Joway Health Industries Group Inc - FORM 10-Q

Joway Health Industries Group Inc - FORM 10-Q - May 15, 2012

Attached files

Attached files

Joway Health Industries Group Inc Reports

Attached files

Joway Health Industries Group Inc Reports

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

file	filename
EXCEL - IDEA: XBRL DOCUMENT - Joway Health Industries Group Inc	Financial_Report.xls
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF PERIODIC REPORT - Joway Health Industries Group Inc	d333275dex311.htm
EX-14.1 - CODE OF ETHICS - Joway Health Industries Group Inc	d333275dex141.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - Joway Health Industries Group Inc	d333275dex321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER OF PERIODIC REPORT - Joway Health Industries Group Inc	d333275dex312.htm
EX-32.2 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - Joway Health Industries Group Inc	d333275dex322.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 March 31, 2012

¨	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.

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 May 11, 2012 was 20,036,000 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			20

Item 3. Quantitative and Qualitative Disclosures About Market Risk			27

Item 4. Controls and Procedures			27

PART II - OTHER INFORMATION			28

Item 1. Legal Proceedings			28

Item 1A. Risk Factors			28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29

Item 3. Defaults Upon Senior Securities			29

Item 4. Mine Safety Disclosures			29

Item 5. Other Information			29

Item 6. Exhibits			29

SIGNATURES			30

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

In the opinion of management, the accompanying unaudited 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 CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	Page

Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011 (Audited)		4

Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)		5

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)		6

Notes to Consolidated Financial Statements		7-20

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	March 31, 2012 (Unaudited)		December 31, 2011 (Audited)
ASSETS

CURRENT ASSETS:
Cash	$	3,230,724	$	3,372,189
Accounts receivable		11,331		38,053
Other receivables		129,196		46,970
Inventories		1,121,126		873,999
Advances to suppliers		436,338		377,028
Prepaid taxs		186,729		185,763
Prepaid expense		53,026		3,591

Total current assets		5,168,470		4,897,593


PROPERTY, PLANT AND EQUIPMENT, net		6,567,408		6,571,154


OTHER ASSETS:
Long-term investment		237,165		235,675
Intangible assets, net		621,934		622,321
Long-term prepaid expenses		201,480		203,391

Total other assets		1,060,579		1,061,387


Total assets	$	12,796,457	$	12,530,134


LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	257,192	$	119,727
Advances from customers		20,134		13,172
Taxes payable		31,366		—
Other payables		75,894		65,697
Due to related parties		337,035		358,678

Total current liabilities		721,621		557,274


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; 20,036,000 and 20,018,000 shares issued and outstanding as of March 31, 2012 and December 31, 2011		20,036		20,018
Additional paid-in-capital		7,361,143		7,343,161
Statutory reserves		354,052		354,052
Retained earnings		3,396,280		3,388,766
Accumulated other comprehensive income		943,325		866,863

Total stockholders’ equity		12,074,836		11,972,860

Total liabilities and stockholders’ equity	$	12,796,457	$	12,530,134

The accompanying notes are an integral part of these financial statements

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


	Three months ended March 31,
	2012			2011
	(Unaudited)			(Unaudited)
REVENUES	$	790,632		$	1,699,038

COST OF REVENUES		195,381			355,406


GROSS PROFIT		595,251			1,343,632

Selling expenses		172,511			144,309
General and administrative expenses		421,787			561,435

OPERATING EXPENSES		594,298			705,744


INCOME FROM OPERATIONS		953			637,888


Interest income		1,318			1,616
Other income		8,739			361,268
Other expenses		(48	)		(666	)

OTHER INCOME, NET		10,009			362,218


INCOME BEFORE INCOME TAXES		10,962			1,000,106

INCOME TAXES		3,448			222,376


NET INCOME		7,514			777,730

OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment		76,462			71,707


COMPREHENSIVE INCOME	$	83,976		$	849,437


NET INCOME PER COMMON SHARE, BASIC AND DILUTED	$	0.00		$	0.04


WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED		20,027,297			20,000,000

