Joway Health Industries Group Inc - FORM 10-Q

Joway Health Industries Group Inc - FORM 10-Q - August 14, 2012

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EXCEL - IDEA: XBRL DOCUMENT - Joway Health Industries Group Inc	Financial_Report.xls
EX-31.1 - EX-31.1 - Joway Health Industries Group Inc	d351726dex311.htm
EX-31.2 - EX-31.2 - Joway Health Industries Group Inc	d351726dex312.htm
EX-32.1 - EX-32.1 - Joway Health Industries Group Inc	d351726dex321.htm
EX-32.2 - EX-32.2 - Joway Health Industries Group Inc	d351726dex322.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 June 30, 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 August 14, 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			21

Item 3. Quantitative and Qualitative Disclosures About Market Risk			31

Item 4. Controls and Procedures			31

PART II—OTHER INFORMATION			32

Item 1. Legal Proceedings			32

Item 1A. Risk Factors			32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32

Item 3. Defaults Upon Senior Securities			32

Item 4. Mine Safety Disclosures			32

Item 5. Other Information			33

Item 6. Exhibits			33

SIGNATURES			34

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 June 30, 2012 (Unaudited) and December 31, 2011 (Audited)		4

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and the Six months Ended June 30, 2012 and 2011 (Unaudited)		5

Consolidated Statements of Cash Flows for the Six months Ended June 30, 2012 and 2011 (Unaudited)		6

Notes to Consolidated Financial Statements		7-21

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	June 30, 2012 (Unaudited)		December 31, 2011 (Audited)
ASSETS
CURRENT ASSETS:
Cash	$	2,595,088	$	3,372,189
Accounts receivable		32,124		38,053
Other receivables		62,344		46,970
Inventories		1,462,424		873,999
Advances to suppliers		150,199		377,028
Prepaid taxes		237,529		185,763
Prepaid expense		12,000		3,591

Total current assets		4,551,708		4,897,593

PROPERTY, PLANT AND EQUIPMENT, net		6,453,052		6,571,154

OTHER ASSETS:
Long-term investment		237,353		235,675
Intangible assets, net		618,099		622,321
Long-term prepaid expenses		198,524		203,391

Total other assets		1,053,976		1,061,387

Total assets	$	12,058,736	$	12,530,134

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	176,585	$	119,727
Advances from customers		3,169		13,172
Other payables		76,613		65,697
Due to related parties		210,660		358,678

Total current liabilities		467,027		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 at June 30, 2012 and December 31, 2011, respectively		20,036		20,018
Additional paid-in-capital		7,361,143		7,343,161
Statutory reserves		354,052		354,052
Retained earnings		2,904,032		3,388,766
Accumulated other comprehensive income		952,446		866,863

Total stockholders’ equity		11,591,709		11,972,860

Total liabilities and stockholders’ equity	$	12,058,736	$	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 (LOSS)


	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
REVENUES	$	425,683		$	997,538		$	1,216,315		$	2,696,576

COST OF REVENUES		111,355			198,743			306,736			554,149

GROSS PROFIT		314,328			798,795			909,579			2,142,427

Selling expenses		181,636			142,005			354,147			286,314
General and administrative expenses		619,561			538,613			1,041,348			1,100,048

OPERATING EXPENSES		801,197			680,618			1,395,495			1,386,362

INCOME (LOSS) FROM OPERATIONS		(486,869	)		118,177			(485,916	)		756,065

Interest income		3,298			1,559			4,616			3,175
Other income		570			15,107			9,309			376,375
Other expenses		(316	)		(600	)		(364	)		(1,266	)

OTHER INCOME, NET		3,552			16,066			13,561			378,284

INCOME (LOSS) BEFORE INCOME TAXES		(483,317	)		134,243			(472,355	)		1,134,349

INCOME TAXES		8,931			80,932			12,379			303,308

NET INCOME (LOSS)		(492,248	)		53,311			(484,734	)		831,041

OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment		9,121			190,029			85,583			261,736

