PINX:TONJ Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
 (Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ______________ to _____________
 
Commission file number: 333-140645
 
TONGJI HEALTHCARE GROUP, INC.
 (Exact name of registrant as specified in its charter)
 
Nevada
 
99-0364697
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
No. 5 Beiji Road
Nanning, Guangxi, People’s Republic of China
 
 
 530011
(Address of principal executive offices)
 
(Zip Code)
 
011-86-771-2020000 

(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed 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 o

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   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 o
Accelerated filer
 o
       
Non-accelerated filer
 o
Smaller reporting company
 x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x


 
1

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes o    No o

 
APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

As of May 15, 2012, there are 15,812,191 shares of $0.001 par value common stock issued and outstanding.



 













 
2

 


 

 
FORM 10-Q
TONGJI HEALTHCARE GROUP, INC.
INDEX

     
Page
       
PART I.
Financial Information
    4
       
 
Item 1.  Financial Statements (Unaudited).
    4
       
 
Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011.
    4
       
 
Condensed Consolidated Statements of Operations and Comprehensive Income (loss) for the Three Months Ended March 31, 2012 and 2011 (Unaudited).
  5
       
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited).
    6
       
 
Notes to Condensed Consolidated Financial Statements as of March 31, 2012 (Unaudited).
    7
       
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
    21
       
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
    25
       
 
Item 4.  Controls and Procedures.
    25
       
PART II.
Other Information
    28
       
 
Item 1.  Legal Proceedings.
    28
       
 
Item 1A. Risk Factors.
    28
       
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
    28
       
 
Item 3.  Defaults Upon Senior Securities.
    28
       
 
Item 4.  Mine Safety Disclosures.
    28
       
 
Item 5.  Other Information.
    28
       
 
Item 6.  Exhibits.
    28
 
 
 
 
 
3

 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
The unaudited condensed consolidated financial statements of registrant as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011 follow.  The condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.  All such adjustments are of a normal and recurring nature. 
 
 
 
TONGJI HEALTHCARE GROUP, INC.
 
CONSOLIDATED BALANCE SHEETS
 
   
   
   
March 31, 2012
   
December 31, 2011
 
    (Unaudited)        
ASSETS
       
             
Current Assets
           
Cash and cash equivalents
  $ 25,438     $ 32,126  
Accounts receivable, net
    526,849       557,523  
Due from related parties
    54,774       54,246  
Medicine supplies
    178,774       165,368  
Prepaid expenses and other current assets
    2,157       2,925  
                 
Total Current Assets
    787,992       812,188  
                 
Equipment, net
    2,071,795       2,157,733  
                 
Construction in progress
    9,866,135       9,060,115  
                 
Long term deposits
    182,266       181,053  
                 
TOTAL ASSETS
  $ 12,908,188     $ 12,211,089  
                 
LIABILITIES AND SHAREHOLDERS' DEFICIT
         
                 
Current Liabilities
               
Accounts payable and accrued expenses
  $ 268,724     $ 213,204  
Due to related parties
    10,346,117       9,542,604  
Other payables
    596,998       593,403  
Current portion of notes payable
    323,053       312,913  
                 
Total Current Liabilities
    11,534,892       10,662,124  
                 
Notes payable
    1,320,515       1,395,009  
Contingent liability
    163,107       159,117  
                 
Total Liabilities
    13,018,514       12,216,250  
                 
Commitments and contingencies                
                 
STOCKHOLDERS' DEFICIT
               
Preferred stock; $0.001 par value, 20,000,000 shares authorized and none issued and outstanding
               
Common stock; $0.001 par value, 100,000,000 shares authorized and 15,812,191 shares issued and outstanding as of March 31, 2012 and December 31, 2011 respectively
    15,812       15,812  
Additional paid in capital
    430,509       429,230  
Accumulated deficit
    (685,495 )     (581,741 )
Accumulated other comprehensive income
    128,848       131,538  
                 
Total Stockholders' Deficit
    (110,326 )     (5,161 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 12,908,188     $ 12,211,089  
                 
                 
The accompanying notes are an integral part of these consolidated financial statements.
 


 
4

 

TONGJI HEALTHCARE GROUP, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 
FOR THE THREE MONTH PERIODS ENDED MARCH 31
 
  (UNAUDITED)  
             
   
2012
   
2011
 
             
OPERATING REVENUE
           
    In-patient service revenue
  $ 349,255     $ 395,708  
    Out-patient service revenue
    286,236       228,281  
         Total operating revenue
    635,491       623,989  
                 
OPERATING EXPENSES
               
    Salary and fringes
    182,938       138,404  
    Medicine and supplies
    328,411       245,011  
    Administrative expenses
    42,638       55,998  
    Depreciation expenses
    110,142       38,502  
    Other operating expenses     46,049       65,251  
         Total operating expenses
    710,178       543,166  
                 
INCOME (LOSS) FROM OPERATIONS
    (74,687 )     80,823  
                 
OTHER INCOME (EXPENSE)
               
    Other income (expense)
    12,103       (289 )
    Interest expense, net of income
    (41,170 )     (19,191 )
        Total Other Expense
    (29,067 )     (19,480 )
                 
INCOME (LOSS) BEFORE INCOME TAXES
    (103,754 )     61,343  
                 
Provision for income taxes
    -       -  
                 
NET INCOME (LOSS)
    (103,754 )     61,343  
                 
Foreign currency translation gain (loss)
    (2,690 )     1,461  
                 
COMPREHENSIVE INCOME (LOSS)
  $ (106,444 )   $ 62,804  
                 
Net Income (loss) per common stock-Basis and Diluted
  $ (0.007 )   $ 0.004  
                 
Weighted average common stock outstanding
               
Basic and Diluted
    15,812,191       15,812,191  
                 
                 
The accompanying notes are an integral part of these consolidated financial statements.
 

 

 
5

 
 
TONJI HEALTHCARE GROUP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FOR THE THREE MONTH PERIODS ENDED MARCH 31
 
(UNAUDITED)  
             
   
2012
   
2011
 
   
 
       
Cash flows from operating activities:
           
Net Income (loss)
 
$
(103,754
)
 
$
61,343
 
Adjustments to reconcile net income (loss) to
         
Cash provided by operating activities:
         
Depreciation expense
   
110,142
     
38,502
 
Stock option expense
   
1,279
     
-
 
Increase/(decrease) in assets and liabilities:
         
Accounts receivable
   
34,489
     
(100,208
)
Medical supplies
   
(12,326
)
   
(55,690
)
Prepaid expense and other current assets
   
788
     
(3,636
)
Accounts payable and accrued expenses
   
54,218
     
60,927
 
Other payables
   
(383
)
   
457
 
Total adjustments
   
188,207
     
(59,648
)
                 
Net Cash Provided By Operating Activities
   
84,453
     
1,695
 
                 
Cash flows from investing activities:
               
Acquisitions of fixed assets
   
(9,510
)
   
(13,981
)
Additions to construction in progress
   
(747,044
)
   
(377,235
)
Due from related parties
   
(165
)
   