The accompanying notes are an integral part of these financial statements

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three months ended March 31,
	2012			2011
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,514		$	777,730
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		131,474			98,799
Amortization		4,716			4,437
Stock-based compensation		18,000			0
Changes in operating assets and liabilities:
Accounts receivable, trade		26,722			125
Other receivables		(82,226	)		44,376
Inventories		(247,127	)		123,896
Advances to suppliers		(59,310	)		(37,709	)
Prepaid expense		(47,524	)		16,529
Accounts payable		137,465			20,878
Advances from customers		6,962			(1,422	)
Other payable		(390	)		(4,168	)
Salary and welfare payable		10,587			8,892
Taxes payable		30,400			(124,979	)

Net cash provided by (used in) operating activities		(62,737	)		927,384


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property plant and equipment		(127,728	)		(658,929	)

Net cash used in investing activities		(127,728	)		(658,929	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Due to related parties		(21,643	)		(157,682	)

Net cash used in financing activities		(21,643	)		(157,682	)


EFFECT OF EXCHANGE RATE CHANGES ON CASH		70,643			67,525


NET INCREASE (DECREASE) IN CASH		(141,465	)		178,298

CASH, beginning of period		3,372,189			5,281,420


CASH, end of period	$	3,230,724		$	5,459,718


SUPPLEMENTAL DISCLOSURES:

Income taxes paid	$	7,171		$	218,380
Interest paid	$	—		$	—

The accompanying notes are an integral part of these financial statements

JOWAY HEALTH INDUSTRIES GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION

The 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 the construction of Tourmaline Wellness Houses. Prior to July 25, 2010, Joway Shengshi owned 90.91% of Joway Technology. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, another stockholder of Joway Technology on July 25, 2010 to acquire the remaining 9.09% of the share of Joway Technology. As a result of the share acquisition, Joway Technology became a wholly-owned subsidiary of Joway Shengshi.

Tianjin Joway Decoration Engineering Co., Ltd. (referred to herein as “Joway Decoration”) was incorporated on April 22, 2009 in PRC. It engages in the distribution of Tourmaline Activated Water Machines, Tourmaline Wellness House for family use and Tourmaline Wellness House materials. Prior to July 9, 2010, Joway Shengshi owned 90% of Joway Decoration. Joway Shengshi entered into a share acquisition agreement with Jingyun Chen, another stockholder of Joway Decoration on July 9, 2010 to acquire the remaining 10% of the shares of Joway Decoration. As a result of the share acquisition, Joway Decoration became a wholly-owned subsidiary of Joway Shengshi. Jingyun Chen is currently the General Manager of Joway Decoration.

Tianjin Oriental Shengtang Import & Export Trading Co., Ltd (referred to herein as “Shengtang Trading”) was incorporated on September 18, 2009 in the PRC. It engages in purchasing raw materials which it sells to other companies of the group. Prior to July 28, 2010, Joway Shengshi owned 95% of Shengtang Trading. Joway Shengshi entered into a share acquisition agreement with Wang Aiying, another stockholder of Shengtang Trading on July 28, 2010 to acquire the remaining 5% of the shares of Shengtang Trading. As a result of the share acquisition, Shengtang Trading became a wholly-owned subsidiary of Joway Shengshi.

The following table lists the Company and its subsidiaries:


Name	Domicile and Date of Incorporation	Paid in Capital		Percentage of Effective Ownership	Principal Activities
Joway Health Industries Group Inc.	March 21, 2003, Nevada	USD	20,036	86.88% owned by Crystal Globe Limited 13.12% 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 tourmaline 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 Tourmaline Activated Water Machine, Tourmaline Wellness House for family use and Tourmaline Wellness House materials
Tianjin Oriental Shengtang Import & Export Trading Co., Ltd.	September 18, 2009, PRC	USD	292,463.75	100% owned by Tianjin Joway Shengshi Group Co., Ltd	Distribution of tourmaline products

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

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

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

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

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

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

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

In connection with the Share Exchange and as consideration for entering into the VIE Agreements the shareholders of Joway Shengshi, entered into a Call Option Agreement with the sole shareholder of Crystal Globe (the controlling shareholder of Dynamic Elite), pursuant to which the shareholders of Joway Shengshi have the right to purchase up to 100% of the shares of Crystal Globe at an aggregate price equal to $20,000 over the next three years. The Call Option vests as to 34% of the shares of Crystal Globe on April 2, 2011 and as to 33% on April 2 of 2012 and 2013. As a result, the shareholders of Joway Shengshi will become 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 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 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 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 three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. The accompanying consolidated financial statements should be read in conjunction with the Company’s form 10-K for the fiscal year ended December 31, 2011 which was filed on March 30, 2012.

