0001213900-13-006409.txt : 20131114 0001213900-13-006409.hdr.sgml : 20131114 20131114131317 ACCESSION NUMBER: 0001213900-13-006409 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20130930 FILED AS OF DATE: 20131114 DATE AS OF CHANGE: 20131114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Joway Health Industries Group Inc CENTRAL INDEX KEY: 0001263364 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 980221494 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-108715 FILM NUMBER: 131218483 BUSINESS ADDRESS: STREET 1: NO 19 BAOWANG ROAD STREET 2: BAODI ECONOMIC DEVELOPMENT ZONE CITY: TIANJIN, PRC STATE: F4 ZIP: 300180 BUSINESS PHONE: 862258896888 MAIL ADDRESS: STREET 1: NO 19 BAOWANG ROAD STREET 2: BAODI ECONOMIC DEVELOPMENT ZONE CITY: TIANJIN, PRC STATE: F4 ZIP: 300180 FORMER COMPANY: FORMER CONFORMED NAME: G2 VENTURES INC DATE OF NAME CHANGE: 20030911 10-Q 1 f10q0913_joway.htm QUARTERLY REPORT f10q0913_joway.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
¨
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  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
       
Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
¨  
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
The number of shares outstanding of the Issuer’s Common Stock as of November 14, 2013 was 20,054,000 shares.
 


 
 

 
 
TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
    3  
         
Item 1. Financial Statements
    3  
         
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    21  
         
Item 3. Quantitative and Qualitative Disclosures About Market Risk
    30  
         
Item 4. Controls and Procedures
    30  
         
PART II - OTHER INFORMATION
    31  
         
Item 1. Legal Proceedings
    31  
         
Item 1A. Risk Factors
    31  
         
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    31  
         
Item 3. Defaults Upon Senior Securities
    31  
         
Item 4. Mine Safety Disclosures
    31  
         
Item 5. Other Information
    31  
         
Item 6. Exhibits
    32  
         
SIGNATURES
    33  

 
2

 
 
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements included in this Form 10-Q reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
 
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

   
 
Page
 
   
     
Condensed Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012 
    4  
         
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and the Nine months Ended September 30, 2013 and 2012 (Unaudited
    5  
   
       
Condensed Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2013 and 2012 (Unaudited
    6  
         
Notes to Unaudited Condensed Consolidated Financial Statements 
    7-20  
 
 
3

 
 
JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
   
September 30,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
       
ASSETS
           
             
CURRENT ASSETS:
           
Cash
  $ 151,945     $ 522,145  
Short-term investment
    243,847       1,266,604  
Accounts receivable
    -       11,594  
Other receivables
    47,533       46,727  
Inventories
    1,273,434       1,254,705  
Advances to suppliers
    376,995       276,953  
Prepaid taxes
    428,825       211,760  
Prepaid expense
    56,529       42,898  
Total current assets
    2,579,108       3,633,386  
                 
PROPERTY, PLANT AND EQUIPMENT, net
    6,144,129       6,316,360  
                 
OTHER ASSETS:
               
Long-term investment
    243,847       237,488  
Intangible assets, net
    655,457       656,211  
Long-term prepaid expenses
    189,166       192,825  
Total other assets
    1,088,470       1,086,524  
                 
Total assets
  $ 9,811,707     $ 11,036,270  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 54,237     $ 39,948  
Advances from customers
    53,416       20,265  
Other payables
    54,137       69,080  
Due to related parties
    97,045       121,515  
Total current liabilities
    258,835       250,808  
                 
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 and 20,036,000 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
    20,054       20,036  
Additional paid-in-capital
    7,361,665       7,361,143  
Statutory reserves
    354,052       354,052  
Retained earnings
    581,488       2,089,151  
Accumulated other comprehensive income
    1,235,613       961,080  
Total stockholders' equity
    9,552,872       10,785,462  
Total liabilities and stockholders' equity
  $ 9,811,707     $ 11,036,270  
   
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
 
4

 
 
JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)
   
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
REVENUES
  $ 389,863     $ 294,959     $ 874,469     $ 1,511,274  
                                 
COST OF REVENUES
    146,114       107,285       327,130       414,021  
                                 
GROSS PROFIT
    243,749       187,674       547,339       1,097,253  
                                 
    Selling expenses
    99,245       83,400       346,222       437,547  
    General and administrative expenses
    433,451       481,292       1,492,349       1,522,640  
OPERATING EXPENSES
    532,696       564,692       1,838,571       1,960,187  
                                 
(LOSS) FROM OPERATIONS
    (288,947 )     (377,018 )     (1,291,232 )     (862,934 )
                                 
    Interest income
    189       896       675       5,512  
    Other income
    712       63,553       8,361       72,862  
    Other (expenses)
    (808 )     (22,253 )     (147,230 )     (22,617 )
OTHER INCOME (EXPENSE), NET
    93       42,196       (138,194 )     55,757  
                                 
(LOSS) BEFORE INCOME TAXES
    (288,854 )     (334,822 )     (1,429,426 )     (807,177 )
                                 
INCOME TAXES
    (2,011 )     4,331       78,237       16,710  
                                 
NET (LOSS)
    (286,843 )     (339,153 )     (1,507,663 )     (823,887 )
                                 
OTHER COMPREHENSIVE INCOME:
                               
     Foreign currency translation adjustment
    61,082       (26,269 )     274,533       59,314  
                                 
COMPREHENSIVE (LOSS)
  $ (225,761 )   $ (365,422 )   $ (1,233,130 )   $ (764,573 )
                                 
NET (LOSS) PER COMMON SHARE, BASIC AND DILUTED
  $ (0.01 )   $ (0.02 )   $ (0.08 )   $ (0.04 )
                                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
    20,054,000       20,036,000       20,041,077       20,033,109  
                                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
         
 
 
5

 
 
JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES
 
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             
   
Nine months ended September 30,
 
   
2013
   
2012
 
   
(Unaudited)
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net (loss)
  $ (1,507,663 )   $ (823,887 )
Adjustments to reconcile net income to net cash used in operating activities
               
Depreciation
    412,816       372,027  
Amortization
    20,492       13,252  
Stock-based compensation
    540       18,000  
Changes in operating assets and liabilities:
               
Accounts receivable, trade
    11,594       28,865  
Other receivables
    (806 )     (82,843 )
Inventories
    (18,729 )     (291,310 )
Advances to suppliers
    (100,042 )     (113,927 )
Prepaid expense
    (13,631 )     4,347  
Accounts payable
    14,289       (15,367 )
Advances from customers
    33,151       24,430  
Other payable
    (10,757 )     (2,151 )
Salary and welfare payable
    (4,186 )     22  
Taxes payable
    (217,065 )     (22,747 )
Net cash (used in) operating activities
    (1,379,997 )     (891,289 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property plant and equipment
    (32,513 )     (120,591 )
Redemption of investment
    1,022,757       -  
Net cash provided by (used in) investing activities
    990,244       (120,591 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of due to related parties
    (24,470 )     (243,060 )
Net cash (used in) financing activities
    (24,470 )     (243,060 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    44,023       54,854  
                 