COMPREHENSIVE INCOME (LOSS)	$	(483,127	)	$	243,340		$	(399,151	)	$	1,092,777

NET INCOME (LOSS) PER COMMON SHARE, BASIC AND DILUTED	$	(0.02	)	$	0.00		$	(0.02	)	$	0.04

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED		20,036,000			20,018,000			20,031,648			20,018,000

The accompanying notes are an integral part of these financial statements

JOWAY HEALTH INDUSTRIES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six months ended June 30,
	2012			2011
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(484,734	)	$	831,041
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		253,851			217,265
Amortization		9,096			9,450
Stock-based compensation		18,000			27,000
Changes in operating assets and liabilities:
Accounts receivable, trade		5,929			9,638
Other receivables		(15,374	)		15,891
Inventories		(307,676	)		(557,688	)
Advances to suppliers		(53,920	)		(208,586	)
Prepaid expense		(3,542	)		(5,508	)
Accounts payable		56,858			(119,703	)
Advances from customers		(10,003	)		14,203
Other payable		(3,510	)		(6,724	)
Salary and welfare payable		14,426			15,425
Taxes payable		(51,766	)		(524,094	)

Net cash used in operating activities		(572,365	)		(282,390	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property plant and equipment		(135,749	)		(770,980	)

Net cash used in investing activities		(135,749	)		(770,980	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Due to related parties		(148,018	)		(212,620	)

Net cash used in financing activities		(148,018	)		(212,620	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		79,031			246,671

NET DECREASE IN CASH		(777,101	)		(1,019,319	)

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

CASH, end of period	$	2,595,088		$	4,262,101

SUPPLEMENTAL DISCLOSURES:
Income taxes paid	$	15,700		$	497,675
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 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
			86.88% owned by Crystal Globe Limited
Joway Health Industries Group Inc.	March 21, 2003, Nevada	USD 20,036	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 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 six month period ended June 30, 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 six months ended June 30,				For the year ended December 31,
	2012		2011		2011
Period ended RMB: USD Exchange rate		6.3197		6.46400		6.3647
Average RMB: USD Exchange rate		6.3255		6.54818		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.

Foreign currency translation adjustments have been reported as comprehensive income in the consolidated financial statements and totaled $9,121 and $190,029 for the three months ended June 30, 2012 and 2011, respectively, and $85,583 and $261,736 for the six months ended June 30, 2012 and 2011.

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 June 30, 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 June 30, 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 $150,199 and $377,028 as of June 30, 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 six months ended June 30, 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 $16,009 and $9,502 for the three months ended June 30, 2012 and 2011, respectively, and $24,187 and $21,538 for the six months ended June 30, 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 June 30, 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.

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which is codified in ASC Topic 210, Balance Sheet. This pronouncement contains new disclosure requirements about a company’s right of setoff and related arrangements associated with its financial and derivative instruments. ASU 2011-11 will be effective retrospectively for annual and interim periods beginning on or after January 1, 2013. 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:


	June 30,		December 31,
	2012		2011
Accounts receivable	$	32,124	$	38,053
Less: Allowance for bad debt		—		—

Accounts receivable	$	32,124	$	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:


	June 30,		December 31,
	2012		2011
Raw materials	$	362,554	$	293,807
Packages		13,712		6,215
Finished goods		1,047,590		535,736
Low value consumables		38,568		38,241

Total	$	1,462,424	$	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:


	June 30,			December 31,
	2012			2011
Building	$	5,868,134		$	5,748,086
Operating Equipment		377,421			374,541
Office furniture and equipment		328,261			323,141
Vehicles		1,089,193			1,081,492

Total		7,663,009			7,527,260
Less: accumulated depreciation		(1,209,957	)		(956,106	)

Property, plant and equipment, net	$	6,453,052		$	6,571,154

Depreciation expense for the three months ended June 30, 2012 and 2011 amounted to $122,377 and $118,466, respectively, and for the six months ended June 30, 2012 and 2011 amounted to $253,851 and $217,265, respectively.