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 three months ended March 31,				For the year ended December 31,
	2012		2011		2011
Period ended RMB: USD Exchange rate		6.3247		6.5701		6.3647
Average RMB: USD Exchange rate		6.32012		6.5894		6.47351

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

For the three months ended March 31, 2012 and 2011 foreign currency translation adjustments of $76,462 and $71,707, respectively, have been reported as comprehensive income in the consolidated financial statements.

Other Comprehensive Income

Other comprehensive income is defined as the change in equity during the period from transactions and other events, excluding the changes resulting from investments by owners and distributions to owners, and is not included in the computation of income tax expense or benefit. Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.

Concentrations of Credit Risk

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

Fair Value of Financial Instruments

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

•

Level 1 – defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;

•

Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

•

Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The carrying amounts reported in the balance sheets for cash, accounts receivable, other receivable, accounts payable, other payable, and amounts due from related parties generally approximate their fair market values based on the short-term maturity of these instruments. ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

Cash and Cash Equivalents

For financial reporting purposes, the Company considers all highly liquid financial instruments with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at any point during the period of the financial statements presented. Balances at financial institutions or state-owned banks within the PRC are not covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

Accounts Receivable

Accounts receivable are carried at net realizable value. The Company maintains reserves for potential credit losses on accounts receivable. Management 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 reserves. As of March 31, 2012 and December 31, 2011, respectively, the Company had no allowance for doubtful accounts.

Inventories

Inventories are stated at the lower of cost, as determined by the specific identification method on contract level (for each individual contract, inventories cost flow are determined by weighted-average method), or the net realizable value, which is determined on selling prices less any further costs expected to be incurred for completion and disposal. The Company regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether a valuation allowance is required. As of March 31, 2012 and December 31, 2011, 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 $436,338 and $377,028 as of March 31, 2012 and December 31, 2011, respectively.

Investments

Investments in which the Company has a 20% to 50% interest are accounted for by the equity method. Under the equity method the carrying value of the investment is adjusted for the Company’s proportionate share of the investee’s income or loss.

Investments in which the Company has less than a 20% interest are accounted for by the cost method. Under the cost method, investments are carried at cost and income is recorded when dividends are received from those investments.

Property, Plant, and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation, and include expenditures that substantially increase the useful lives of existing assets.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:



Building		20 years

Operating Equipment		10 years

Office furniture and equipment		3 or 5 years

Vehicles		10 years

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

Intangible assets

Intangible assets mainly consist of land use rights. All land located in the PRC is owned by the government and cannot be sold to any individual or company. The land use rights granted to the Company are being amortized using the straight-line method over the lease term of 50 years. Other intangible assets are software programs that are amortized over their estimated useful life of 10 years.

Impairment of Long-Lived Assets

Long-lived assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in FASB ASC 360. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. The Company did not record any impairment loss for the three months ended March 31, 2012 and 2011.

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 $8,178 and $12,036 for the three months ended March 31, 2012 and 2011, 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.

As of March 31, 2012 and 2011, the Company had no deferred tax assets or liabilities.

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

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. ASU 2011-04 will be effective for interim and annual periods beginning after Dec. 15, 2011, with early adoption permitted. The adoption of this standard did not materially expand its consolidated financial statement footnote disclosures.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends the current comprehensive income guidance. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, we must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for interim and annual periods beginning after Dec. 15, 2011, with early adoption permitted. The adoption of ASU 2011-05 did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which amends the guidance in ASC 350-20, “Intangibles – Goodwill and Other – Goodwill”. Under ASU 2011-08, entities have the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, then entities are required to perform the two-step goodwill impairment test. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not anticipate that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

NOTE 3 – ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:


	March 31,		December 31,
	2012		2011
Accounts receivable	$	11,331	$	38,053
Less: Allowance for bad debt		—		—

Accounts receivable	$	11,331	$	38,053

As of the periods presented, the Company has no allowance for bad debts, because the Management, based on their analysis, considers all the accounts receivable to be collectible.

NOTE 4 – INVENTORIES

Inventories consisted of the following:


	March 31,		December 31,
	2012		2011
Raw materials	$	326,997	$	293,807
Packages		13,986		6,215
Finished goods		741,660		535,736
Low value consumables		38,483		38,241

Total	$	1,121,126	$	873,999

Goods shipped in transit represent goods on the way from the suppliers to the Company. 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.