NET (DECREASE) IN CASH
    (370,200 )     (1,200,086 )
                 
CASH, beginning of period
    522,145       3,372,189  
                 
CASH, end of period
  $ 151,945     $ 2,172,103  
                 
SUPPLEMENTAL DISCLOSURES:
               
                 
Income taxes paid
  $ 172,549     $ 20,527  
Interest paid
  $ -     $ -  
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
 
6

 
 
JOWAY HEALTH INDUSTRIES GROUP INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 – ORGANIZATION
 
The unaudited condensed consolidated financial statements include the financial statements of Joway Health Industries Group Inc. (referred to herein as “Joway Health”), its subsidiaries, and variable interest entities (“VIEs”) where Joway Health is deemed the primary beneficiary. Joway Health, its subsidiaries and VIEs are collectively referred to herein as the “Company”, “we” and “us”.
 
Joway Health (formerly G2 Ventures, Inc.) was originally incorporated under the laws of the State of Texas on March 21, 2003. On September 21, 2010, Joway Health entered into a Share Exchange Agreement (the “Share Exchange”) with the sole stockholder of Dynamic Elite International Limited. As a result of the Share Exchange, Dynamic Elite became a wholly-owned subsidiary of Joway Health and the stockholders of Dynamic Elite acquired approximately 76.08% of the issued and outstanding stock of Joway Health. The share exchange transaction resulted in the shareholders of Dynamic Elite acquiring a majority voting interest in Joway Health. Generally accepted accounting principles in the United States of America require that the company whose shareholders retain the majority interest in the combined business be treated as the acquirer for accounting purposes. The reverse acquisition process utilizes the capital structure of Joway Health and the assets and liabilities of Dynamic Elite recorded at historical cost. On December 22, 2010, Joway Health changed its jurisdiction of incorporation from the State of Texas to the State of Nevada.
 
Dynamic Elite International Limited (referred to herein as “Dynamic Elite”) was incorporated under the laws of the British Virgin Islands on June 2, 2010 as a limited liability company (a BVI company). Dynamic Elite engages in manufacturing and distributing tourmaline products in China. Its wholly owned subsidiary, Tianjin Junhe Management Consulting Co., Ltd. was incorporated on September 15, 2010 in Tianjin, People’s Republic of China (“PRC”). Other than the equity interest in Junhe Consulting, Dynamic Elite does not own any assets or conduct any operations.
 
Tianjin Junhe Management Consulting Co., Ltd. (referred to herein as “Junhe Consulting”) conducts its business through Tianjin Joway Shengshi Group Co., Ltd. that is consolidated as a variable interest entity.
 
Tianjin Joway Shengshi Group Co., Ltd. (referred to herein as “Joway Shengshi”) was incorporated in PRC on May 17, 2007. Joway Shengshi is currently owned 99% by Jinghe Zhang, the Company’s current CEO and President and 1% by Song Baogang. Joway Shengshi engages in manufacturing and distributing tourmaline products in China. Shenyang Joway Electronic Technology Co., Ltd., Tianjin Joway Decoration Engineering Co., Ltd. and Tianjin Oriental Shengtang Trading Import & Export Trading Co., Ltd are subsidiaries of Joway Shengshi.
 
Shenyang Joway Electronic Technology Co., Ltd. (referred to herein as “Joway Technology”) was originally named Liaoning Joway Technology Engineering Co., Ltd. which was incorporated on March 28, 2007 in PRC. The name was changed on June 22, 2011. It engages in the distribution of Tourmaline Activated Water Machines and Tourmaline Wellness Houses. Prior to July 25, 2010, Joway Shengshi owned 90.91% of Joway Technology. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, another stockholder of Joway Technology on July 25, 2010 to acquire the remaining 9.09% of the share of Joway Technology. As a result of the share acquisition, Joway Technology became a wholly-owned subsidiary of Joway Shengshi.
 
Tianjin Joway Decoration Engineering Co., Ltd. (referred to herein as “Joway Decoration”) was incorporated on April 22, 2009 in PRC. It engages in the distribution of Tourmaline Activated Water Machines, Tourmaline Wellness House for family use and Tourmaline Wellness House materials. Prior to July 9, 2010, Joway Shengshi owned 90% of Joway Decoration. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, another stockholder of Joway Decoration on July 9, 2010 to acquire the remaining 10% of the shares of Joway Decoration. As a result of the share acquisition, Joway Decoration became a wholly-owned subsidiary of Joway Shengshi.  Jingyun Chen is currently the General Manager of Joway Decoration.
 
 
7

 
 
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
 
 
8

 
 
On September 16, 2010, prior to the share exchange, Junhe Consulting entered into a series of contractual agreements (the “Contractual Agreements”) with Joway Shengshi and Joway Shengshi’s owners. The following is a brief description of the Contractual Agreements entered into between Junhe Consulting and Joway Shengshi or Joway Shengshi’s owners

1. Consulting Services Agreement. Pursuant to the consulting services agreement between Junhe Consulting and Joway Shengshi, Junhe Consulting has the right to advise, consult, manage and operate Joway Shengshi, and collect and own all of the net profits of the Operating Entities.

2. Operating Agreement. Under the operating agreement between Junhe Consulting and Joway Shengshi, Junhe Consulting has the right to recommend director candidates and appoint the senior executives of Joway Shengshi, approve any transactions that may materially affect the assets, liabilities, rights or operations of Joway Shengshi, and guarantee the contractual performance by Joway Shengshi of any agreements with third parties, in exchange for a pledge by Joway Shengshi of its accounts receivable and assets.

3. Voting Rights Proxy Agreement. Under the voting rights proxy agreement between Joway Shengshi’s owners and Junhe Consulting, the owners of Joway Shengshi have vested their collective voting control over Joway Shengshi to Junhe Consulting and will only transfer their respective equity interests in Joway Shengshi to Junhe Consulting or its designee.

4. Option Agreement. Under the option agreement between Joway Shengshi’s owners and Junhe Consulting, the owners of Joway Shengshi have granted Junhe Consulting the irrevocable right and option to acquire all of their equity interests in Joway Shengshi.

5. Equity Pledge Agreement. Under the equity pledge agreement between Joway Shengshi’s owners and Junhe Consulting, the owners of Joway Shengshi have pledged all of their rights, titles and interests in Joway Shengshi to Junhe Consulting to guarantee Joway Shengshi’s performance of its obligations under the Consulting Services Agreement.