NOTE 6 – INTANGIBLE ASSETS

Intangible assets consisted of the following:


	June 30,			December 31,
	2012			2011
Land use rights	$	653,205		$	648,586
Other intangible assets		36,104			35,849

Total		689,309			684,435
Less: accumulated amortization		(71,210	)		(62,114	)

Intangible assets, net	$	618,099		$	622,321

Amortization expense of intangible assets for the three months ended June 30, 2012 and 2011 was $4,380 and $5,013, respectively, and for the six months ended June 30, 2012 and 2011 was $9,096 and $9,450, 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:


	June 30,		December 31,
	2012		2011
Shenyang Joway Industrial Development Co., Ltd.	$	157,273		$	288,309
Jinghe Zhang		53,387			70,369

Total	$	210,660		$	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 half of 2012, the Company repaid $131,036 of these advances. As of June 30, 2012, the total unpaid principal balance due Shenyang Joway for advances was $157,273. 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 $4,584,010 has been repaid. In 2010 and 2011, Joway Shengshi was advanced $0 by Jinghe Zhang. As of June 30, 2012, the total unpaid principal balance due Jinghe Zhang for advances was $53,387.

•

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 June 30, 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 six months ended June 30,
	2012			2011
Tax computed at China statutory rates		25	%		25	%
Effect of reduced rate on Joway Decoration (1)		(12	%)		(6	%)
Tax adjustment from China tax authority for 2010 income tax (2)		0			7	%
Effect of losses		(16	%)		0
Effective rate		(3	%)		26	%

(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.

(2)	The Company’s 2010 Corporate Income Tax Filing in China was reviewed by the PRC tax authority and reduced the Company’s income tax deduction for the 2010 taxable year. As a result, the Company paid additional income tax of $61,653.

As of June 30, 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 June 30, 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 June 30, 2012


	Sales		COGS		Gross profit		Loss from operations			Depreciation and amortization		Assets
Healthcare Knitgoods Series	$	189,583	$	47,786	$	141,797	$	(214,153	)	$	56,453	$	411,633
Daily Healthcare and Personal Care Series		96,884		27,958		68,926		(100,960	)		28,849		219,930
Wellness House and Activated Water Machine Series		139,216		35,611		103,605		(171,756	)		41,455		848,480

Segment Totals	$	425,683	$	111,355	$	314,328		(486,869	)	$	126,757		1,480,043

Other Income, net								3,552
Income Tax								8,931

Unallocated Assets													10,578,693

Net Loss							$	(492,248	)

Total Assets												$	12,058,736

For the three months ended June 30, 2011


	Sales		COGS		Gross profit		Income (loss) from operations		Depreciation and amortization		Assets
Healthcare Knitgoods Series	$	627,042	$	91,543	$	535,499	$	52,984	$	77,618	$	273,646
Daily Healthcare and Personal Care Series		130,808		42,488		88,320		-21,830		16,192		158,971
Wellness House and Activated Water Machine Series		239,688		64,712		174,976		87,023		29,669		823,417

Segment Totals	$	997,538	$	198,743	$	798,795		118,177	$	123,479		1,256,034

Other Income (Expense), net								16,066
Income Tax								80,932

Unallocated Assets												11,651,403

Net Income							$	53,311

Total Assets											$	12,907,437

For the six months ended June 30, 2012


	Sales		COGS		Gross profit		Loss from operations			Depreciation and amortization		Assets
Healthcare Knitgoods Series	$	539,501	$	122,767	$	416,734	$	(202,241	)	$	116,631	$	411,633
Daily Healthcare and Personal Care Series		245,320		68,265		177,055		(104,406	)		53,034		219,930
Wellness House and Activated Water Machine Series		431,494		115,704		315,790		(179,269	)		93,282		848,480

Segment Totals	$	1,216,315	$	306,736	$	909,579		(485,916	)	$	262,947		1,480,043

Other Income (Expense), net								13,561
Income Tax								12,379

Unallocated Assets													10,578,693

Net Loss							$	(484,734	)