(1,439
)
                 
Net Cash Used in Investing Activities
   
(756,719
)
   
(392,655
)
                 
Cash flows from financing activities:
               
Payments of capital lease
   
(75,977
)
   
-
 
Stock issuance
   
-
     
394
 
Due to related parties
   
741,291
     
220,367
 
                 
Net Cash Provided by Financing Activities
   
665,314
     
220,761
 
                 
Effects of foreign currency translation
   
264
     
760
 
                 
Net decrease in cash and cash equivalents
   
(6,688
)
   
(169,439
)
                 
Cash and cash equivalents-beginning of period
   
32,126
     
209,586
 
                 
Cash and cash equivalents-ending of period
 
$
25,438
   
$
40,147
 
                 
Cash paid during the year for:
               
Income taxes
 
$
-
   
$
-
 
Interest
 
$
42,952
   
$
-
 
                 
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 

 

 
6

TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)
 
NOTE 1- ORGANIZATION
 
Nanning Tongji Hospital, Inc. ("NTH") was established in Nanning in the province of Guangxi of the People’s Republic of China ("PRC") by the Nanning Tongji Medical Co. Ltd. and an individual on October 30, 2003.
 
NTH is a designated hospital for medical insurance in the City of Nanning and Guangxi Province. NTH specializes in the areas of internal medicine, surgery, gynecology, pediatrics, emergency medicine, ophthalmology, medical cosmetology, rehabilitation, dermatology, otolaryngology, traditional Chinese medicine, medical imaging, anesthesia, acupuncture, physical therapy, health examination, and prevention.
 
On December 19, 2006, NTH filed Articles of Incorporation in the State of Nevada to establish Tongji Healthcare Group, Inc. (the "Company"). On the same day, Tongji, Inc., a wholly owned subsidiary of the Company, was incorporated in the State of Colorado. Tongji Inc. was dissolved on March 25, 2011.
 
On December 27, 2006, Tongji acquired 100% of the equity in NTH pursuant to an Agreement and Plan of Merger, pursuant to which NTH became a wholly owned subsidiary of Tongji. The Company was authorized to issue 50,000,000 shares of common stock, par value $0.001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share. The Company issued 15,652,557 shares of common stock to the stockholders of NTH in exchange for 100% of the issued and outstanding shares of common stock of NTH. Thereafter and for purposes of these consolidated financial statements the "Company" and "NTH" are used to refer to the operations of Nanning Tongji Hospital Co. Ltd. The acquisition of NTH was accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of NTH obtained control of the consolidated entity. Accordingly, the reorganization of the two companies was recorded as a recapitalization of NTH, with NTH being treated as the continuing operating entity.
 
Under the People’s Republic of China Regulation of Healthcare Institutions, hospitals shall register with the Administration of Health of the local government to obtain their licenses for hospital service operations. The Company received its renewed operation license from the government of Nanning in November 2007, and this license remains valid until the next scheduled renewing date in November 2020.
 
As the Company maintains a facility with more than 100 beds, it must have its license renewed at least every three years. The Company is also obligated to provide free service or dispatch their physicians or employees for public assistance. A very small percentage of the Company’s resources are devoted to this.
 
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
The accompanying unaudited condensed consolidated financial statements have been prepared by management without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements include all of the adjustments, which, in the opinion of management, are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. The condensed consolidated balance sheet information as of December 31, 2011 was derived from the audited consolidated financial statements included in the Form 10-K. These condensed consolidated financial statements should be read in conjunction with the audited financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended on December 31, 2011 (“Form 10-K”), filed with the Commission on April 16, 2012.
 

 
7

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the condensed consolidated financial statements and the Form 10K.
 
PRINCIPLES OF CONSOLIDATION
 
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary NTH. All intercompany accounts and transactions have been eliminated in consolidation.
 
CASH AND CASH EQUIVALENTS
 
For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. A substantial amount of the Company’s cash is held in bank accounts in the People’s Republic of China (“PRC” or China) and is not protected by Federal Deposit Insurance Corporation (FDIC) insurance or any other similar insurance. Cash held in China amounted to $25,438 as of March 31, 2012. Given the current economic environment and the financial condition of the banking industry, there is a risk that the deposits may not be readily available or covered by such insurance. The Company has had no loss of cash in domestic or foreign banks in past years.
 
USE OF ESTIMATES
 
The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported assets and liabilities, disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of net revenues and expenses during the reporting period. Actual results may differ from those estimates and such differences may be material. The more significant estimates and assumptions by management include, among others, useful lives and residual values of fixed assets, valuation of inventories, accounts receivable, stock based compensation, and allowance for bad debt. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
 
TRANSLATION ADJUSTMENT
 
The Company's functional currency is the Chinese Renminbi (RMB). The reporting currency is that of the US Dollar. Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income and expenditures are translated at the average exchange rate of the year. The RMB is not freely convertible into foreign currency and all foreign currency exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollar at the rates used in translation.
 

 
8

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)


NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the financial statements were as follows:
 
March 31, 2012
 
Balance sheet
RMB 6.31 to US $1.00
Statement of income and other comprehensive income
RMB 6.30 to US $1.00
   
December 31, 2011
 
Balance sheet
RMB 6.35 to US $1.00
Statement of income and other comprehensive income RMB 6.45 to US $1.00
 
March 31, 2011
 
Balance sheet
RMB 6.55 to US $1.00
Statement of income and other comprehensive income
RMB 6.57 to US $1.00
 
RECLASSIFICATIONS
 
Certain items previously reported under specific financial statement captions have been reclassified to conform to the current year presentation.
 
REVENUE RECOGNITION
 
The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin 104 (ASC 605). Service revenue is recognized on the dates services were rendered. When a formal arrangement exists, the price is fixed or determinable. When the service is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
 
The Company generates revenue from individual patients as well as third-party payers, including PRC government programs and insurance providers, under which the hospital is paid based upon government established charges. Revenues for pharmaceutical drug sales are recognized upon the drug being administered to a patient.
 
Patient revenues are recorded based on pre-established rates set by the local government. The Company bills for services provided to Medicare patients through a medical card (the US equivalent of an insurance card). There have not been significant differences between the amounts the Company has billed the government Medicare funds and the amounts collected from the Medicare funds.
 
ACCOUNTS RECEIVABLE
 
Accounts receivable are recorded at the estimated net realizable amounts from government fund, insurance companies and patients. Collections have not been considered an area that exposes the Company to additional risk. Hospital staff verifies patient coverage prior to examinations and/or procedures.
 
For any Medicare patient who visits the hospital and is qualified for acceptance, the hospital will only include the portion that the social insurance organization will pay in the accounts receivable and collects the self-pay portion in cash at the time of service. Management continues to estimate the likelihood of bad debt on an ongoing basis.
 

 
9

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)


NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
The Company has estimated a bad debt allowance of approximately $42,000 as of March 31, 2012 and December 31, 2011.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Company applies the provisions of FASB ASC Topic 825, which requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of March 31, 2012 and December 31, 2011 the fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, notes payable and other payables approximated the carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate with market rates except for related party debt or receivables for which it is not practicable to estimate fair value.
 