As a result of the Contractual Agreements, Joway Shengshi is effectively a variable interest entity of Junhe Consulting. Accordingly, the Company through its wholly-owned subsidiary Junhe Consulting, consolidates Joway Shengshi’s results of operation, assets and liabilities in its financial statements.

In connection with the Share Exchange and as consideration for entering into the VIE Agreements the shareholders of Joway Shengshi, entered into a Call Option Agreement with the sole shareholder of Crystal Globe (the controlling shareholder of Dynamic Elite), pursuant to which the shareholders of Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an aggregate price equal to $20,000 over the next three years. The Call Option vests as to 34% of the shares of Crystal Globe on April 2, 2011 and as to 33% on April 2 of 2012 and 2013. As a result, the shareholders of Joway Shengshi are now the indirect beneficial owners of the shares of the Company held by Crystal Globe.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). 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.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and the footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013. 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, 2012 which was filed on April 1, 2013.
 
 
9

 
 
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”, Joway Shengshi, as a VIE of Junhe Consulting, has been consolidated in the Company’s financial statements. Joway Shengshi’s sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s net income includes all of Joway Shengshi’s net income.
 
Based on the various Contractual Agreements, the Company is able to exercise control over the VIEs, and to obtain in full the economic benefits. Accordingly, the non–controlling interests have no economic interest in the VIEs.
 
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,
 
   
2013
   
2012
   
2012
 
Period ended RMB: USD Exchange rate
    6.1514       6.334       6.3161  
Average RMB: USD Exchange rate
    6.22152       6.32745       6.31984  

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 income in the consolidated financial statements and totaled $61,082 and negative $26,269 for the three months ended September 30, 2013 and 2012, respectively, and $274,533 and $59,314 for the nine months ended September 30, 2013 and 2012, respectively.
 
10

 
 
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 September 30, 2013 and December 31, 2012, based on a review of its outstanding balances, the Company allowance for doubtful accounts had a zero balance, respectively.
 
 
11

 
 
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, 2013 and December 31, 2012, respectively, the Company has no reserves for inventories.
 
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 $376,995 and $276,953 as of September 30, 2013 and December 31, 2012, 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.
 
 
12

 
 
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, 2013 and 2012.
 
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 $6,152 and $8,148 for the three months ended September 30, 2013 and 2012, respectively, and $13,867 and $32,335 for the nine months ended September 30, 2013 and 2012, 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.
 
 
13

 
 
Subsequent Events
 
The Company evaluates subsequent events for purposes of recognition or disclosure through the date that the financial statements are issued.
 
Recently Issued Accounting Pronouncements
 
The Company does not anticipate that the adoption of recently issued accounting pronouncements to have a material effect on the Company's condensed consolidated financial statements.
 
NOTE 3 – ACCOUNTS RECEIVABLE
 
Accounts receivable consisted of the following:
 
   
September 30,
   
December 31,
 
   
2013
   
2012
 
Accounts receivable
  $ -     $ 11,594  
Less: Allowance for bad debt
    -       -  
Accounts receivable
  $ -     $ 11,594  
 
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:
 
   
September 30,
   
December 31,
 
   
2013
   
2012
 
Raw materials
  $ 284,361     $ 287,560  
Packages
    6,866       6,850  
Finished goods
    941,570       920,829  
Low value consumables
    40,637       39,466  
Total
  $ 1,273,434     $ 1,254,705  
 
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.
 
 
14

 
 
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consisted of the following:
 
   
September 30,
   
December 31,
 
   
2013
   
2012
 
Building
  $ 6,167,649     $ 5,974,918  
Operating Equipment
    387,747       377,636  
Office furniture and equipment
    340,323       331,449  
Vehicles
    1,107,084       1,078,215  
Total
    8,002,803       7,762,218  
Less: accumulated depreciation
    (1,858,674 )     (1,445,858 )
Property, plant and equipment, net
  $ 6,144,129     $ 6,316,360  
 
Depreciation expense for the three months ended September 30, 2013 and 2012 amounted to $134,658 and $118,176, respectively, and for the nine months ended September 30, 2013 and 2012 amounted to $412,816 and $372,027, respectively.
 
NOTE 6 – INTANGIBLE ASSETS
 
Intangible assets consisted of the following:
 
   
September 30,
   
December 31,
 
   
2013
   
2012
 
Land use rights
  $ 671,077     $ 653,578  
Other intangible assets
    85,861       83,622  
Total
    756,938       737,200  
Less: accumulated amortization
    (101,481 )     (80,989 )
Intangible assets, net
  $ 655,457     $ 656,211  
 
Amortization expense of intangible assets for the three months ended September 30, 2013 and 2012 was $6,675 and $4,156, respectively, and for the nine months ended September 30, 2013 and 2012 amounted to $20,492 and $13,252, respectively.
 
The estimated amortization expense for the next five years is as follows:
 
Estimated amortization expense for
     
the year ending December 31,
 
Amount
 
2013
  $ 27,167  
2014
  $ 27,167  
2015
  $ 27,167  
2016
  $ 27,167  
2017
  $ 27,167  
Thereafter
  $ 520,376  
 
 
15

 
 
NOTE 7 – RELATED PARTY TRANSACTIONS
 
Payables due to related parties consisted of the following:
 
   
September 30,
   
December 31,
 
   
2013
   
2012
 
Shenyang Joway Industrial Development Co., Ltd.
  $ 48,609     $ 71,539  
Jinghe Zhang
    48,436       49,976  
Total
  $ 97,045     $ 121,515  
 
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 January 15, 2009, Joway Shengshi entered into a sales contract with Shenyang Joway, pursuant to which Joway Shengshi agreed to purchase inventory of $27,560 from Shenyang Joway.
 
On February 15, 2009, Joway Shengshi entered into an Equipment Sales Contract with Shenyang Joway. Pursuant to the agreement, Joway Shengshi agreed to purchase certain operating and office equipment in the amount of $158,832 from Shenyang Joway.
 
On December 1, 2009, we, through our subsidiary Joway Shengshi, entered into a royalty-free license agreement with Shenyang Joway. Pursuant to the license agreement, we are authorized to use the trademark “Xi” for a term of nine years.
 
On December 20, 2009, Joway Shengshi entered into a sales contract with Shenyang Joway. Pursuant to the sales contract, Joway Shengshi agreed to purchase inventory of $137,395 from Shenyang Joway.
 