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:


	March 31,			December 31,
	2012			2011
Building	$	5,863,494		$	5,748,086
Operating Equipment		377,123			374,541
Office furniture and equipment		326,039			323,141
Vehicles		1,088,332			1,081,492

Total		7,654,988			7,527,260
Less: accumulated depreciation		(1,087,580	)		(956,106	)

Property, plant and equipment, net	$	6,567,408		$	6,571,154

Depreciation expense for the three months ended March 31, 2012 and 2011 amounted to $131,474 and $98,799, respectively.

NOTE 6 – INTANGIBLE ASSETS

Intangible assets consisted of the following:


	March 31,			December 31,
	2012			2011
Land use rights	$	652,689		$	648,586
Other intangible assets		36,075			35,849

Total		688,764			684,435
Less: accumulated amortization		(66,830	)		(62,114	)

Intangible assets, net	$	621,934		$	622,321

Amortization expense of intangible assets for the three months ended March 31, 2012 and 2011 was $4,716 and $4,437, respectively.

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


Estimated amortization expense for the year ending December 31,	Amount
2012	$	16,557
2013	$	16,557
2014	$	16,557
2015	$	16,557
2016	$	16,557
Thereafter	$	539,536

NOTE 7 – RELATED PARTY TRANSACTIONS

Payables due to related parties consist of the following:


	March 31,		December 31,
	2012		2011
Shenyang Joway Industrial Development Co., Ltd.	$	279,338	$	288,309
Jinghe Zhang		57,697		70,369

Total	$	337,035	$	358,678

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. During the first quarter of 2012, the Company repaid $8,971 of these advances. As of March 31, 2012, the total unpaid principal balance due Shenyang Joway for advances was $279,338. 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 $4,579,700 has been repaid. In 2010 and 2011, Joway Shengshi was advanced $0 by Jinghe Zhang. As of March 31, 2012, the total unpaid principal balance due Jinghe Zhang for advances was $57,697.

•

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 March 31, 2012, 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.

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, is subject to taxable income at a verified rate of 5% of revenue in 2011 pursuant to “Measures for Verification Collection of Enterprise Income Tax” issued by the PRC State Administration of Taxation.

The table below summarizes the differences between the PRC statutory federal rate and the Company’s effective tax rate:


	For the three months ended March 31,
	2012			2011
Tax computed at China statutory rates		25	%		25	%
Effect of reduced rate on Joway Decoration (1)		(13	%)		(3	%)
Effect of losses in non-PRC entities not deductible for Chinese tax purposes		19	%		0
Effective rate		31	%		22	%

(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, is subject to taxable income at a verified rate of 5% of revenue.

As of March 31, 2012 and 2011, the Company had no deferred tax assets or liabilities.

NOTE 9 – STATUTORY RESERVES

Pursuant to the laws and regulations of the PRC, annual income of the Company’s subsidiaries is required to be partly allocated to the statutory reserves funds after the payment of the PRC income taxes. The allocation to the statutory reserves funds should be at least 10% of income after tax until the reserves reaches 50% of the entities’ registered capital or members’ equity. The reserve funds are not transferable to the Company in the form of cash dividends, loans or advances. Thus the reserve funds are not available for distribution except in liquidation. As of March 31, 2012, the Company had allocated $354,052 to statutory reserves.

NOTE 10 – OTHER INCOME

Other income mainly consists of subsidy income from Tianjin Baodi District Management Committee and short-term investment income.

Joway Shengshi and Joway Decoration are located in Tianjin Baodi District. Pursuant to a series of investment encouragement policies issued by the Tianjin Baodi government, in January 2011 Joway Shengshi and Joway Decoration were awarded by Tianjin Baodi District Management Committee a total of RMB 2,307,012 (~ US $350,110) for the contribution to tax revenue for the years 2009 and 2010 in Tianjin Baodi District.