FAIR VALUE MEASUREMENTS
 
FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.
 
Various inputs are considered when determining the fair value of the Company’s investments, and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
 
 
·
Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
 
 
·
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).
 
 
·
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
 
The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or non-recurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The Company had no financial assets and liabilities carried at fair value on a recurring basis.
 
The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
 
 
 
 
10

TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)
 
 
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
CONCENTRATIONS, RISKS, AND UNCERTAINTIES
 
All of the Company’s operations are located in the PRC. There can be no assurance that the Company will be able to successfully continue to operate and failure to do so would have a material adverse effect on the Company’s financial position, results of operations and cash flows. In addition, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, the price of medicine, competition, governmental and political conditions, and changes in regulations. Because the Company is dependent on the domestic market of the PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject to risk of restrictions on the transfer of funds, domestic policy changes, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.
 
INVENTORIES
 
Inventories consisting of medicine supplies, both western and traditional Chinese medicine, are valued on the lower of weighted average cost or market basis. Inventory includes product cost and inbound freight. Management compares the cost of inventories with the market value and allowance is made for writing down their inventories to market value, if such value is lower.
 
EQUIPMENT
 
Equipment is recorded at cost. Depreciation is computed over the estimated useful lives of the related asset type using the straight-line method. Maintenance and repairs are expensed as incurred and the costs of additions and betterments that increase the useful lives of the assets are capitalized. When equipment is disposed, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in other income or expenses.
 
CONSTRUCTION-IN-PROGRESS
 
A hospital facility currently under development is accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including land rights cost, development expenditure, professional fees and the interest expenses capitalized during the course of construction for the purpose of financing the project. Upon completion of the project, the cost of construction-in-progress will be transferred to fixed assets, at which time depreciation will commence.
 
CAPITALIZATION OF INTEREST

Interest cost is capitalized for qualifying assets when the portion of the interest cost incurred during the assets' acquisition periods could have been avoided if expenditures for the assets had not been made. The amount capitalized in an accounting period is determined by applying the capitalization rate to the average amount of accumulated expenditures for the asset during the period. The capitalization rates used in an accounting period is based on the rates applicable to borrowings outstanding during the period.

Capitalization period covers the duration of the activities required to get the asset ready for its intended use, provided that expenditures for the asset have been made and interest cost is being incurred. Interest capitalization continues as long as those activities and the incurrence of interest cost continue.

IMPAIRMENT OF LONG-LIVED ASSETS
 
The Company’s long-lived assets are reviewed for impairment in accordance with the guidance of FASB Topic ASC 360, “Property, Plant, and Equipment”, and FASB ASC Topic 205 “Presentation of Financial Statements”. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
 
The Company tests long-lived assets for recoverability at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary. There was no impairment of long-lived assets for the periods ended March 31, 2012 and 2011.
 

 
11

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
BASIC AND DILUTED EARNINGS PER SHARE
 
Earnings per share (EPS) is calculated in accordance with the FASB ASC Topic 260, “Earnings Per Share.” Basic net income (loss) per share is based upon the weighted average number of common shares outstanding. Diluted net income (loss) per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Potentially dilutive securities to purchase 100,000 shares of common stock were not included in the calculation of the diluted earnings per share as their effect would be anti-dilutive for the period ended March 31, 2012. During the three month period ended March 31, 2011, the average market price of the common stock during the period was less than the exercise price of the stock options. Accordingly, the stock options were anti-dilutive and have not been included in the calculation of diluted earnings per share.
 
INCOME TAXES
 
FASB ASC Topic 740, "Income Taxes” requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
 
In accordance with ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB ASC Topic 740” , which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
 
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities or deferred tax asset valuation allowance.
 
The Company has made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by ASC 740-10 and has not recognized any material uncertain tax positions.
 
In addition, companies in the PRC are required to pay business taxes consisting of 5% of income they derive from providing medical treatment, as well as city construction taxes and educational taxes which are 7% and 3%, respectively, of the business taxes. In April 2010, the Company was granted an exemption from these taxes until further notice from the tax bureau.
 
The Company had accrued approximately $40,000 for failure to file US tax returns and Form 5472 between the years 2006 to 2009. The Company is current with its required filings. In addition, the Company does not accrue United States income taxes on unremitted earnings from foreign operations, as it is the Company’s intention to invest these earnings in the foreign operations indefinitely.
 

 
 
12

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)
 
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
STATEMENT OF CASH FLOWS
 
In accordance with FASB ASC Topic 230, "Statement of Cash Flows," cash flows from the Company's operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
 
EMPLOYEE BENEFIT COSTS
 
The Company contributes to a defined contribution retirement plan organized by the municipal government in the province in which the Company’s subsidiary is registered. The Company makes contributes for qualified employees that are eligible to participate in the plan. Contributions to the plan are calculated at 30% of the employees’ salaries above a fixed threshold amount; employees contribute 8% and the Company’s subsidiary contributes the balance of 22%. The Chinese government is responsible for the benefit liability to retired employees. The Company has no other material obligation for the payment of retirement beyond the annual contribution.
 
STOCK-BASED COMPENSATION
 
For purposes of determining the variables used in the calculation of stock compensation expense under the provisions of FASB ASC Topic 505, “Equity” and FASB ASC Topic 718, “Compensation — Stock Compensation,” we perform an analysis of current market data and historical Company data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black Scholes model. Depending upon the number of stock options granted, any fluctuations in these calculations could have a material effect on the results presented in our consolidated statement of operations. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our financial statements.
 
Stock-based compensation costs that have been included in operating expenses amounted to $1,279 and $395, for the three month periods ended March 31, 2012 and 2011, respectively.
 
 
 
 
 

 
13

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
COMPREHENSIVE INCOME
 
The Company reports comprehensive income in accordance with FASB ASC Topic 220 “Comprehensive Income," which established standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements.
 
Total comprehensive income is defined as all changes in stockholders' equity during a period, other than those resulting from investments by and distributions to stockholders (i.e., issuance of equity securities and dividends). Generally, for the Company, total comprehensive income (loss) equals net income (loss) plus or minus adjustments for currency translation. Total comprehensive income (loss) represents the activity for a period net of related tax and was an income (loss) of $(106,444) and 62,804 for the three months periods ended March 31, 2012 and 2011, respectively.
 
While total comprehensive income is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income as of the balance sheet date. For the Company, AOCI is primarily the cumulative balance related to the currency adjustments and increased overall equity by $128,848 and $131,538 as of March 31, 2012 and December 31, 2011, respectively.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In July 2011, ASU 2011-07 was issued for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. The amendments in this Update require certain health care entities to change the presentation of their statement of operations be reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. The adoption of this amendment does not have a material effect on the financial position, results of operations, or cash flows of the Company.
 