Total Assets												$	12,058,736

For the six months ended June 30, 2011


	Sales		COGS		Gross profit		Income from operations		Depreciation and amortization		Assets
Healthcare Knitgoods Series	$	1,732,659	$	294,062	$	1,438,597	$	446,101	$	145,674	$	273,646
Daily Healthcare and Personal Care Series		446,593		110,881		335,712		79,900		37,547		158,971
Wellness House and Activated Water Machine Series		517,324		149,206		368,118		230,064		43,494		823,417

Segment Totals	$	2,696,576	$	554,149	$	2,142,427		756,065	$	226,715		1,256,034

Other Income (Expense), net								378,284
Income Tax								303,308

Unallocated Assets												11,651,403

Net Income							$	831,041

Total Assets											$	12,907,437

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 June 30,				For the six months ended June 30,
	2012		2011		2012		2011
Sales to franchise customers	$	366,554	$	907,021	$	1,103,953	$	2,520,009
Sales to non-franchise customers		59,129		90,517		112,362		176,567

Total sales	$	425,683	$	997,538	$	1,216,315	$	2,696,576

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 June 30,					For the six months ended June 30,
	2012			2011		2012			2011
REVENUES	$	425,683		$	997,538	$	1,216,315		$	2,696,576
COST OF REVENUES		111,355			198,743		306,736			554,149

GROSS PROFIT		314,328			798,795		909,579			2,142,427
OPERATING EXPENSES		801,197			680,618		1,395,495			1,386,362

INCOME (LOSS) FROM OPERATIONS		(486,869	)		118,177		(485,916	)		756,065
OTHER (EXPENSE) INCOME, NET		3,552			16,066		13,561			378,284

INCOME (LOSS) BEFORE INCOME TAXES		(483,317	)		134,243		(472,355	)		1,134,349
INCOME TAXES		8,931			80,932		12,379			303,308

NET INCOME (LOSS)	$	(492,248	)	$	53,311	$	(484,734	)	$	831,041

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 June 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	$	189,583			44.5	%	$	96,884			22.8	%	$	139,216			32.7	%	$	425,683
COST OF REVENUES		47,786			42.9	%		27,958			25.1	%		35,611			32.0	%		111,355

GROSS PROFIT		141,797			45.1	%		68,926			21.9	%		103,605			33.0	%		314,328
GROSS MARGIN		74.8	%					71.1	%					74.4	%					73.8	%
OPERATING EXPENSES		355,950			44.4	%		169,886			21.2	%		275,361			34.4	%		801,197

INCOME FROM OPERATIONS	$	(214,153	)		44.0	%	$	(100,960	)		20.7	%	$	(171,756	)		35.3	%	$	(486,869	)

For the three months ended June 30, 2011


	Healthcare Knitgoods Series			% of Total			Daily Healthcare and Personal Care Series			% of Total			Wellness House and Activated Water Machine Series			% of Total			Total
REVENUES	$	627,042			62.9	%	$	130,808			13.1	%	$	239,688			24.0	%	$	997,538
COST OF REVENUES		91,543			46.1	%		42,488			21.4	%		64,712			32.6	%		198,743

GROSS PROFIT		535,499			67.0	%		88,320			11.1	%		174,976			21.9	%		798,795
GROSS MARGIN		85.4	%					67.5	%					73.0	%					80.1	%
OPERATING EXPENSES		482,515			70.9	%		110,150			16.2	%		87,953			12.9	%		680,618

INCOME FROM OPERATIONS	$	52,984			44.8	%	$	(21,830	)		-18.5	%	$	87,023			73.6	%	$	118,177

For the six months ended June 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	$	539,501			44.4	%	$	245,320			20.2	%	$	431,494			35.5	%	$	1,216,315
COST OF REVENUES		122,767			40.0	%		68,265			22.3	%		115,704			37.7	%		306,736