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 $743,092 has been repaid. For the nine months ended September 30, 2013, the Company repaid $22,930 of these advances. As of September 30, 2013, the total unpaid principal balance due Shenyang Joway for advances was $48,609. 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 $4,588,961 has been repaid. For the nine months ended September 30, 2013, the Company repaid $1,540 of these advances. As of September 30, 2013, the total unpaid principal balance due Jinghe Zhang for advances was $48,436.
 
On May 10, 2007, Joway Technology 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 Technology. The advances are interest free, unsecured, and have no specified repayment terms. The agreement is valid throughout Joway Technology’s term of operation. During the period beginning March 28, 2007 (inception of Joway Technology) through December 31, 2010, Joway Technology received cash advances in the aggregate principal amount of $22,031 from Jinghe Zhang all of which has been repaid. As of September 30, 2013, the total unpaid principal balance due Jinghe Zhang for advances was $0.
 
The amounts owed to related parties are non-interest bearing and have no specified repayment terms.
 
 
16

 
 
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 Company’s subsidiary, Joway Decoration, as a wholesale and retail enterprise, was subject to taxable income at a verified rate of 5% of revenue in 2012 pursuant to “Measures for Verification Collection of Enterprise Income Tax” issued by the PRC State Administration of Taxation and changed to subject to EIT from 2013.

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,
 
   
2013
   
2012
 
Tax computed at China statutory rates
    25 %     25 %
Effect of reduced rate on Joway Decoration (1)
    0       (7 %)
Tax adjustment from China tax authority for 2012 income tax (2)
    (6 %)     0  
Effect of losses
    (25 %)     (20 %)
Effective rate
    (6 %)     (2 %)
 
 (1) Pursuant to Measures for Verification Collection of Enterprise Income Tax issued by the PRC State Administration of Taxation, Joway Decoration, as a wholesale and retail enterprise, was subject to taxable income at a verified rate of 5% of revenue for the year of 2012.
   
 (2) The Company’s 2012 Corporate Income Tax Filing in China was reviewed by the PRC tax authority and reduced the Company’s income tax deduction for the 2012 taxable year. As a result, the Company paid additional income tax of $70,224.
 
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, 2013, the Company had allocated $354,052 to statutory reserves.
 
 
17

 
 
NOTE 10 – SEGMENTS
 
In 2013 and 2012, the Company operated in three reportable business segments: (1) Healthcare Knitgoods 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, 2013
 
   
Sales
   
COGS
   
Gross profit
   
Loss from
 operations
   
Depreciation
 and
amortization
   
Assets
 
Healthcare Knitgoods Series
  $ 100,023     $ 25,957     $ 74,066     $ (77,078 )   $ 36,260     $ 564,910  
Daily Healthcare and Personal Care Series
    123,129       40,211       82,918       (71,808 )     44,637       334,836  
Wellness House and Activated Water Machine Series
    166,711       79,946       86,765       (140,061 )     60,436       613,187  
Segment Totals
  $ 389,863     $ 146,114     $ 243,749       (288,947 )   $ 141,333       1,512,933  
Other Income, net
                            93                  
Income Tax
                            (2,011 )                
Unallocated Assets
                                            8,298,774  
Net Loss
                          $ (286,843 )                
Total Assets
                                          $ 9,811,707  
 
For the three months ended September 30, 2012
 
 
 
Sales
   
COGS
   
Gross profit
   
Loss from
operations
   
Depreciation
and
 amortization
   
Assets
 
Healthcare Knitgoods Series
  $ 73,046     $ 25,225     $ 47,821     $ (127,704 )   $ 30,294     $ 459,805  
Daily Healthcare and Personal Care Series
    120,107       31,416       88,691       (103,823 )     49,813       239,349  
Wellness House and Activated Water Machine Series
    101,806       50,644       51,162       (145,491 )     42,223       820,732  
Segment Totals
  $ 294,959     $ 107,285     $ 187,674       (377,018 )   $ 122,332       1,519,886  
Other Income, net
                            42,196                  
Income Tax
                            4,331                  
Unallocated Assets
                                            10,027,549  
Net Loss
                          $ (339,153 )                
Total Assets
                                          $ 11,547,435  
 
 
18

 
 
For the nine months ended September 30, 2013
 
   
Sales
   
COGS
   
Gross profit
   
Loss from
 operations
   
Depreciation
 and
 amortization
   
Assets
 
Healthcare Knitgoods Series
  $ 199,915     $ 54,804     $ 145,111     $ (275,211 )   $ 99,060     $ 564,910  
Daily Healthcare and Personal Care Series
    298,992       98,208       200,784       (427,847 )     148,153       334,836  
Wellness House and Activated Water Machine Series
    375,562       174,118       201,444       (588,174 )     186,095       613,187  
Segment Totals
  $ 874,469     $ 327,130     $ 547,339       (1,291,232 )   $ 433,308       1,512,933  
Other Expense, net
                            (138,194 )                
Income Tax
                            78,237                  
Unallocated Assets
                                            8,298,774  
Net Loss
                          $ (1,507,663 )                
Total Assets
                                          $ 9,811,707  
 
For the nine months ended September 30, 2012
 
   
Sales
   
COGS
   
Gross profit
   
Loss from operations
   
Depreciation and amortization
   
Assets
 
Healthcare Knitgoods Series
  $ 612,547     $ 147,992     $ 464,555     $ (329,945 )   $ 156,160     $ 459,805  
Daily Healthcare and Personal Care Series
    365,427       99,681       265,746       (208,229 )     93,161       239,349  
Wellness House and Activated Water Machine Series
    533,300       166,348       366,952       (324,760 )     135,958       820,732  
Segment Totals
  $ 1,511,274     $ 414,021     $ 1,097,253       (862,934 )   $ 385,279       1,519,886  
Other Income, net
                            55,757                  
Income Tax
                            16,710                  
Unallocated Assets
                                            10,027,549  
Net Loss
                          $ (823,887 )                
Total Assets
                                          $ 11,547,435  

 
19

 
 
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,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Sales to franchise customers
  $ 374,234     $ 278,039     $ 820,998     $ 1,381,992  
Sales to non-franchise customers
    15,629       16,920       53,471       129,282  
                                 
Total sales
  $ 389,863     $ 294,959     $ 874,469     $ 1,511,274  
 
NOTE 12 - INVESTMENT
 
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 RMB 5,000,000. 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 with Industrial and Commercial Bank of China. This is classified as a level 2 investment within the fair value hierarchy. During the nine months ended September 30, 2013, $1,022,757 of this short-term investment in the total amount of $1,266,604 were liquidated and returned to the company.  As of September 30, 2013, the remaining short- term investment was $243,847.
 
 
20

 
 
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, 2013.
 
