% to $16,275 for the three months ended September 30, 2020 from $147,933 for the three months ended September 30, 2019. Operating expenses for our wellness house and activated water machine segment increased by $65,652 or 60.1% to $174,958 for the three months ended September 30, 2020 from $109,306 for the three months ended September 30, 2019.

Loss from operations. As a result of the foregoing, our loss from operations was $194,617 for the three months ended September 30, 2020, compared to $188,627 for the three months ended September 30, 2019, an increase of $5,990. The increased loss was mainly due to the decrease in sales.

Income taxes. Our income tax expenses did not incur for the three months ended September 30, 2020 and 2019.

Net loss. For the three months ended September 30, 2020, our net loss was $194,694 compared to $260,262 for the three months ended September 30, 2019. The decreased loss was mainly due to decrease in other expenses.

For the Nine Months Ended September 30, 2020 Compared to September 30, 2018

Revenue. For the nine months ended September 30, 2020, revenue was $159,407 compared to $468,766 for the nine months ended September 30, 2019, a decrease of $309,359 or 66%. This decrease was mainly due to the downturn of the health care industry in China affected by COVID-19.

Revenue from healthcare knit goods segment decreased by $39,749, or 64.4% to $21,984 for the nine months ended September 30, 2020 from $61,733 for the nine months ended September 30, 2019. 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 $112,173 or 71.8% to $44,035 for the nine months ended September 30, 2020 from $156,208 for the nine months ended September 30, 2019. This was primarily due to the decrease in sales of most of our daily healthcare and personal care products affected by industry downturn affected by COVID-19.

Revenue from wellness houses and activated water machines decreased by $157,437 or 62.8% to $93,388 for the nine months ended September 30, 2020 from $250,825 for the nine months ended September 30, 2019. This decrease was mainly due to the decrease of our wellness houses.

Cost of Goods Sold. For the nine months ended September 30, 2020, cost of goods sold was $83,268 compared to $221,872 for the nine months ended September 30, 2019, a decrease of $138,604, or 62.5%. This decrease was mainly due to the decrease in sales.

Cost of goods sold for healthcare knit goods segment decreased to $6,010 for the nine months ended September 30, 2020 from $28,307 for the nine months ended September 30, 2019, a decrease of $22,297 or 78.8%. 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 $26,925 for the nine months ended September 30, 2020 from $68,315 for the nine months ended September 30, 2019, a decrease of $41,390 or 60.6%. 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 $50,333 for the nine months ended September 30, 2020 from $125,250 for the nine months ended September 30, 2019, a decrease of $74,917 or 59.8%. This decrease was mainly due to the decrease in sales.

Gross profit. Our gross profit decreased by $170,755 or 69.2% to $76,139 for the nine months ended September 30, 2020, compared to $246,894 for the nine months ended September 30, 2019. This decrease was due to the decrease in sales. Our gross margin decreased slightly from 52.7% for the nine months ended September 30, 2019 to 47.8% for the nine months ended September 30, 2020.

Gross profit for the healthcare knit goods segment decreased by $17,452 or 52.2% to $15,974 for the nine months ended September 30, 2020 compared to $33,426 for the nine months ended September 30, 2019. This decrease was mainly due to the decrease in sales. The gross margins of healthcare knit goods segment increased from 54.1% for the nine months ended September 30, 2019 to 72.7% for the nine months ended September 30, 2020. It was mainly due to the less discounts on the healthcare knit goods to our franchisees during the third quarter of 2020.

Gross profit of daily healthcare and personal care segment decreased by $70,783 or 80.5% to $17,110 for the nine months ended September 30, 2020, compared to $87,893 for the nine months ended September 30, 2019. This decrease was primarily due to the decrease in sales. Our gross margin of daily healthcare and personal care segment decreased from 56.3% for the nine months ended September 30, 2019 to 38.9% for the nine months ended September 30, 2020. It was mainly due to the more discounts on the daily healthcare and personal care products to our franchisees during the third quarter of 2020.

Gross profit of the wellness house and activated water machine segments decreased by $82,520 or 65.7% to $43,055 for the nine months ended September 30, 2020, compared to $125,575 for the nine months ended September 30, 2019. 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 50.1% for the nine months ended September 30, 2019 to 46.1% for the nine months ended September 30, 2020.

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $274,203 or 25.4%, from $1,078,377 for the nine months ended September 30, 2019 to $804,174 for the nine months ended September 30, 2020. This decrease was mainly due to the decrease of travel expenses and salary. Operating expenses for healthcare knit goods segment decreased by $31,110 or 21.9% to $110,904 for the nine months ended September 30, 2020 from $142,014 for the nine months ended September 30, 2019. Operating expenses for daily healthcare and personal care segment decreased by $137,206 or 38.2% to $222,148 for the nine months ended September 30, 2020 from $359,354 for the nine months ended September 30, 2019. Operating expenses for our wellness house and activated water machine segment decreased by $105,887 or 18.4% to $471,122 for the nine months ended September 30, 2020 from $577,009 for the nine months ended September 30, 2019.