GROSS PROFIT		416,734			45.8	%		177,055			19.5	%		315,790			34.7	%		909,579
GROSS MARGIN		77.2	%					72.2	%					73.2	%					74.8	%
OPERATING EXPENSES		618,975			44.4	%		281,461			20.2	%		495,059			35.5	%		1,395,495

INCOME FROM OPERATIONS	$	(202,241	)		41.6	%	$	(104,406	)		21.5	%	$	(179,269	)		36.9	%	$	(485,916	)

For the six months ended June 30, 2011


	Healthcare Knitgoods Series			% of Total			Daily Healthcare and Personal Care Series			% of Total			Wellness House and Activated Water Machine Series			% of Total			Total
REVENUES	$	1,732,659			64.3	%	$	446,593			16.6	%	$	517,324			19.2	%	$	2,696,576
COST OF REVENUES		294,062			53.1	%		110,881			20.0	%		149,206			26.9	%		554,149

GROSS PROFIT		1,438,597			67.1	%		335,712			15.7	%		368,118			17.2	%		2,142,427
GROSS MARGIN		83.0	%					75.2	%					71.2	%					79.4	%
OPERATING EXPENSES		992,496			71.6	%		255,812			18.5	%		138,054			10.0	%		1,386,362

INCOME FROM OPERATIONS	$	446,101			59.0	%	$	79,900			10.6	%	$	230,064			30.4	%	$	756,065

For The Three Months Ended June 30, 2012 Compared to June 30, 2011

Revenue. For the three months ended June 30, 2012 , revenue was $425,683 compared to $997,538 for the three months ended June 30, 2011, a decrease of $571,855 or 57.3%. This decrease was mainly attributable to the decrease in revenue from healthcare knit goods segment and wellness houses and activated water machines segment. In the second quarter of 2012, China’s economy continued to slow down, with its GDP growth dropping to 7.8 percent, compared with 8.1 percent in the first quarter of 2012. The demand to our products has been affected by the slowdown of the economy. In addition, 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. Further, we strengthened the enforcement of the terms of our franchise agreements and policies in 2012. As a result, the number of our franchisees dropped during the second quarter of 2012.

Revenue from healthcare knit goods segment decreased by $437,459 or 69.8% to $189,583 for the three months ended June 30, 2012 from $627,042 for the three months ended June 30, 2011. This decrease was mainly due to $0.4 million of decrease in sales of our mattress products.

Revenue from daily healthcare and personal care products decreased by $33,924 or 25.9% to $96,884 for the three months ended June 30, 2012 from $130,808 for the three months ended June 30, 2011. This was primarily due to the decrease in sales of Tourmaline Waist Protector and Xin-Nao-Ling Fish Oil Soft Gel.

Revenue from wellness houses and activated water machines decreased by $100,472 or 41.9% to $139,216 for the three months ended June 30, 2012 from $239,688 for the three months ended June 30, 2011. This decrease was mainly due to the decrease in sales of Wellness house for family use and Tourmaline Water Machine.

Cost of Goods Sold. For the three months ended June 30, 2012, cost of goods sold was $111,355 compared to $198,743 for the three months ended June 30, 2011, a decrease of $87,388, or 44%. This decrease was mainly due to the decrease in sales.

Cost of goods sold for healthcare knit goods segment decreased to $47,786 for the three months ended June 30, 2012 from $91,543 for the three months ended June 30, 2011, a decrease of $43,757 or 47.8%. This decrease was mainly due to the decrease in the cost of Mattress products.

Cost of goods sold for the daily healthcare and personal care segment decreased to $27,958 for the three months ended June 30, 2012 from $42,488 for the three months ended June 30, 2011, a decrease of $14,530 or 34.2%. This decrease was primarily due to the decrease in the cost of Xin-Nao-Ling Fish Oil Soft Gel.

Cost of goods sold for our wellness house and activated water machine segment decreased to $35,611 for the three months ended June 30, 2012 from $64,712 for the three months ended June 30, 2011, a decrease of $29,101 or 45%. This decrease was mainly due to the decrease in the cost of Wellness House.