FORWARD-LOOKING STATEMENTS:
 
Certain statements made in this report may constitute “forward-looking statements on our current expectations and projections about future events.” These forward-looking statements involve known or unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases you can identify forward-looking statements by some words such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions, and are subject to a number of risks and uncertainties. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements are made as of the date of this report, and we assume no obligation to update these forward-looking statements whether as a result of new information, future events, or otherwise, other than as required by law. In light of these assumptions, risks, and uncertainties, the forward-looking events discussed in this report might not occur and actual results and events may vary significantly from those discussed in the forward-looking statements.
 
Overview
 
General
 
We develop, manufacture, market, distribute, and sell products, including knit goods, daily healthcare and personal care products, and wellness house and activated water machine products, that are coated, embedded or filled with tourmaline. Most of our products, such as clothing, bedding, and mattresses are purchased as finished products which we then coat and/or infuse with liquid or granular tourmaline using one or more of our manufacturing techniques. We conduct all of our operations in Tianjin City, China and distribute most of our products to more than 200 franchisees in China. Our franchisees, in turn, sell the products to their customers. All of our revenues to date have been generated by sales to customers located in the PRC.
 
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 manufacturing 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 manufacturing 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.
 
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.
 
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. We expect administrative expenses to continue to increase as we incur expenses related to costs of compliance with U.S. securities laws and regulations, and our reporting obligations thereunder, including increased audit and legal fees and investor relations expenses.
 
Other (expense) income.  Our other (expense) income consists primarily of interest income, subsidy income, other revenue from sales of obsolete equipment and other expenses related to the tax penalty amounts requested by PRC tax authority after a review of our 2012 tax filings of corporate income and value added tax (VAT).
 
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. No provision for income taxes in the United States has been made as the Company has no income taxable in the United States. The Company’s PRC subsidiaries expect to use their retained earnings to support their PRC operations, and do not expect to declare any dividends within the foreseeable future.
 
 
21

 
 
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,
 
   
2013
   
2012
   
2013
   
2012
 
REVENUES
  $ 389,863     $ 294,959     $ 874,469     $ 1,511,274  
COST OF REVENUES
    146,114       107,285       327,130       414,021  
GROSS PROFIT
    243,749       187,674       547,339       1,097,253  
OPERATING EXPENSES
    532,696       564,692       1,838,571       1,960,187  
(LOSS) FROM OPERATIONS
    (288,947 )     (377,018 )     (1,291,232 )     (862,934 )
OTHER INCOME (EXPENSE), NET
    93       42,196       (138,194 )     55,757  
(LOSS) BEFORE INCOME TAXES
    (288,854 )     (334,822 )     (1,429,426 )     (807,177 )
INCOME TAXES
    (2,011 )     4,331       78,237       16,710  
NET (LOSS)
  $ (286,843 )     (339,153 )   $ (1,507,663 )     (823,887 )
 
Business Segments

In 2013 and 2012, we operated in three reportable business segments: (1) Healthcare Knitgoods, (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, 2013
 
   
Healthcare
Knitgoods
Series
   
% of
 Total
   
Daily
Healthcare
 and Personal
 Care Series
   
% of
Total
   
Wellness House
and Activated
 Water Machine
 Series
   
% of
 Total
   
Total
 
REVENUES
  $ 100,023       25.7 %   $ 123,129       31.6 %   $ 166,711       42.8 %   $ 389,863  
COST OF REVENUES
    25,957       17.8 %     40,211       27.5 %     79,946       54.7 %     146,114  
GROSS PROFIT
    74,066       30.4 %     82,918       34.0 %     86,765       35.6 %     243,749  
GROSS MARGIN
    74.0 %             67.3 %             52.0 %             62.5 %
OPERATING EXPENSES
    151,144       28.4 %     154,726       29.0 %     226,826       42.6 %     532,696  
(LOSS) FROM OPERATIONS
  $ (77,078 )     26.7 %   $ (71,808 )     24.9 %   $ (140,061 )     48.5 %   $ (288,947 )
 
 
22

 
 
For the three months ended September 30, 2012
 
   
Healthcare
Knitgoods
 Series
   
% of
Total
   
Daily
 Healthcare
 and Personal
 Care Series
   
% of
 Total
   
Wellness House
 and Activated
Water Machine
 Series
   
% of
 Total
   
Total
 
REVENUES
  $ 73,046       24.8 %   $ 120,107       40.7 %   $ 101,806       34.5 %   $ 294,959  
COST OF REVENUES
    25,225       23.5 %     31,416       29.3 %     50,644       47.2 %     107,285  
GROSS PROFIT
    47,821       25.5 %     88,691       47.3 %     51,162       27.3 %     187,674  
GROSS MARGIN
    65.5 %             73.8 %             50.3 %             63.6 %
OPERATING EXPENSES
    175,525       31.1 %     192,514       34.1 %     196,653       34.8 %     564,692  
(LOSS)  FROM OPERATIONS
  $ (127,704 )     33.9 %   $ (103,823 )     27.5 %   $ (145,491 )     38.6 %   $ (377,018 )
 
For the nine months ended September 30, 2013
 
   
Healthcare
Knitgoods
Series
   
% of
 Total
   
Daily
Healthcare
and Personal
 Care Series
   
% of
 Total
   
Wellness House
 and Activated
Water Machine
 Series
   
% of
Total
   
Total
 
REVENUES
  $ 199,915       22.9 %   $ 298,992       34.2 %   $ 375,562       42.9 %   $ 874,469  
COST OF REVENUES
    54,804       16.8 %     98,208       30.0 %     174,118       53.2 %     327,130  
GROSS PROFIT
    145,111       26.5 %     200,784       36.7 %     201,444       36.8 %     547,339  
GROSS MARGIN
    72.6 %             67.2 %             53.6 %             62.6 %
OPERATING EXPENSES
    420,322       22.9 %     628,631       34.2 %     789,618       42.9 %     1,838,571  
(LOSS) FROM OPERATIONS
  $ (275,211 )     21.3 %   $ (427,847 )     33.1 %   $ (588,174 )     45.6 %   $ (1,291,232 )
 
For the nine months ended September 30, 2012
 
   
Healthcare
Knitgoods
Series
   
% of
Total
   
Daily
 Healthcare
 and Personal
 Care Series
   
% of
 Total
   
Wellness House
 and Activated
Water Machine
 Series
   
% of
Total
   
Total
 
REVENUES
  $ 612,547       40.5 %   $ 365,427       24.2 %   $ 533,300       35.3 %   $ 1,511,274  
COST OF REVENUES
    147,992       35.7 %     99,681       24.1 %     166,348       40.2 %     414,021  
GROSS PROFIT
    464,555       42.3 %     265,746       24.2 %     366,952       33.4 %     1,097,253  
GROSS MARGIN
    75.8 %             72.7 %             68.8 %             72.6 %
OPERATING EXPENSES
    794,500       40.5 %     473,975       24.2 %     691,712       35.3 %     1,960,187  
(LOSS)  FROM OPERATIONS
  $ (329,945 )     38.2 %   $ (208,229 )     24.1 %   $ (324,760 )     37.6 %   $ (862,934 )
 
For The Three Months Ended September 30, 2013 Compared to September 30, 2012
 
Revenue. For the three months ended September 30, 2013, revenue was $389,863 compared to $294,959 for the three months ended September 30, 2012, an increase of $94,904 or 32.2%. This increase was mainly due to the increase in revenue from wellness houses and activated water machines. In the third quarter of 2012, we suffered a sales downturn caused by our enhanced enforcement of the terms of our franchise agreements and policies in 2012 and the slowdown of the Chinese economy.  From the second quarter of 2013, our sales were starting to recover after the completion of the rectification work on our franchisees.
 