In June 2011, the FASB issued an update to ASC Topic 220 “Comprehensive Income” that amends the presentation of comprehensive income in the financial statements by requiring an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update also eliminates the option to present the components of other comprehensive income as part of the statement of equity. The guidance is effective for interim and annual reporting periods beginning on or after December 15, 2011, with early adoption permitted. The adoption of this guidance will not have a material effect on the Company’s financial condition, results of operations or cash flows.
 

 
14

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
GOING CONCERN
 
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has negative working capital of $10,746,900, an accumulated deficit of $685,495, and a stockholders’ deficit of $110,326 as of March 31, 2012. The Company’s ability to continue as a going concern ultimately is dependent on the management’s ability to obtain equity or debt financing, attain further operating efficiencies, and achieve profitable operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company not be able to continue as a going concern.
 
Management has taken certain restructuring steps to provide the necessary capital to continue its operations. These steps included: 1) plan to convert existed related parties’ loans into equity, 2) to complete construction of the new hospital and begin generating revenue by the end of the next year, 3) plan to increase sales revenue with additional medical equipments. No assurances can be given that the steps taken will provide necessary capital for the Company to continue its operations.
 
NOTE 3- EQUIPMENT
 
Equipment as of March 31, 2012 and December 31, 2011 comprised the following:
 
   
Estimated Useful Lives (Years)
   
March 31,
2012
   
December 31,
2011
 
Office equipment
   
5-10
   
$
85,341
   
$
84,773
 
Medical equipment
   
5
     
3,083,186
     
3,053,237
 
Fixtures
   
10
     
112,247
     
111,500
 
Vehicles
   
5
     
44,112
     
43,818
 
Total equipments
           
3,324,886
     
3,293,328
 
                         
Less accumulated depreciation
           
(1,253,091
)
   
(1,135,595
)
                         
Property and equipment, net
         
$
2,071,795
   
$
2,157,733
 
 
Depreciation expense charged to operations was $110,142 and $38,502 for the three month periods ended March 31, 2011 and 2010, respectively.
 
NOTE 4- CONSTRUCTION IN PROGRESS
 
The Company is constructing a new hospital on leased land. Costs capitalized primarily consists of payments for construction costs, acquisition cost, land rights cost, development expenditure, professional fees, and capitalized interest. The Company is required to make payments for construction costs of approximately $7,587,300 and any excess construction cost payments incurred during the construction phase. The land lease term will start upon completion of the new hospital construction. The new hospital is expected to be completed in February 2013.
 
The Company will amortize the cost of the hospital over the life of the land lease of twenty years. Capitalized interest was approximately $122,000 as of March 31, 2012.
 

 
15

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)

NOTE 5- CONTINGENCIES
 
Certain conditions may exist as of the date the consolidated financial statements are issued. These conditions may result in a future loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
 
On August 3, 2011, Guangxi Jingjian Real Estate Development Company (“Jingjian”) filed a civil suit against Nanning Tongji Hospital, Inc. (“Nanning Tongji”), a subsidiary of Tongji Healthcare Group (“Tongji” and together with Nanning Tongji, the “Company”) in the People’s Court in Qingxiu District, Nanning City, People’s Republic of China. In its complaint, Jingjian asserts a breach of contract claim against the Company, alleging that the Company has failed to make timely and total payment of the project transfer fee under certain Business Building Project Agreement between the Company and Jingjian (the “Agreement”). Jingjian seeks a total of RMB 3,162,500 (approximately $498,000) in the complaint, including payment of the remaining RMB 800,000 (approximately $126,000) project transfer fee and liquidated damages of RMB 2,362,500 (approximately $372,000) for late payment of such fee. The trial commenced on September 27, 2011 but no judgment has been entered as of the date of this Current Report. The Company believes that the liquidated damages are excessive and intends to vigorously defend the lawsuit. Pending a court decision, the Company had accrued approximately $160,000 as of March 31, 2012.
 
NOTE 6- MAJOR SUPPLIERS AND CUSTOMERS
 
The Company purchases the majority of its medicine supplies from Guangxi Tongji Medicine Co. Ltd., a related party with common major stockholders. Medicine purchased accounted for 66% and 68% of all medicine purchases for three month period ended March 31, 2012. Amounts due were approximately $900,000 and $613,000 as of March 31, 2012 and 2011.
 
The Company had two major customers for the three month period ended March 31, 2012 and 2011: Nanning Social Insurance Center and Guangxi Province Social Insurance Center. Nanning Social Insurance Center accounted for 42% and 41% of revenue for the three month periods ended March 31, 2012 and 2011. Guangxi Province Social Insurance Center accounted for 14% and 11% of revenue for the three month periods ended March 31, 2012 and 2011.
 
As of March 31, 2012 and December 31, 2011, accounts receivable due from Nanning Social Insurance Center and Guangxi Province Social Insurance Center was approximately $413,000 and $134,000, respectively.
 
NOTE 7- CAPITAL LEASE OBLIGATIONS
 
Sale and Lease Back
 
On March 25, 2011, the Company completed a financing arrangement with an independent third party to sell and leaseback certain machinery and equipment. The net carrying value of the machinery and equipment sold was $262,683. The machinery and equipment was sold for $371,517, of which $334,365 was received in cash and $37,152 was held as refundable deposit. The transaction has been accounted for as a financing arrangement, wherein the property remains on the Company’s books and will continue to be depreciated. A financing obligation in the amount of $371,517, representing the proceeds, has been recorded under “Note Payable” in the Company’s Balance Sheet, and is being reduced based on payments under the lease. Note payable was $329,150 as of March 31, 2012.
 

 
16

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)

NOTE 7- CAPITAL LEASE OBLIGATIONS - continued
 
The lease has a term of 5 years and requires minimum annual rental payments including principal and interest as follows:
 
Year Ending December 31
 
Amount
 
2012
 
$
75,213
 
2013
   
100,285
 
2014
   
100,285
 
2015
   
100,285
 
2016
   
33,428
 
Total
 
$
409,496
 
 
In October 2011, the Company entered into an agreement to lease certain machinery and equipment that are classified as capital leases. The cost of equipment under capital leases of approximately $1,440,000 is included in the Balance Sheet equipment at March 31, 2012. Accumulated depreciation of the leased equipment at March 31, 2012 was approximately $103,470. Depreciation of assets under capital leases is included in depreciation expense. Note payable was $1,314,418 as of March 31, 2012.
 
The lease has a term of 5 years and requires minimum annual rental payments including principal and interest as follows:
 
Year Ending December 31
 
Amount
 
2012
 
$
280,742
 
2013
   
374,323
 
2014
   
374,323
 
2015
   
374,323
 
2016
   
218,355
 
Total
 
$
1,622,066
 
 
NOTE 8- OTHER PAYABLE
 
Other payable as of March 31, 2012 and December 31, 2011 consists of the following:
 
   
March 31, 2012
   
December 31, 2011
 
Advance from customers
 
$
2,869
   
$
4,267
 
Welfare payable
   
54,863
     
60,492
 
Capital lease deposits paid by third party
   
353,795
     
335,677
 
Other payables
   
185,471
     
192,967
 
Total
 
$
596,998
   
$
593,403
 

 

 
17

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)

 
NOTE 9- STOCKHOLDERS' EQUITY
 
Preferred Stock
 
As of March 31, 2012 and December 31, 2011, the Company has 20,000,000 shares of preferred stock authorized with a par value of $0.001. There are no shares issued and outstanding as of March 31, 2012.
 