Gross profit. Our gross profit decreased by $484,467 or 60.6% to $314,328 for the three months ended June 30, 2012, compared to $798,795 for the three months ended June 30, 2011. This decrease was mainly due to the decrease in gross profit for healthcare knit goods segment. Our gross margin decreased from 80.1% for the three months ended June 30, 2011 to 73.8% for the three months ended June 30, 2012. This decrease was mainly due to the decrease in the gross margin of our healthcare knit goods segment.

Gross profit for the healthcare knit goods segment decreased by $393,702 or 73.5% to $141,797 for the three months ended June 30, 2012 compared to $535,499 for the three months ended June 30, 2011. This decrease was mainly attributable to decreased sales of our mattress products. The gross margins of healthcare knit goods segment decreased from 85.4% for the three months ended June 30, 2011 to 74.8% for the three months ended June 30, 2012. This decrease was mainly due to the decrease in the sales of our mattress products with higher gross margin.

Gross profit of daily healthcare and personal care segment decreased by $19,394 or 22% to $68,926 for the three months ended June 30, 2012, compared to $88,320 for the three months ended June 30, 2011. This decrease was primarily due to the decrease in gross profit of our Tourmaline Waist Protector. But, the gross margin of daily healthcare and personal care segment increased from 67.5% for the three months ended June 30, 2011 to 71.1% for the three months ended June 30, 2012. This increase was mainly due to our cosmetic products, which were newly introduced in 2012 and have higher gross profit margin of over 80 percent.

Gross profit of the wellness house and activated water machine segments increased by $71,371 or 40.8% to $103,605 for the three months ended June 30, 2012, compared to $174,976 for the three months ended June 30, 2011. This decrease was mainly due to the decrease in gross profit of our wellness house for family use and Tourmaline Water Machines. The gross margin of our wellness house and activated water machine segments increased from 73% for the three months ended June 30, 2011 to 74.4% for the three months ended June 30, 2012. This increase was mainly attributed to our newly introduced product, Foot Sauna Bucket, which have higher gross profit margin of over 80 percent.

Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses increased by $120,579, or 17.7%, from $680,618 for the three months ended June 30, 2011 to $801,197 for the three months ended June 30, 2012. This increase was mainly due to the increase of employee salaries, audit and attorney fees. Operating expenses for healthcare knit goods segment decreased by $126,565 or 26.2% to $355,950 for the three months ended June 30, 2012 from $482,515 for the three months ended June 30, 2011. Operating expenses for daily healthcare and personal care segment increased by $59,736 or 54.2% to $169,886 for the three months ended June 30, 2012 from $110,150 for the three months ended June 30, 2011. Operating expenses for our wellness house and activated water machine segment increased by $187,408 or 213.1% to $275,361 for the three months ended June 30, 2012 from $87,953 for the three months ended June 30, 2011. This increase was due to the fact that we have been increasing our marketing and sales efforts on our wellness house and activated water machine segment since the beginning of 2012.

Income from operations. As a result of the foregoing, our income from operations was negative $486,869 for the three months ended June 30, 2012, compared to $118,177 for the three months ended June 30, 2011, a decrease of $605,046. This decrease was mainly due to both the decrease in sales and the increase in operating expenses.

Income taxes. Our income tax expenses decreased from $80,932 for the three months ended June 30, 2011 to $8,931 for the three months ended June 30, 2012. The decrease was primarily due to the decrease in income.

Net income. For the three months ended June 30, 2012, our net income was negative $492,248 compared to $53,311 for the three months ended June 30, 2011. This huge decrease was mainly due to a huge decrease in our income from operations.

For the six months Ended June 30, 2012 Compared to June 30, 2011

Revenue. For the six months ended June 30, 2012, revenue was $1,216,315 compared to $2,696,576 for the six months ended June 30, 2011, a decrease of $1,480,261 or 54.9%. This decrease was mainly due to the durable consumables feature of our main products. 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 dropped in 2012. In addition, the slowdown in the economy of China has also affected the purchases of our products in general.