Revenue from healthcare knit goods segment increased by $26,977 or 36.9% to $100,023 for the three months ended September 30, 2013 from $73,046 for the three months ended September 30, 2012. This increase was mainly due to $0.02 million of increase in sales of our mattress products. Our mattress products were our best-selling products for the three months ended September 30, 2013, and the sales of our mattress increased sharper in the recovery period after the sharp decrease in the downturn period, compared to other products.
 
 
23

 
 
Revenue from daily healthcare and personal care products increased by $3,022 or 2.5% to $123,129 for the three months ended September 30, 2013 from $120,107 for the three months ended September 30, 2012. Our daily healthcare and personal care products were less affected in the downturn and recovery periods because the sales in our new products of this segment promoted in 2012 offset the influence.
 
Revenue from wellness houses and activated water machines increased by $64,905 or 63.8% to $166,711 for the three months ended September 30, 2013 from $101,806 for the three months ended September 30, 2012. This increase was mainly due to $0.04 million of increase in sales of wellness house for family use. From March of 2013, we gave our franchisees more discounts on our wellness house for family use products, which increased the sales.
 
Cost of Goods Sold. For the three months ended September 30, 2013, cost of goods sold was $146,114 compared to $107,285 for the three months ended September 30, 2012, an increase of $38,829 or 36.2%. This increase was mainly due to the increased cost in the wellness houses and activated water machines segment.
 
Cost of goods sold for healthcare knit goods segment increased to $25,957 for the three months ended September 30, 2013 from $25,225 for the three months ended September 30, 2012, an increase of $732 or 2.9%. This increase was mainly due to the increase in sales.
 
Cost of goods sold for the daily healthcare and personal care segment increased to $40,211 for the three months ended September 30, 2013 from $31,416 for the three months ended September 30, 2012, an increase of $8,795 or 28%. This increase was primarily due to the increase in the cost of our new products.
 
Cost of goods sold for our wellness house and activated water machine segment increased to $79,946 for the three months ended September 30, 2013 from $50,644 for the three months ended September 30, 2012, an increase of $29,302 or 57.9%. This increase was mainly due to the increase in the cost of our wellness house for family use as a result of the increase in sales.
 
Gross profit. Our gross profit increased by $56,075 or 29.9% to $243,749 for the three months ended September 30, 2013, compared to $187,674 for the three months ended September 30, 2012. This increase was mainly due to the increase in gross profit for healthcare knit goods segment and wellness houses and activated water machines segment. Our gross margin decreased slightly from 63.6% for the three months ended September 30, 2012 to 62.5% for the three months ended September 30, 2013.
 
Gross profit for the healthcare knit goods segment increased by $26,245 or 54.9% to $74,066 for the three months ended September 30, 2013 compared to $47,821 for the three months ended September 30, 2012. This increase was mainly due to the increased sales of our mattress products, which have higher gross margins. The gross margins of healthcare knit goods segment increased from 65.5% for the three months ended September 30, 2012 to 74% for the three months ended September 30, 2013. The increased output of our healthcare knit goods caused the lower cost rate and higher gross profit margin.
 
Gross profit of daily healthcare and personal care segment decreased by $5,773 or 6.5% to $82,918 for the three months ended September 30, 2013, compared to $88,691 for the three months ended September 30, 2012. This decrease was primarily due to the decrease in gross profit of our cosmetic products. The gross margin of daily healthcare and personal care segment decreased from 73.8% for the three months ended September 30, 2012 to 67.3% for the three months ended September 30, 2013. This decrease was mainly due to the decreased sales of our cosmetic products, which have higher gross profit margin.
 
Gross profit of the wellness house and activated water machine segments increased by $35,603 or 69.6% to $86,765 for the three months ended September 30, 2013, compared to $51,162 for the three months ended September 30, 2012. This increase was mainly due to the increase in gross profit of wellness house for family use. The gross margin of our wellness house and activated water machine segments increased slightly from 50.3% for the three months ended September 30, 2012 to 52% for the three months ended September 30, 2013.
 
 
24

 
 
Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $31,996, or 5.7%, from $564,692 for the three months ended September 30, 2012 to $532,696 for the three months ended September 30, 2013. This decrease was mainly due to the decrease of marketing fees and travel expenses. Operating expenses for healthcare knit goods segment decreased by $24,381 or 13.9% to $151,144 for the three months ended September 30, 2013 from $175,525 for the three months ended September 30, 2012. Operating expenses for daily healthcare and personal care segment decreased by $37,788 or 19.6% to $154,726 for the three months ended September 30, 2013 from $192,514 for the three months ended September 30, 2012. Operating expenses for our wellness house and activated water machine segment increased by $30,173 or 15.3% to $226,826 for the three months ended September 30, 2013 from $196,653 for the three months ended September 30, 2012.
 
Loss from operations. As a result of the foregoing, our loss from operations was $288,947 for the three months ended September 30, 2013, compared to $377,018 for the three months ended September 30, 2012, a decrease of $88,071 or 23.4%. This decrease was mainly due to the increase in sales.
 
Income taxes. Our income tax expenses were negative $2,011 for the three months ended September 30, 2013, compared to $4,331 for the three months ended September 30, 2012. The negative income tax in the third quarter of 2013 was mainly due to a reverse to the excess income tax accrued in 2012 amounted to $1,567 and the change of currency translation rate.
 
Net loss. For the three months ended September 30, 2013, our net loss was $286,843 compared to $339,153 for the three months ended September 30, 2012. This decrease was mainly due to increase in sales and the decrease in operating expenses.
 