Common Stock
 
As of March 31, 2012 and December 31, 2011, the Company has 100,000,000 shares of common stock authorized with a par value of $0.001.
 
Statutory Reserves
 
As stipulated by the Company Law of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following:
 
i. Making up cumulative prior years’ losses, if any;
   
ii.
Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;
   
iii.
Allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.
 
As of March 31, 2012, the Company had accumulated deficits of $685,494. Therefore, the Company did not appropriate a reserve for the statutory surplus reserve for the three months period ended March 31, 2012.
 
Stock Option
 
Stock-based compensation amounted to $1,279 and $394 for the three month periods ended March 31, 2012 and 2011.
 
On March 3, 2011, an option to purchase 100,000 shares of common stock was granted to the company’s CFO. The option vests in two equal installments of 33,333 shares each, with the last installment being 33,334 shares, starting on the first anniversary of grant and subsequent anniversaries thereafter, at an exercise price equivalent to the closing price per share of common stock on the date of grant.
 
The fair value of the option award is estimated on the date of grant using the Black Scholes model to be $15,400. The valuation was based on the assumptions noted in the following table.
 
Expected volatility
    105 %
Expected dividends
    0 %
Stock price
    0.24  
Expected term (in years)
 
3 years
Risk-free rate
    1.32 %

 

 
18

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)

 
NOTE 9- STOCKHOLDERS' EQUITY - continued
 
The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future. The market price volatility of our common stock was based on historical volatility since May 13, 2010. The expected life of the options is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.
 
The fair value of the option granted will be expensed according to following schedule:
 
Year
 
Expense
 
2011
 
$
4,262
 
2012
   
5,147
 
2013
   
5,133
 
2014
   
858
 
Thereafter
   
-
 
Total
 
$
15,400
 

There were no options granted, exercised or cancelled/expired during the three month period ended March 31, 2012.
 
NOTE 10- EARNINGS PER SHARE
 
When calculating diluted earnings per share for common stock equivalents, FASB ASC Topic 260, requires the Company to include the potential shares that would be outstanding if all outstanding stock options were exercised. This is offset by shares the Company could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent.
 
The following reconciles the components of the EPS computation for the three month periods ended March 31, 2012 and 2011:
 
   
Income
   
Shares
   
Per Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
   
US$
         
US$
 
For the three month periods ended March 31, 2012:
                 
Net loss
   
(103,753)
             
Basic EPS loss available to common stockholders
   
(103,753)
     
15,812,191
     
(0.007)
 
Effect of dilutive securities:
                       
Diluted EPS income available to common stockholders
   
(103,753)
     
15,812,191
     
(0.007)
 
                         
For the three months periods ended March 31, 2011:
                       
Net loss
   
(61,343)
                 
Basic EPS loss available to common stockholders
   
(61,343)
     
15,812,191
     
(0.004)
 
Effect of dilutive securities:
     
-
     
-
     
-
-Diluted EPS income available to common stockholders
   
(61,343)
     
15,812,191
     
(0.004)
 
 

 
19

 
TONGJI HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(UNAUDITED)


NOTE 11- RELATED PARTY TRANSACTIONS AND COMMITMENTS
 
Due from/to Related Parties
 
The Company has entered into agreements with Nanning Tongji Chain Pharmacy Co. Ltd., Guangxi Tongji Medicine Co. Ltd., and Nanning Switch Factory whereby the Company from time to time will advance amounts to assist them in their operations. The three companies have common major stockholders. The advanced amounts accrue interest at a rate of 1.5% per annum. The amount receivable as of March 31, 2012 and December 31, 2011 was $54,774 and $54,246, respectively. Interest income for the month periods ended March 31, 2012 and 2011 were approximately $165 and $185, respectively.
 
The Company has entered into an agreement with the Chairman and a stockholder of the Company, Nanning Tongji Chain Pharmacy Co. Ltd., Guangxi Tongji Medicine Co. Ltd., and Nanning Tongji Electric Coating Factory, whereby the Company from time to time will be advanced amounts to assist them in their operations. The advanced amounts accrue interest at a rate of 1.5% per annum. As of March 31, 2012 and December 31, 2011, $10,346,117 and $9,542,604 were payable to these related parties respectively. Interest expenses for the three month periods ended March 31, 2012 and 2011 were $34,445 and $19,376 respectively.
 
Rental Commitments
 
The Company has entered into a lease agreement for their hospital with Guangxi Tongji Medicine Co. Ltd that expires December 2014. The monthly lease payment is approximately $2,500. The Company also in the process of cooperating with Guangxi Construction Engineering Corporation Langdong 8th Group in building a new 600-bed hospital in Nanning, China. It expects the new hospital to be completed by February 2013. The hospital is being constructed by Guangxi Construction Engineering Corporation Langdong 8th Group and, when completed, the land will be leased by the Company for a twenty-year term. The annual lease payments will gradually increase each year. Based on the exchange rate at March 31, 2012, minimum future lease payments are as follows:
 
   
Related Party
   
Non-Related Party
   
Total
 
1-5 years
 
$
85,943
   
$
1,964,450
   
$
2,050,393
 
6-10 years
   
-
     
2,812,015
     
2,812,015
 
11-15 years
   
-
     
3,208,073
     
3,208,073
 
16-20 years
   
-
     
3,556,605
     
3,556,605
 
Total
 
$
85,943
   
$
11,541,143
   
$
11,627,086
 

 
 
 
 
 
 

 
 
20

 


 Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related condensed notes included elsewhere in this report. Our financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements.

Overview
 
Nanning Tongji Hospital, Inc. ("NTH" or “Tongji Hospital”) was established in Nanning City Guangxi Province of the People’s Republic of China ("PRC") by Guangxi Tongji Medical Co. Ltd. and an individual on October 30, 2003.
 
NTH is a designated hospital for medical insurance in City of Nanning and Guangxi Province. NTH specializes in the areas of internal medicine, surgery, gynecology, pediatrics, emergency medicine, ophthalmology, medical cosmetology, rehabilitation, dermatology, otolaryngology, traditional Chinese medicine, medical imaging, anesthesia, acupuncture, physical therapy, health examination, and prevention.
 
On December 27, 2006, we, through our wholly-owned subsidiary, Tongji, Inc., a Colorado company, acquired 100% of the equity in NTH pursuant to an Agreement and Plan of Merger –unless otherwise provided, all references to “the Company”, “us”, “we” refer to Tongji Healthcare Group, Inc. and its subsidiaries, Tongji, Inc. and Nanning Tongji Hospital, Inc. We issued 15,652,557 shares of common stock to the shareholders of NTH in exchange for 100% of the issued and outstanding shares of NTH. Accordingly, NTH became a wholly owned subsidiary of Tongji, Inc. We have been in the business of operating hospitals and providing healthcare services in Nanning, Guangxi Province of the PRC.
 