NOTE 11 – SEGMENTS

In 2012 and 2011, 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 March 31, 2012


	Sales		COGS		Gross profit		Income (loss) from operations			Depreciation and amortization		Assets

Healthcare Knitgoods Series	$	349,918	$	74,981	$	274,937	$	11,912		$	60,275	$	316,358

Daily Healthcare and Personal Care Series		148,436		40,307		108,129		(3,446	)		25,569		222,332

Wellness House and Activated Water Machine Series		292,278		80,093		212,185		(7,513	)		50,346		849,959


Segment Totals	$	790,632	$	195,381	$	595,251		953		$	136,190		1,388,649


Other Income (Expense), net								10,009

Income Tax								3,448


Unallocated Assets													11,407,808


Net Income							$	7,514


Total Assets												$	12,796,457

For the three months ended March 31, 2011


	Sales		COGS		Gross profit		Income from operations		Depreciation and amortization		Assets

Healthcare Knitgoods Series	$	1,105,617	$	202,519	$	903,098	$	393,117	$	67,178	$	152,261

Daily Healthcare and Personal Care Series		315,785		68,393		247,392		101,730		19,188		202,003

Wellness House Activated Water Machine Series		277,636		84,494		193,142		143,041		16,870		304,370


Segment Totals	$	1,699,038	$	355,406	$	1,343,632		637,888	$	103,236		658,634


Other Income (Expense), net								362,218

Income Tax								222,376


Unallocated Assets												12,536,678


Net Income							$	777,730


Total Assets											$	13,195,312

NOTE 12 – FRANCHISE REVENUES

The Company enters into franchising agreements to develop retail outlets for the Company’s products. The agreements provide that franchisees will sell Company products exclusively at a predetermined retail price. In exchange the Company provides them with geographic exclusivity, discounted products, training and support. The agreements also require franchisees to adhere to certain standards of product merchandising, promotion and presentment. The agreements also prohibit franchisees from selling competitor’s products. The agreements do not require any initial franchise fees from the franchisees, nor do they require the franchisees to pay continuing royalties. The agreements do not require the franchisees to purchase any minimum levels of product, but do require that they make at least one purchase during each year. The Company does not act to manage the franchisees’ levels of product. Franchisees hold periodic conferences, assisted by the Company’s marketing department, to promote product awareness and the introduction of new products. The franchising agreements are generally for terms of three years and are renewable at the mutual agreement of both parties. The franchising agreements are cancelable at the Company’s discretion if franchisees violate the terms of the agreements.

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


	For the three months ended March 31,
	2012		2011
Sales to franchise customers	$	737,399	$	1,612,988
Sales to non-franchise customers		53,233		86,050


Total sales	$	790,632	$	1,699,038

NOTE 13 – INVESTMENT

On August 28, 2011, Joway Shengshi and Tianjin Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Tianjin Hezhi”) entered a cooperative contract, pursuant to which Joway Shengshi and Tianjin Hezhi established a new company named Tianjin Joway Hezhi Pharmaceutical Co., Ltd. (referred to herein as “Joway Hezhi”) with registered capital of RMB 20,000,000. Joway Hezhi was incorporated on October 21, 2011 with initial registered capital of RMB5,000,000. It will engage in the production and distribution of Chinese-Western preparations, health food, healthcare products, medical instruments and plain food. On October 11, 2011, Joway Shengshi contributed RMB 1,500,000 and owned 30% of Joway Hezhi. As of the date of this Report, Joway Hezhi is in the early preparatory period and has no operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012.

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, and other revenue from sales of obsolete equipment.

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.

Results of Operations

The following table sets forth certain information regarding our results of operations.


	For the three months ended March 31,
	2012		2011
REVENUES	$	790,632	$	1,699,038
COST OF REVENUES		195,381		355,406

GROSS PROFIT		595,251		1,343,632
OPERATING EXPENSES		594,298		705,744

INCOME FROM OPERATIONS		953		637,888
OTHER (EXPENSE) INCOME, NET		10,009		362,218

INCOME BEFORE INCOME TAXES		10,962		1,000,106
INCOME TAXES		3,448		222,376

NET INCOME	$	7,514	$	777,730

Business Segments

In 2012 and 2011, 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 March 31, 2012

		$1,105,617			$1,105,617			$1,105,617			$1,105,617			$1,105,617			$1,105,617			$1,105,617
	Healthcare Knitgoods Series			% of Total			Daily Healthcare and Personal Care Series			% of Total			Wellness House and Activated Water Machine Series			% of Total			Total
REVENUES	$	349,918			44.3	%	$	148,436			18.8	%	$	292,278			37.0	%	$	790,632
COST OF REVENUES		74,981			38.4	%		40,307			20.6	%		80,093			41.0	%		195,381

GROSS PROFIT		274,937			46.2	%		108,129			18.2	%		212,185			35.6	%		595,251
GROSS MARGIN		78.6	%					72.8	%					72.6	%					75.3	%
OPERATING EXPENSES		263,025			44.3	%		111,575			18.8	%		219,698			37.0	%		594,298