Loss from operations. As a result of the foregoing, our loss from operations was $728,035 for the nine months ended September 30, 2020, compared to $831,483 for the nine months ended September 30, 2019, a decrease of $103,448. 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, 2020 and 2019.

Net loss. Our net loss was $729,220 for the nine months ended September 30, 2020, compared to $904,309 for the nine months ended September 30, 2019. 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 cancellable at our discretion if franchisees violate the terms of the agreements.

The following is a breakdown of revenue between franchise and non-franchise customers:

Liquidity and Capital Resources

Our cash at December 31, 2019 was $99,979 and decreased to $86,236 at September 30, 2020, a decrease of $13,743. This decrease was mainly due to our deteriorated operating results. On September 30, 2020, we had negative working capital of $1,318,644, a decrease of $451,319 from $867,325 on December 31, 2019.

Our cash flow information summary is as follows:

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Net Cash Used in Operating Activities

Net cash used in operating activities was $427,565 for the nine months ended September 30, 2020, compared to $536,344 for the nine months ended September 30, 2019. This decrease was primarily due to a decrease of $175,089 in net loss.

For the nine months ended September 30, 2020, cash was mainly used to cover the loss of $729,220, which was primarily offset by an add-back of depreciation of $292,084 and amortization of $10,127.

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 and amortization of $14,359.

Net Cash Used in Investing Activities

Net cash used in investing activities was $0 for the nine months ended September 30, 2020, compared to $89,219 for the nine months ended September 30, 2019.

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

Net Cash Provided by Financing Activities

For the nine months ended September 30, 2020, $434,818 of cash was provided by financing activities, compared to $582,308 for the nine months ended September 30, 2019. 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 $0 and $118,458 of these advances for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, the total unpaid principal balance due Shenyang Joway for advances was $0. Shenyang Joway was cancelled in 2019.

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 $6,548,144 from Jinghe Zhang of which $4,632,811 has been repaid. For the nine months ended September 30, 2020 and 2019, the Company received $434,818 and $700,766 of these advances, respectively. As of September 30, 2020, the total unpaid principal balance due Jinghe Zhang for advances was $1,915,333.

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, 2020, the Company had allocated $354,052 to statutory reserves.

Off Balance Sheet Items

Under SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

• any obligation under certain guarantee contracts,
• any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,
• any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in shareholder equity in our statement of financial position, and
• any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

Critical Accounting Policies

Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.

Basis of Consolidation

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

Pursuant to Accounting Standards Codification Topic 810 “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.

Based on the various Contractual Agreements, we believe we are able to exercise control over the VIEs, and to obtain the full economic benefits. We believe that the terms of the exclusive option agreement are currently exercisable and legally enforceable under PRC laws and regulations. We also believe that the minimum amount of consideration permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for us to exercise our rights under the exclusive option agreement. A simple majority vote of our board of directors is required to pass a resolution to exercise our rights under the exclusive option agreement, for which consent of the shareholder of VIEs is not required. Therefore, we believe this gives us the power to direct the activities that most significantly impact VIEs’ economic performance. T We believe that our ability to exercise effective control, together with the consulting service agreements and the equity pledge agreements, give us the rights to receive substantially all of the economic benefits from VIEs in consideration for the services provided by its wholly owned subsidiaries in China. Accordingly, as the primary beneficiary of VIEs and in accordance with U.S. GAAP, Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading, as VIEs of Junhe Consulting, has been consolidated in the Company’s financial statements. Sales from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading are included in our total sales, their incomes or losses from operations are consolidated with ours, and our net income or loss includes net income or loss from Joway Shengshi, Joway Technology, Joway Decoration, and Shengtang Trading.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured.

With respect to sales of product to both franchisee and non-franchisee customers, we prepare product shipment upon the receipt of a customer’s purchase order. Sales prices are based on fixed price lists that are different depending on whether the price list is for franchisee customers or for non-franchisee customers. We recognize revenue when the product is shipped. We do not sell product to any customers with a right of return. 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:

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

Recent Accounting Pronouncements

We do not anticipate that the adoption of recently issued accounting pronouncements to have a material effect on our condensed consolidated financial statements.

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, 2020, 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, 2020 that materially affected, or were reasonably likely to materially affect our internal control over financial reporting.

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, 2019. 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, 2019 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.