Revenue from healthcare knit goods segment decreased by $1,193,158, or 68.9% to $539,501 for the six months ended June 30, 2012 from $1,732,659 for the six months ended June 30, 2011. This decrease was mainly due to the decrease in sales of our mattress products.

Revenue from daily healthcare and personal care products decreased by $201,273 or 45.1% to $245,320 for the six months ended June 30, 2012 from $446,593 for the six months ended June 30, 2011. This was primarily due to the decrease in sales of our Tourmaline Scarf products and Tourmaline Socks.

Revenue from wellness houses and activated water machines decreased by $85,830 or 16.6% to $431,494 for the six months ended June 30, 2012 from $517,324 for the six months ended June 30, 2011. This decrease was mainly due to the decrease in sales of Tourmaline Water Machine.

Cost of Goods Sold. For the six months ended June 30, 2012, cost of goods sold was $306,736 compared to $554,149 for the six months ended June 30, 2011, a decrease of $247,413, or 44.6%. This decrease was mainly due to a decrease in sales.

Cost of goods sold for healthcare knit goods segment decreased to $122,767 for the six months ended June 30, 2012 from $294,062 for the six months ended June 30, 2011, a decrease of $171,295 or 58.3%. 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 $68,265 for the six months ended June 30, 2012 from $110,881 for the six months ended June 30, 2011, a decrease of $42,616 or 38.4%. This decrease was mainly due to the decrease in the cost of our Tourmaline Scarf products.

Cost of goods sold for our wellness house and activated water machine segment decreased to $115,704 for the six months ended June 30, 2012 from $149,206 for the six months ended June 30, 2011, a decrease of $33,502 or 22.5%. This decrease was mainly due to the decrease in sales.

Gross profit. Our gross profit decreased by $1,232,848 or 57.5% to $909,579 for the six months ended June 30, 2012, compared to $2,142,427 for the six months ended June 30, 2011. This decrease was primarily due to the decrease in gross profit for healthcare knit goods segment. In addition, our gross margin decreased from 79.4% for the six months ended June 30, 2011 to 74.8% for the six months ended June 30, 2012. This decrease was mainly due to the decrease in sales of healthcare knit goods segment.

Gross profit for the healthcare knit goods segment decreased by $1,021,863 or 71% to $416,734 for the six months ended June 30, 2012 compared to $1,438,597 for the six months ended June 30, 2011. 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 83% for the six months ended June 30, 2011 to 77.2% for the six months ended June 30, 2012. This decrease was mainly due to the decrease in the sales of our mattress products with higher gross margin.

Gross profit of daily healthcare and personal care segment decreased by $158,657or 47.3% to $335,712 for the six months ended June 30, 2012, compared to $177,055 for the six months ended June 30, 2011. This decrease was primarily due to the decrease in gross profit of our Tourmaline Scarf products. Our gross margin of daily healthcare and personal care segment decreased from 75.2% for the six months ended June 30, 2011 to 72.2% for the six months ended June 30, 2012. 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 segments decreased by $52,328 or 14.2% to $315,790 for the six months ended June 30, 2012, compared to $368,118 for the six months ended June 30, 2011. This decrease was mainly due to the decrease in sales of Tourmaline Water Machines. The gross margin of our wellness house and activated water machine segments increased from 71.2% for the six months ended June 30, 2011 to 73.2% for the six months ended June 30, 2012. 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 increased by $9,133, or 0.7%, from $1,386,362 for the six months ended June 30, 2011 to $1,395,495 for the six months ended June 30, 2012. This increase was mainly due to the increase of marketing expenses. Operating expenses for healthcare knit goods segment decreased by $373,521 or 37.6% to $618,975 for the six months ended June 30, 2012 from $992,496 for the six months ended June 30, 2011. Operating expenses for daily healthcare and personal care segment increased by $25,649 or 10% to $281,461 for the six months ended June 30, 2012 from $255,812 for the six months ended June 30, 2011. Operating expenses for our wellness house and activated water machine segment increased by $357,005 or 258.6% to $495,059 for the six months ended June 30, 2012 from $138,054 for the six months ended June 30, 2011. The increase was due to the fact that we have been increasing our marketing and sales efforts on our wellness house and activated water machine segment since the beginning of 2012.