INCOME FROM OPERATIONS	$	11,912			1249.9	%	$	(3,446	)		-361.6	%	$	(7,513	)		-788.4	%	$	953

For the three months ended March 31, 2011

		$1,105,617			$1,105,617			$1,105,617			$1,105,617			$1,105,617			$1,105,617			$1,105,617
	Healthcare Knitgoods Series			% of Total			Daily Healthcare and Personal Care Series			% of Total			Wellness House and Activated Water Machine Series			% of Total			Total
REVENUES	$	1,105,617			65.1	%	$	315,785			18.6	%	$	277,636			16.3	%	$	1,699,038
COST OF REVENUES		202,519			57.0	%		68,393			19.2	%		84,494			23.8	%		355,406

GROSS PROFIT		903,098			67.2	%		247,392			18.4	%		193,142			14.4	%		1,343,632
GROSS MARGIN		81.7	%					78.3	%					69.6	%					79.1	%
OPERATING EXPENSES		509,981			72.3	%		145,662			20.6	%		50,101			7.1	%		705,744

INCOME FROM OPERATIONS	$	393,117			61.6	%	$	101,730			15.9	%	$	143,041			22.4	%	$	637,888

For The Three Months Ended March 31, 2012 Compared to March 31, 2011

Revenue. Revenue was $790,632 compared to $1,699,038 for the three months ended March 31, 2011 (the “Prior Period”), a decrease of $908,406 or 53.5%. This decrease was mainly attributable to a decrease in revenue from healthcare knit goods segment. Our main products are mostly durable consumables, including mattress products the useful life of which is typically three or more years. In 2010 most of our franchisees were new customers and had high initial demand for our main products. Our franchisees’ demand for our products may have been affected because of the large amount of our main products they purchased in 2010. Aimed at this situation, we are developing more fast consumables. For instance, we introduced a line of cosmetics and edible health products in December 2011. In addition, we strengthened the enforcement of the terms of our franchise agreements and policies in 2011 after focusing mostly on increasing franchise stores in 2010. As a result, the number of our franchisees increased more slowly in 2011. According to the National Bureau of Statistics, China’s gross domestic product increase by 8.1% and 9.7% for the three months ended March 31, 2012 and 2011, respectively. The slowdown in the economy of China has also affected the purchases of our products in general.

Revenue from the healthcare knit goods segment decreased by $755,699, or 68.4% to $349,918 from $1,105,617 for the Prior Period. This was mainly due to the decrease in sales of our mattress products. The sale of our mattress products decreased by 75%, from $0.8 million for the Prior Period to $0.2 million. Our mattress products are durable consumables, and our revenues may have been impacted by the large orders of this product from our franchisees in 2010.

Revenue from daily healthcare and personal care products decreased by $167,349 or 53%, to $148,436 from $315,785 for the Prior Period. This was mainly due to a $0.1 million of decrease in sales of our scarf products. At the end of 2011, we introduced a line of cosmetics and edible health products to develop our fast consumable products. Our cosmetics and newly introduced edible health products contributed a $0.02 million of revenue.

Revenue from wellness houses and activated water machines increased by $14,642 or 5.3%, from $277,636 for the Prior Period to $292,278. This was primarily due to a $0.4 million of increase in sales of Foot Sauna Bucket, which was newly introduced in February 2011 and became our best-selling product in 2012.

Cost of Goods Sold. Cost of goods sold was $195,381 compared to $355,406 for the Prior Period, a decrease of $160,025 or 45%. This decrease was mainly due to the decrease in sales.

Cost of goods sold for the healthcare knit goods segment decreased to $74,981 from $202,519 for the Prior Period, a decrease of $127,538 or 63%. This decrease was mainly due to the decrease in the cost of our mattress products as a result of the decrease in sales.

Cost of goods sold for the daily healthcare and personal care segment decreased to $40,307 from $68,393 for the Prior Period, a decrease of $28,086 or 41.1%. This decrease was mainly due to a decrease in the cost of our scarf products as a result of the decrease in sales.

Cost of goods sold for our wellness house and activated water machine segment decreased to $80,093 from $84,494 for the Prior Period, a decrease of $4,401 or 5.2%. This decrease was mainly due to the decrease in cost of our activated water machine as a result of the decrease in sales.