For the Nine Months Ended September 30, 2013 Compared to September 30, 2012
 
Revenue. For the nine months ended September 30, 2013, revenue was $874,469 compared to $1,511,274 for the nine months ended September 30, 2012, a decrease of $636,805 or 42.1%. This decrease was mainly due to the decrease in revenue from healthcare knit goods segment and wellness houses and activated water machines segment. In our healthcare knit goods segment and wellness houses and activated water machines segment, most products are durable consumables which have three or more years of life cycle. Our franchisees’ demand for our products for the first half of 2013 may have been affected because of the large amount of our main products they purchased in the end of 2010. In addition, from the year of 2012, in order to concentrate on high-quality franchisees we strengthened the enforcement of the terms of our franchise agreements and policies after focusing mostly on increasing franchise stores in 2011. As a result, the number of our franchisees decreased compared to the number in 2012, which also caused a decrease in revenue.
 
Revenue from healthcare knit goods segment decreased by $412,632, or 67.4% to $199,915 for the nine months ended September 30, 2013 from $612,547 for the nine months ended September 30, 2012. This decrease was mainly due to the decrease in sales of our mattress products.
 
Revenue from daily healthcare and personal care products decreased by $66,435 or 18.2% to $298,992 for the nine months ended September 30, 2013 from $365,427 for the nine months ended September 30, 2012. This was primarily due to the decrease in sales of our cosmetic products.
 
Revenue from wellness houses and activated water machines decreased by $157,738 or 29.6% to $375,562 for the nine months ended September 30, 2013 from $533,300 for the nine months ended September 30, 2012. This decrease was mainly due to the decrease in sales of Foot Sauna Bucket.
 
Cost of Goods Sold.  For the nine months ended September 30, 2013, cost of goods sold was $327,130 compared to $414,021 for the nine months ended September 30, 2012, a decrease of $86,891, or 21%. This decrease was mainly due to a decrease in sales.
 
Cost of goods sold for healthcare knit goods segment decreased to $54,804 for the nine months ended September 30, 2013 from $147,992 for the nine months ended September 30, 2012, a decrease of $93,188 or 63%. This decrease was mainly due to the decrease in the cost of our mattress products.
 
Cost of goods sold for the daily healthcare and personal care segment decreased to $98,208 for the nine months ended September 30, 2013 from $99,681 for the nine months ended September 30, 2012, a decrease of $1,473 or 1.5%. This decrease was mainly due to the decrease in the cost of our cosmetic products.
 
Cost of goods sold for our wellness house and activated water machine segment increased to $174,118 for the nine months ended September 30, 2013 from $166,348 for the nine months ended September 30, 2012, an increase of $7,770 or 4.7%. This increase was mainly due to the increase in the cost of our wellness houses for family use.
 
 
25

 
 
Gross profit. Our gross profit decreased by $549,914 or 50.1% to $547,339 for the nine months ended September 30, 2013, compared to $1,097,253 for the nine months ended September 30, 2012. This decrease was primarily due to the decrease in gross profit for healthcare knit goods segment and wellness house and activated water machine segment. In addition, our gross margin decreased from 72.6% for the nine months ended September 30, 2012 to 62.6% for the nine months ended September 30, 2013. This decrease was mainly due to wellness house and activated water machine segment.
 
Gross profit for the healthcare knit goods segment decreased by $319,444 or 68.8% to $145,111 for the nine months ended September 30, 2013 compared to $464,555 for the nine months ended September 30, 2012. 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 75.8% for the nine months ended September 30, 2012 to 72.6% for the nine months ended September 30, 2013. The reduced output of our healthcare knit goods caused higher cost rate and lower gross profit margin.
 
Gross profit of daily healthcare and personal care segment decreased by $64,962 or 24.4% to $200,784 for the nine months ended September 30, 2013, compared to $265,746 for the nine months ended September 30, 2012. This decrease was primarily due to the decrease in gross profit of our cosmetic products. Our gross margin of daily healthcare and personal care segment decreased from 72.7% for the nine months ended September 30, 2012 to 67.2% for the nine months ended September 30, 2013. This decrease was mainly due to the decrease in sales of our cosmetic products, which have higher gross margins.
 
Gross profit of the wellness house and activated water machine segments decreased by $165,508 or 45.1% to $201,444 for the nine months ended September 30, 2013, compared to $366,952 for the nine months ended September 30, 2012. This decrease was mainly due to the decrease in sales of Foot Sauna Bucket. The gross margin of our wellness house and activated water machine segments decreased from 68.8% for the nine months ended September 30, 2012 to 53.6% for the nine months ended September 30, 2013. This decrease was mainly due to the more discount to our franchisees.
 
Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $121,616, or 6.2%, from $1,960,187 for the nine months ended September 30, 2012 to $1,838,571 for the nine months ended September 30, 2013. This decrease was mainly due to the decrease of conference expenses and travel expenses. Operating expenses for healthcare knit goods segment decreased by $374,178 or 47.1% to $420,322 for the nine months ended September 30, 2013 from $794,500 for the nine months ended September 30, 2012. Operating expenses for daily healthcare and personal care segment increased by $154,656 or 32.6% to $628,631 for the nine months ended September 30, 2013 from $473,975 for the nine months ended September 30, 2012. Operating expenses for our wellness house and activated water machine segment increased by $97,906 or 14.2% to $789,618 for the nine months ended September 30, 2013 from $691,712 for the nine months ended September 30, 2012. These changes were due to the fact that we put more marketing and sales efforts on our wellness house and activated water machine segment and daily healthcare and personal care segment in place of healthcare knit goods segment.
 
Loss from operations. As a result of the foregoing, our loss from operations was $1,291,232 for the nine months ended September 30, 2013, compared to $862,934 for the nine months ended September 30, 2012, an increase of $428,298. This increase was mainly due to the decrease in sales.
 
Income taxes. Our income tax expenses were $78,237 for the nine months ended September 30, 2013, compared to $16,710 for the nine months ended September 30, 2012. The increase was due to an additional income tax for the year of 2012 requested by PRC tax authority after a review of our 2012 Corporate Income Tax Filing.
 
Net loss. Our net loss was $1,507,663 for the nine months ended September 30, 2013, compared to $823,887 for the nine months ended September 30, 2012. This decrease was mainly due to the decrease in sales.
 
 
26

 
 
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,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Sales to franchise customers
  $ 374,234     $ 278,039     $ 820,998     $ 1,381,992  
Sales to non-franchise customers
    15,629       16,920       53,471       129,282  
                                 
Total sales
  $ 389,863     $ 294,959     $ 874,469     $ 1,511,274  
 
Liquidity and Capital Resources
 
Our cash at the beginning of the nine months ended September 30, 2013 was $522,145 and decreased to $151,945 by the end of September 30, 2013, a decrease of $370,200. This decrease was mainly due to the loss from our operations. On September 30, 2013, we had net working capital of $2,320,273, a decrease of $1,062,305 from $3,382,578 on December 31, 2012.
 