Income from operations. As a result of the foregoing, our income from operations was negative $485,916 for the six months ended June 30, 2012, compared to $756,065 for the six months ended June 30, 2011, a decrease of $1,241,981. This decrease was mainly due to the decrease in sales.

Income taxes. Our income tax expenses were $12,379 for the six months ended June 30, 2012, compared to $303,308 for the six months ended June 30, 2011. This was mainly due to the decrease in income before income tax.

Net income. Our net income was negative $484,734 for the six months ended June 30, 2012, compared to $831,041 for the six months ended June 30, 2011. 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 June 30,				For the six months ended June 30,
	2012		2011		2012		2011
Sales to franchise customers	$	366,554	$	907,021	$	1,103,953	$	2,520,009
Sales to non-franchise customers		59,129		90,517		112,362		176,567

Total sales	$	425,683	$	997,538	$	1,216,315	$	2,696,576

Liquidity and Capital Resources

Our cash at the beginning of the six months ended June 30, 2012 was $3,372,189 and decreased to $2,595,088 by the end of June 2012, a decrease of $777,101. At June 30, 2012, we had net working capital of $4,084,681, a decrease of $255,638 from $4,340,319 at December 31, 2011.

Our cash flow information summary is as follows:


	For the six months ended June 30,
	2012			2011
Net cash used in:
Operating activities	$	(572,365	)	$	(282,390	)
Investing activities		(135,749	)		(770,980	)
Financing activities	$	(148,018	)	$	(212,620	)

Net Cash Used In Operating Activities

Net cash used in operating activities was $572,365 for the six months ended June 30, 2012 compared to $282,390 for the six months ended June 30, 2011. This change was primarily due to the reduced cash collection driven by $1,315,775 of decrease in net income, which was primarily offset by reduced cash payment driven by $472,328 of difference in the impact of changes in taxes payable and $250,012 of difference in the impact of changes in inventory.

For the six months ended June 30, 2012, cash was mainly used to purchase materials of $307,676, which were primarily offset by an add-back of $253,851 of depreciation for non-cash expense.

For the six months ended June 30, 2011, cash was mainly used to purchase materials of $557,688 and pay tax of $524,094, which were primarily offset by cash provided from net income of $831,041 and an add-back of $217,265 of depreciation for non-cash expense.

Net Cash Used In Investing Activities

Net cash used in investing activities was $135,749 for the six months ended June 30, 2012, compared to $770,980 for the six months ended June 30, 2011. Cash was mostly used to remodel our training building and purchase some operating equipments in the amount of $1.4 million. For the six months ended June 30, 2011, 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 $148,018 for the six months ended June 30, 2012, compared to $212,620 for the six months ended June 30, 2011. 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 $16,982 and $156,070 of these advances for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, the total unpaid principal balance due Jinghe Zhang for advances made to Joway Shengshi was $53,387.

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 $131,036 and $53,473 of these advances for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, the total unpaid principal balance due Shenyang Joway for advances was $157,273. 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 June 30, 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.

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which is codified in ASC Topic 210, Balance Sheet. This pronouncement contains new disclosure requirements about a company’s right of setoff and related arrangements associated with its financial and derivative instruments. ASU 2011-11 will be effective retrospectively for annual and interim periods beginning on or after January 1, 2013. 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 June 30, 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. 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.

•

We have established the position of internal audit manager. In September 2011, we hired an internal audit manager who resigned in July 2012. We are seeking a new internal audit manager to fill the vacancy.

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

Our internal audit manager resigned in July 2012. Now we are seeking a new internal audit manager with professional internal control knowledge and rich experience with U.S. GAAP.

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.

None.

Item 6. Exhibits.

EXHIBIT INDEX


Exhibit No.		Description

31.1		Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and Rule 14d-14(a).

31.2		Certification of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

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: August 14, 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