Gross profit. Our gross profit decreased by $748,381 or 55.7% to $595,251, compared to $1,343,632 for the Prior Period. This decrease was mainly due to the decrease in gross profit for healthcare knit goods segment and daily healthcare and personal care segment. Our gross margin was 75.3%, compared to 79.1% for the Prior Period. This decrease was mainly due to the decrease of gross margin in daily healthcare and personal care segment.

Gross profit of the healthcare knit goods segment decreased by $628,161 or 69.6% to $274,937 compared to $903,098 for the Prior Period. This decrease was mainly due to the decreased sales of our mattress products. The gross margin of our healthcare knit goods segment declined from 81.7% for the Prior Period to 78.6%. This decrease was mainly due to the increase of sales in our products which have lower gross margins.

Gross profit of the daily healthcare and personal care segment decreased by $139,263 or 56.3% to $108,129 compared to $247,392 for the Prior Period. This decrease was primarily due to the decreased sales of our scarf products. The gross margin of our daily healthcare and personal care segment declined from 78.3% for the Prior Period to 72.8%. This decrease was mainly due to the decrease in sales of our scarf products, which have higher gross margins.

Gross profit of the wellness house and activated water machine segment increased by $19,043 or 9.9% to $212,185 compared to $193,142 for the Prior Period. This increase was mainly due to an increase in sales of Foot Sauna Bucket. The gross margin of our wellness house and activated water machine segment increased from 69.6% for the Prior Period to 72.6%. This increase was mainly due to a decline in the purchase costs of our wellness house for family use.

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $111,446, or 15.8%, from $705,744 for the Prior Period to $594,298. This decrease was mainly due to a decrease in entertainment expenses and audit and attorney fees. Operating expenses for healthcare knit goods segment decreased by $246,956 or 48.4% to $263,025 from $509,981 for the Prior Period. Operating expenses for daily healthcare and personal care segment decreased by $34,087 or 23.4% to $111,575 from $145,662 for the Prior Period. Operating expenses for our wellness house and activated water machine segment increased by $169,597 or 338.5% to $219,698 from $50,101 for the Prior Period. This increase was due to increased marketing and management expenses in this segment. Beginning in 2011 we have been increasing our marketing and sales efforts on this segment.

Income from operations. As a result of the foregoing, our income from operations was $953 compared to $637,888 for the Prior Period, a decrease of $636,935. This decrease was mainly due to the decrease in sales.

Income taxes. Our income tax expenses were $3,448 compared to $222,376 for the Prior Period. This was mainly due to the decrease in income before income tax.

Net income. Our net income was $7,514 compared to $777,730 for the Prior Period. This decrease was mainly due to the decrease in sales.

Franchising

We enter into franchise agreements to develop retail outlets for our products. These agreements provide that franchisees will sell our products exclusively. In exchange, we provide them with geographic exclusivity, discounted products, training, and support. The agreements also require franchisees to adhere to certain standards of product merchandising, promotion, and presentment. The agreements do not require the franchisees to purchase any minimum levels of product, but do require that they make at least one purchase during each year. The agreements are generally for terms of three years and are renewable at the mutual agreement of both parties. The Agreements are cancelable at our discretion if franchisees violate the terms of the agreements.

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


	For the three months ended March 31,
	2012		2011

Sales to franchise customers	$	737,399	$	1,612,988
Sales to non-franchise customers		53,233		86,050


Total sales	$	790,632	$	1,699,038

Liquidity and Capital Resources

Our cash at the beginning of the three months ended March 31, 2012 was $3,372,189 and decreased to $3,230,724 by the end of March 2012, a decrease of $141,465. At March 31, 2012, we had net working capital of $4,446,849, an increase of $106,530 from $4,340,319 at December 31, 2011.

Our cash flow information summary is as follows:


	For the three months ended March 31,
	2012			2011
Net cash provided by (used in):
Operating activities	$	(62,737	)	$	927,384
Investing activities		(127,728	)		(658,929	)
Financing activities	$	(21,643	)	$	(157,682	)

Net Cash Provided By (Used In) Operating Activities

Net cash used in operating activities was $62,737 in the current period compared to net cash provided by operating activities of $927,384 for the Prior Period. This change was primarily due to the decrease in net income of $770,216.

In the current period, cash was mainly used to purchase inventory of $247,127, which was primarily offset by cash provided from the increase in account payable of $137,465 and an add-back of $131,474 of depreciation for non-cash expense.