The acquisition of NTH was accounted for as a reverse acquisition under the purchase method of accounting since the shareholders of NTH obtained control of the consolidated entity. Accordingly, the reorganization of the two companies was recorded as a recapitalization of NTH. We treated NTH as the continuing operating entity.
 
According to the PRC Regulation of Healthcare Institutions, hospitals shall be subject to registration with the Health Department of the local government to obtain business license for hospital services. We received our renewed business license from Nanning local government in November 2007, and this license is valid until November, 2020. Other existing regulations having material effects on our business include those dealing with physician's licensing, usage of medicine and injection, public security in health and medical advertising.
 
Furthermore, because we maintain a facility with an excess of 100 beds, we must register with and maintain an operating license from the local Health Department. We are subject to review by the local Health Department at least once every three years. If we fail to meet their standards, our license may be revoked. We are also obligated to provide free services or dispatch our physicians or other employees in the event of a need for public assistance. We dedicate a very small percentage of our resources to providing free public services.
 
We have two main sources of revenue, in-patient service revenue and out-patient service revenue. About 66% of drugs and medications we use in the hospital and sell to our patients are purchased from Guangxi Tongji Medicine Co., Ltd., a related company controlled by our Chief Executive Officer, Yunhui Yu, at prevailing market prices pursuant to a supply contract. The other 34% comes from other suppliers. One of these other suppliers is responsible for more than 13% of our total purchases.
 
The Company generates revenue from individuals as well as third-party payers, including PRC government programs and insurance providers, under which the hospital is paid based upon city government established charges. Revenues are recorded at estimated net amounts due from patients or third-party payers. Revenues from pharmaceutical drug sales are recognized upon the drug being administered to a patient or at the time a prescription by a registered physician is filled.
 
Patient revenues are recorded based on pre-established rates set by the local government. The Company bills for services provided to Medicare patients through a medical card (the US equivalent of an insurance card). Historically, there have been no significant differences between the amounts the Company has billed the government Medicare funds and the amounts collected from the Medicare funds.
 
 
 
21

 
 
 
Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
 
Difference in the Medical System between the U.S. and China
 
In the United States most hospitals have contracts with health insurance companies that provide reduced rates for healthcare services for patients with health insurance.  Medicare and Medicaid patients, also, receive reduced rates. Functionally, the patient is billed for health services at the higher rate normally charged to patients without insurance. The amount billed is then reduced by the charges paid by the insurance carrier and by the difference (sometimes known as the "contractual allowance") between the normal rate for the services and the reduced rate that the hospital estimates it will receive from Medicare, Medicaid and insurance companies.
 
For financial reporting purposes, hospitals in the United States record revenues based upon established billing rates less adjustment for contractual allowances. Revenues are recorded based upon the amounts due from the patients and third-party payers, including federal and state agencies (under the Medicare and Medicaid programs) managed care health plans, health insurance companies, and employers. Estimates of contractual allowances under third-party payer arrangements are based upon the payment terms specified in the related contractual agreements. Third-party payer contractual payment terms are generally based upon predetermined rates per diagnosis, per diem rates, or discounted fee-for-service rates.
 
Due to the complexities involved in determining amounts ultimately due under reimbursement arrangements with a large number of third-party payers, which are often subject to interpretation, the reimbursement actually received by U.S. hospitals for health care services is sometimes different from their estimates.
 
The medical system in the PRC is different from that in the United States. Private medical insurance is not generally available to the PRC’s population and as a result services and medications provided by our hospital are usually paid by cash or by the Medicare agencies of the Nanning municipal government and the Guangxi provincial government. Our billing system automatically calculates the reimbursements that we are entitled to based upon regulations promulgated by theses government agencies. We bill the Medicare agencies directly for services provided to patients covered by these Medicare programs. In addition, due to the fact that rates are established by the government, there is no difference between rates for patients covered by Medicare and patients who pay cash.
 
Since we only deal with the Nanning municipal and the Guangxi provincial Medicare agencies, we are familiar with their regulations pertaining to reimbursements. As a result, there is normally no material difference between the amounts we bill and the amounts we receive for services provided to Medicare patients.
 
Results of Operation - Three months ended March 31, 2012
 
Material changes of items in our Statement of Operations for the three months ended March 31, 2012, as compared to the three months ended March 31, 2011, are discussed below.
 
Operating Revenues – Operating revenue for the three month period ended March 31, 2012, which resulted primarily from in-patient services revenue and out-patient services revenue, were $635,491, an increase of 2% as compared to the operating revenue of $623,989 for the three month period ended March 31, 2011. The increase was primarily in the out-patient services sector, where the average out-patient services revenue per patient increased to $21 for the three month period ended March 31, 2012 from $18 for the same period in 2011.
 
Operating Expenses – Operating expenses were $710,178 for the three month period ended March 31, 2012, an increase of 31% as compared to $543,166 for the same period of 2011. This increase was primarily due to significant increase in salary and fringe expense of approximately $45,000, increase in cost of medicine supplies of approximately $83,000, and increase in depreciation expenses of approximately $72,000.
 
Income from Operations - Operating loss was $74,687 for the three month period ended March 31, 2012, as compared to operating income of $80,823 for the same period of 2011. The primary reasons are the aforementioned changes in operating revenue and operating expenses.
 
Interest Expense – Interest expense for the three-month period ended March 31, 2012 was $41,170 as compared to $19,191 for the three-month period ended March 31, 2011. The increase was primarily due to the increase in loans from related parties and capital lease obligation.
 
Net Loss - As a result of the forgoing, the Company had a net loss of $103,754 during the quarter ended March 31, 2012, compared to a net income of $61,343 for the comparative period in 2011.
 
Trends, Events and Uncertainties
 
The China Ministry of Health, as well as other related agencies, has proposed changes to the price limit we can charge for medical services, drugs and medications. We cannot predict the impact of these proposed changes since the changes are not fully defined and we do not know whether those proposed changes will be implemented or when they may take effect.
 

 
22

 

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
 
We are in the process of cooperating with Guangxi Construction Engineering Corporation Langdong 8th Group (“Langdong 8th Group”) in building a new 600-bed hospital in Nanning city. We expect the new hospital to be completed by February 2013. The hospital is being constructed by Langdong 8th Group and, when completed, will be leased to us for a twenty-year term. The lease payments will start after the construction is completed. The annual lease payments will gradually increase each year. Our agreement with Langdong 8th Group requires us to pay approximately $7,870,000 for construction related costs. In addition, we are responsible for any additional costs necessary to complete the project. As of March 31, 2012, we had paid approximately $9,800,000 for the construction of the hospital. We borrowed most of the funds from our related company Guangxi Tongji Medicine Co., Ltd. We estimate the additional costs to complete the project to be $3,900,000. When the new hospital is completed, we will continue to operate our existing hospital.
 