Our cash flow information summary is as follows:
 
    For the nine months ended September 30,  
   
2013
   
2012
 
Net cash provided by (used in)
       
Operating activities
  $ (1,379,997 )   $ (891,289 )
Investing activities
    990,244       (120,591 )
Financing activities
  $ (24,470 )   $ (243,060 )
 
Net Cash Used In Operating Activities
 
Net cash used in operating activities was $1,379,997 for the nine months ended September 30, 2013 compared to $891,289 for the nine months ended September 30, 2012. This increase was primarily due to the reduced cash collection driven by $683,776 of increase in net loss.
 
For the nine months ended September 30, 2013, cash was mainly used to cover the loss of $1,507,663 and pay taxes of $217,065, which were primarily offset by an add-back of $412,816 of depreciation for non-cash expense.
 
For the nine months ended September 30, 2012, cash was mainly used to cover the loss of $823,887 and purchase materials of $291,310, which were primarily offset by an add-back of $372,027 of depreciation for non-cash expense.
 
 
27

 
 
Net Cash Provided by (Used In) Investing Activities
 
Net cash provided by investing activities was $990,244 for the nine months ended September 30, 2013, compared to $120,591 of net cash used in for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, we took back $1,022,757 of our short-term wealth-management investment, a kind of Marketable Security in Industrial and Commercial Bank of China in the total amount of $1,266,604, which was invested in 2012. For the nine months ended September 30, 2012, cash was mostly used to remodel our training building in the amount of $0.12 million.
 
Net Cash Used In Financing Activities
 
Net cash used in financing activities was $24,470 for the nine months ended September 30, 2013, compared to $243,060 for the nine months ended September 30, 2012. The cash was used to repay Jinghe Zhang and Shenyang Joway for advances made in prior periods.
 
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 December 31, 2010, Joway Shengshi received cash advances in the aggregate principal amount of $4,637,397 from Jinghe Zhang of which $4,588,961 has been repaid. We repaid $1,540 and $26,105 of these advances for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, the total unpaid principal balance due Jinghe Zhang for advances made to Joway Shengshi was $48,436.
 
On May 7, 2007, our operating subsidiary, Joway Shengshi entered into an agreement with Shenyang Joway pursuant to which Joway Shengshi and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital.  On May 10, 2007, our subsidiary, Joway Technology and Shenyang Joway entered into an agreement pursuant to which Joway Technology and Shenyang Joway agreed to provide each other with interest-free, unsecured advances for working capital.  Pursuant to these agreements, Shenyang Joway advanced an aggregate of $791,701 to Joway Shengshi and Joway Technology through December 31, 2010 of which $743,092 has been repaid. We repaid $22,930 and $216,955 of these advances for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, the total unpaid principal balance due Shenyang Joway for advances was $48,609.  Shenyang Joway ceased operations at the end of 2009, although it still exists as a legal entity.
 
The Company has sufficient liquidity from internal and external sources to meet the Company’s operating cash needs over the next 12 months even if Mr. Zhang and Shenyang Joway were to demand immediate repayment of the remaining balance under these loans and no longer wish to provide future loans to us.
 
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, 2013, the Company had allocated $354,052 to statutory reserves.
 
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.
 
 
28

 
 
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,” Joway Shengshi, as a VIE of Junhe Consulting, have been consolidated in our financial statements. Joway Shengshi’s sales are included in our total sales, its income from operations is consolidated with ours, and our net income includes all of Joway Shengshi’s net income. Based on the various VIE Agreements, we are able to exercise control over the VIEs, and to obtain the full economic benefits. Accordingly, the non–controlling interests have no economic interest in the VIEs.
 
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 of an allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses. 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
 
 
29

 
 
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts, and any gain or loss is included in the consolidated statements of income and other comprehensive income. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Significant renewals and betterment to buildings and equipment are capitalized. Leasehold improvements are depreciated over the lesser of the useful life or the life of the lease.
 
Recent Accounting Pronouncements
 
 We do not anticipate that the adoption of recently issued accounting pronouncements to have a material effect on our condensed consolidated financial statements.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
 
Item 4. Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
 
Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures as defined in SEC Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this quarterly report. The purpose of this evaluation is to determine if, as of Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2013, 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.
       
 
 
We have implemented an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatment identified in such report have been fully implemented and confirmed by our internal control department.
 
 
 
In 2011 we established the position of internal audit manager. In September 2011, 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. We are seeking a potential candidate who has sufficient experience in internal control and audit to fill the position vacated in July 2012 by the internal audit manager. As an alternative, we also consider hiring an external professional organization to undertake the work.
 
 
30

 
 
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, 2013 that materially affected, or were reasonably likely to materially affect our internal control over financial reporting.
 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings.
 
None.
 
Item 1A. Risk Factors.
 
As of the date of this filing, there have been no material changes from the risk factors disclosed in Part I, Item 1A (Risk Factors) contained in our Annual Report on Form 10-K for the year ended December 31, 2012. 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, 2012 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.
 
 
31

 
 
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 

 
 
32

 
 
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, 2013
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
 
 
33

EX-31.1 2 f10q0913ex31i_joway.htm CERTIFICATION f10q0913ex31i_joway.htm
EXHIBIT 31.1
 
CERTIFICATION
 
I, Jinghe Zhang, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q for the nine months ended September 30, 2013 of Joway Health Industries Group Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 14, 2013
 
/S/ Jinghe Zhang
Jinghe Zhang
Chief Executive Officer
(Principal Executive Officer)

EX-31.2 3 f10q0913ex31ii_joway.htm CERTIFICATION f10q0913ex31ii_joway.htm
EXHIBIT 31.2
 
CERTIFICATION
 
I, Yuan Huang, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q for the nine months ended September 30, 2013 of Joway Health Industries Group Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 14, 2013
 
/S/ Yuan Huang
Yuan Huang
Chief Financial Officer
(Principal Financial and Accounting Officer)
EX-32.1 4 f10q0913ex32i_joway.htm CERTIFICATION f10q0913ex32i_joway.htm
EXHIBIT 32.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Jinghe Zhang, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Joway Health Industries Group Inc. for the nine months ended September 30, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Joway Health Industries Group Inc.
 
Date: November 14, 2013
 
By:
 
/S/ Jinghe Zhang
   
Jinghe Zhang
   
Chief Executive Officer
 
EX-32.2 5 f10q0913ex32ii_joway.htm CERTIFICATION f10q0913ex32ii_joway.htm
EXHIBIT 32.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Yuan Huang, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Joway Health Industries Group Inc. for the nine months ended September 30, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Joway Health Industries Group Inc.
 
Date: November 14, 2013
 
By:
 
/S/ Yuan Huang
   
Yuan Huang
   
Chief Financial Officer
 
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