In the Prior Period, cash was mainly used to pay taxes of $124,979, which was primarily offset by cash provided from net income of $777,730, decrease in inventory of $123,896 and an add-back of $98,799 of depreciation for non-cash expense.

Net Cash Provided By (Used In) Investing Activities

Net cash used in investing activities was $127,728 in the current period compared to $658,929 for the Prior Period. Cash was mostly used to remodel our training building in the amount of $0.08 million. For the Prior Period, we used cash to purchase three vehicles in the amount of $0.6 million.

Net Cash Used In Financing Activities

Net cash used in financing activities was $21,643 compared to $157,682 for the Prior Period. 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. We repaid $12,672 and $151,455 of these advances for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, the total unpaid principal balance due Jinghe Zhang for advances made to Joway Shengshi was $57,697.

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. Pursant to these agreements, Shenyang Joway advanced an aggregate of $791,701 to Joway Shengshi and Joway Technology through December 31, 2010. We repaid $8,971 and $6,247 of these advances for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, the total unpaid principal balance due Shenyang Joway for advances was $279,338. Shenyang Joway ceased operations at the end of 2009, although it still exists as a legal entity.

The Company has sufficient liquidity to meet the Company’s operating cash needs over the next 12 months 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 March 31, 2012, 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.

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 realizable value. We provide reserves for potential credit losses on accounts receivable. Management reviews the composition of the accounts receivable and analyzes historical bad debts, customer concentrations, customers’ credit worthiness, current economic trends, and changes in customer’s payment patterns to evaluate the adequacy of these reserves.

Inventories

Inventories are stated at the lower of cost, as determined by the specific identification method on contract level (for each individual contract, inventories cost flow is determined by weighted-average method), or the net realizable value, which is determined on selling prices less any further costs expected to be incurred for completion and disposal. Management regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether a valuation allowance is required.

Property, Plant, and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation, and include expenditures that substantially increase the useful lives of existing assets.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:


Building		20 years
Operating Equipment		10 years
Office furniture and equipment		3 or 5 years
Vehicles		10 years

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

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. ASU 2011-04 will be effective for interim and annual periods beginning after Dec. 15, 2011, with early adoption permitted. The adoption of this standard did not materially expand our consolidated financial statement footnote disclosures.

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which amends the guidance in ASC 350-20, “Intangibles – Goodwill and Other – Goodwill.” Under ASU 2011-08, entities have the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, then entities are required to perform the two-step goodwill impairment test. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We do not anticipate that the adoption of this standard will have a material effect on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures as defined in SEC Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this quarterly report. The purpose of this evaluation is to determine if, as of Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2012, 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. In addition, our Internal Audit Manager is not a U.S. Certified Public Accountant, has not attended U.S. institutions or extended educational programs that would provide enough of the relevant education relating to U.S. GAAP, and has limited experience with U.S. GAAP. 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 will develop a comprehensive training and development plan, for our finance, accounting and internal audit personnel, including our Chief Financial Officer, Financial Manager, Internal Audit Manager and others, in the principles and rules of U.S. GAAP, SEC reporting requirements and the application thereof.

•

We will design and implement 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 the future, we will continue to improve our ongoing review and supervision of our internal control over financial reporting.

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.

Since March 2012, we have been in the process of seeking a professional training institution to carry out our internal control training in order to meet the U.S. GAAP and SEC reporting requirements. We have discussed with some institutions and plan to choose one institution to carry out our internal training starting in June, 2012.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting for the three months ended March 31, 2012 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.

This information has been omitted based on our status as a smaller reporting company.

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.

On May 11, 2012, the Board of Directors of the Company amended the Company’s Code of Ethics (the “Code”) to cover the Company’s officers and its senior executives (collectively, the “Covered Officers”). The Code contains general guidelines for conducting the business of the Company. The Covered Officers play an important and elevated role in corporate governance at the Company. Each Covered Officer shall therefore comply with this Code. To the extent this Code requires a higher standard than required by commercial practice or applicable laws, rules or regulations, all Covered Officers adhere to these higher standards. The Company has posted the text of the Code on its internet website at www.jowayhealth.com.

Item 6. Exhibits.

EXHIBIT INDEX


Exhibit No.		Description

14.1		Code of Ethics.*

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*

*	Filed herewith.

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: May 15, 2012


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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company