We plan to acquire other hospitals and companies involved in the healthcare industry in the PRC by cash and our common stock. Substantial capital may be needed for these acquisitions and we may need to raise additional funds through the sale of our common stock, debt financing or other arrangements. We do not have any commitments or arrangements from any person to provide us with any additional capital. We will not be able to acquire other hospitals or businesses if there is no additional capital reasonably available to us.
 
Other than the factors listed above, we do not know of any trends, events or uncertainties that have had or are reasonably expected to have a material impact on our net sales or revenues or income from continuing operations. Our business is not seasonal in nature.
 
Accounting Estimates
 
In the United States most hospitals have contracts with health insurance companies that provide reduced rates for healthcare services for patients with health insurance.  Medicare and Medicaid patients also receive reduced rates. Functionally, the patient is billed for health services at the higher rate normally charged to patients without insurance. The amount billed is then reduced by the charges paid by the insurance carrier and by the difference (sometimes known as the "contractual allowance") between the normal rate for the services and the reduced rate that the hospital estimates it will receive from Medicare, Medicaid and insurance companies.
 
For financial reporting purposes, hospitals in the United States record revenues based upon established billing rates less adjustment for contractual allowances. Revenues are recorded based upon the amounts due from the patients and third-party payers, including federal and state agencies (under the Medicare and Medicaid programs) managed care health plans, health insurance companies, and employers. Estimates of contractual allowances under third-party payer arrangements are based upon the payment terms specified in the related contractual agreements. Third-party payer contractual payment terms are generally based upon predetermined rates per diagnosis, per diem rates, or discounted fee-for-service rates.
 
Due to the complexities involved in determining amounts ultimately due under reimbursement arrangements with a large number of third-party payers, which are often subject to interpretation, the reimbursement actually received by U.S. hospitals for health care services is sometimes different from their estimates.
 
The medical system in the PRC is different from that in the United States. Private medical insurance is not generally available to the PRC’s population and as a result services and medications provided by our hospital are usually paid for in cash or by the Medicare agencies of the Nanning municipal government and the Guangxi provincial government. Our billing system automatically calculates the reimbursements that we are entitled to based upon regulations promulgated by theses government agencies. We bill the Medicare agencies directly for services provided to patients covered by theses Medicare programs. In addition, due to the fact that rates are established by the government, there is no difference between rates for patients covered by Medicare and patients who only use cash.
 
Since we only deal with the Nanning municipal and the Guangxi provincial Medicare agencies we are familiar with their regulations pertaining to reimbursements. As a result, there is normally no material difference between the amounts we bill and the amounts we receive for services provided to Medicare patients.
 
 
 
 
23

 
 
 
Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
 
Liquidity and Capital Resources
 
We generally finance our operations through our operating profit and borrowings from related parties. As of the date of this report, we have not experienced any difficulty in raising funds from related parties, and we have not experienced any liquidity problems in settling our payables in our ordinary course of business. We believe that the Company has adequate funds and capital with respect to conducting its business over the next twelve months.
 
The following shows our material sources and (uses) of cash during the three month periods ended March 31, 2012 and 2011:
 
   
2012
   
2011
 
             
Cash provided by operating activities
 
$
84,453
   
$
1,695
 
                 
Cash (used in) investing activities
 
$
(756,719)
   
$
(392,655
)
                 
Cash provided by financing activities
 
$
665,314
   
$
220,761
 
 
By carefully reducing expenses, the Company substantially reduced the amount of cash being used to fund operating activities. However, substantial funds have been required to fund the construction costs on the new hospital. Financing of operations has come primarily from advances from related parties. We are dependent on related parties to provide working capital and pay the Company’s management team until such time as our operations are profitable. There can be no assurances that related parties will continue to provide additional capital. Without additional capital, we may be forced to cease operations and liquidate.
 
Operating Activities

Net cash provided by operating activities primarily consists of net income, as adjusted by depreciation, stock option, and changes in operating assets and liabilities such as accounts receivable, medical supplies, capital lease deposits, prepaid expense and other current assets, accounts payables and accrued liabilities , and other payable.

Net cash provided by operating activities was $84,453 for the three months ended March 31, 2012, which is primarily attributable to our net loss of $103,754, adjusted by depreciation expense of $110,142, an increased in accounts payable and accrued expenses of $54,218 and a decrease in accounts receivable of $34,489.

Net cash provided by operating activities was $1,695 for the three months ended March 31, 2011, which is primarily attributable to our net income of $61,343, adjusted by depreciation expense of $38,502, an increase in accounts payable and accrued expenses of $60,927, offset by an increase in accounts receivable of $100,208 and medical supplies of $55,690.

Investing Activities

Net cash used in investing activities primarily consists of acquisition of equipment and purchases of construction in progress.

Net cash used in investing activities was $756,719 for the three months ended March 31, 2012, which is primarily attributable to an increase in construction in progress of $747,044.

Net cash used in investing activities was $392,655 for the three months ended March 31, 2011, which is primarily attributable to an increase in construction in progress of $377,235.

Financing Activities
 
Net cash provided by financing activities primarily consists of proceeds from related party loans.
 
Net cash provided by financing activities was $665,314 for the three months ended March 31, 2012, which is primarily attributable to an increase in proceeds from related party loans of $741,297, offset by repayment of capital lease of $75,977.
 
Net cash provided by financing activities was $220,761 for the three months ended March 31, 2011, which is primarily attributable to an increase in proceeds from related party loans of $220,367.
 
 
24

 
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
 
Working Capital
 
Working capital is current liabilities deducted from current assets.
 
Our working capital was negative $10,746,900 for the three months ended March 31, 2012, as compared with negative $9,849,936 for the year ended December 31, 2011, which is primarily attributable to an increase in due from related parties of $528, an increase in medicine supplies of $13,406, offset by an increase in accounts payable of $55,520, an increase in due to related parties of $803,513, an increase in other payable of $3,595, an increase in current portion of notes payable of $10,140, a decrease in accounts receivable of $30,674, a decrease in prepaid expenses and other current assets of $768, and a decrease in cash and cash equivalent of $6,688.
 
Rental Commitments
 
The Company has entered into a lease agreement for their hospital with Guangxi Tongji Medicine Co. Ltd that expires December 2014. The monthly lease payment is approximately $2,500. The Company also in the process of cooperating with Guangxi Construction Engineering Corporation Langdong 8th Group in building a new 600-bed hospital in Nanning, China. It expects the new hospital to be completed by February 2013. The hospital is being constructed by Guangxi Construction Engineering Corporation Langdong 8th Group and, when completed, the land will be leased by the Company for a twenty-year term. The annual lease payments will gradually increase each year.
 
Based on the exchange rate at March 31, 2012, minimum future lease payments are as follows:
 
   
Related Party
   
Non-Related Party
   
Total
 
1-5 years
 
$
85,943
   
$
1,964,450
   
$
2,050,393
 
6-10 years
   
-
     
2,812,015
     
2,812,015
 
11-15 years
   
-
     
3,208,073
     
3,208,073
 
16-20 years
   
-
     
3,556,605
     
3,556,605
 
Total
 
$
85,943
   
$
11,541,143
   
$
11,627,086
 
 
Going Concern
 
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has negative working capital of $10,746,900, an accumulated deficit of $685,495, and a stockholders’ deficit of $110,326 as of March 31, 2012. The Company’s ability to continue as a going concern ultimately is dependent on the management’s ability to obtain equity or debt financing, attain further operating efficiencies, and achieve profitable operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company not be able to continue as a going concern.
 
Management has taken certain restructuring steps to provide the necessary capital to continue its operations. These steps included: 1) the plan to convert existed related parties’ loans into equity, 2) the plan to complete construction of the new hospital and begin generating revenue by the end of the next year, and 3) the plan to increase sales revenue with additional medical equipments. No assurances can be given that the steps taken will provide necessary capital for the Company to continue its operations.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet items reasonably likely to have a material effect on our financial condition.
 
Item 3.        Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4.       Controls and Procedures.
 
Evaluation of Disclosure Controls

Our management maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that the material information required to be disclosed by us in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As of March 31, 2012, our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act.  Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2012 as a result of the material weaknesses identified in our internal control over financial reporting.  These material weaknesses are discussed in “Management’s Report on Internal Control over Financial Reporting” below. Our management considers our internal control over financial reporting to be an integral part of our disclosure controls and procedures.
 
 
25

 
 
Item 4.       Controls and Procedures - continued
 
Management’s Report on Internal Control over Financial Reporting
 
The Company’s management is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. The Company’s management is also required to assess and report on the effectiveness of the Company’s internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of the Company’s financial reporting for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that in reasonable detail accurately and fairly reflect the Company’s transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of the Company’s financial statements and that receipts and expenditures of company assets are made in accordance with management authorization; and (iii) provide reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.
 
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 and procedures may deteriorate.

As of March 31, 2012, our management, under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as required by Rules 13a-15(c) and 15d-15(c) under the Exchange Act.  In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework , including the following five framework components: i) control environment, ii) risk assessment, iii) control activities, iv) information and communications, and v) monitoring.
 
Our management evaluated the design and operating effectiveness of our internal control over financial reporting as part of this assessment, using its knowledge and understanding of our organization, operations, and processes, to determine, in its judgment, the sources and potential likelihood of misstatements in financial reporting.  Based on this assessment, our management, including the Chief Executive Officer and Chief Financial Officer, has concluded that our internal control over financial reporting was not effective as of March 31, 2012.
 
Specifically, our management identified certain matters involving internal control and our operations that it considered to be material weaknesses.  As defined in the Exchange Act, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis.  The material weaknesses identified by our management as of March 31, 2012, are described below:
 
We did not design, implement, or maintain effective entity-level controls related to our control environment, resulting in the following significant control deficiencies:
 
 
o  
The Code of Business Conduct and Ethics, which was specifically designed for public company applicability, has yet to be formally acknowledged by members of management and the finance department.
 
 
o  
There is an absence of independence and financial expertise on the Board of Directors, and we do not have an Audit Committee or a formalized internal audit function, limiting its ability to provide effective oversight of our management.
 
Our management believes that the pervasive nature of these control deficiencies, when aggregated, impact all significant accounts and disclosures and rise to the level of material weakness.
 
The full implementation of, and related training for, our newly-formalized IT policies and procedures were still in process at year-end.  Accordingly, we lacked sufficiently-trained personnel to provide for adequate segregation of duties within the accounting system and effective oversight of controls over access, change, data, and security management.  Because this control deficiency, and the related segregation of duties constraints, is pervasive in nature and impacts all significant accounts, our management believes this deficiency rises to the level of material weakness.
 
 
 
 
26

 
 
 
Item 4.       Controls and Procedures - continued
 
2012 Planned Remediation
 
As financial conditions permit, we plan to take the following actions to improve our internal control over financial reporting.
 
Require all members of our management and the finance department across all corporate entities to certify receipt of the revised Code of Business Conduct and Ethics by signature.  Signed copies will be retained by our management.  Thereafter, our management plans to periodically require signatories to acknowledge that they understand the contents of the Code of Business Conduct and Ethics, and whether they are aware of anyone in our Company that might have violated some part of the Code.
 
Recruit an independent financial expert to the Board of Directors to chair an Audit Committee and formalize roles and responsibilities over our internal control over financial reporting for the Board and our management.  Our management also plans to develop and implement a formal corporate internal audit capability, reporting directly to an independent Audit Committee, to provide effective oversight of our internal control over financial reporting.
 
Continue to engage the services of qualified consultants with China GAAP, U.S. GAAP and SEC reporting experience to support our financial reporting and SOX compliance requirements, including assistance with the following:
 
 
o  
Remediating identified material weaknesses;
 
 
o  
Monitoring our internal control over financial reporting on an ongoing basis;
 
 
o  
Managing our period-end financial closing and reporting processes; and
 
 
o  
Identifying and resolving non-routine or complex accounting matters.
 
Complete the implementation of, and related training for, its IT policies and procedures related to access, change, data, and security management to ensure that all relevant financial information is secure, identified, captured, processed, and reported within the accounting system and spreadsheets supporting financial reporting.
 
Continue providing training to accounting personnel regarding our significant policies and procedures related to accounting, finance, and internal control to ensure that financial reporting competencies are strengthened.
 
Our management will continue to monitor and evaluate the effectiveness of its disclosure controls and procedures, as well as its internal control over financial reporting, on an ongoing basis, and is committed to taking further action and implementing additional improvements, as necessary and as funds allow.  However, our management cannot guarantee that the measures taken or any future measures will remediate the material weaknesses identified or that any additional material weaknesses or significant deficiencies will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting.
 
Notwithstanding the material weaknesses described above, our management believes that there are no material inaccuracies or omissions of material fact and, to the best of its knowledge, believes that the consolidated financial statements included in this annual report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
 
Changes in Internal Control over Financial Reporting

No changes in the Company's internal control over financial reporting has come to management's attention during the Company's last fiscal quarter that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting.

Limitations on Controls

Management does not expect that the Company's disclosure controls and procedures or the Company's internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.  The Company's disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are effective at that reasonable assurance level.

 
27

 

PART II - OTHER INFORMATION

Item 1.
Legal Proceedings.

On August 3, 2011, Guangxi Jingjian Real Estate Development Company (“Jingjian”) filed a civil suit against Nanning Tongji Hospital, Inc. (“Nanning Tongji”), a subsidiary of the Company in the People’s Court in Qingxiu District, Nanning City, People’s Republic of China. In its complaint, Jingjian asserts a breach of contract claim against the Company, alleging that the Company has failed to make timely and total payment of the project transfer fee under certain Business Building Project Agreement between the Company and Jingjian. Jingjian seeks a total of RMB 3,162,500 (approximately $498,000) in the complaint, including payment of the remaining RMB 800,000 (approximately $126,000) project transfer fee and liquidated damages of RMB 2,362,500 (approximately $372,000) for late payment of such fee. The trial commenced on September 27, 2011 but no judgment has been entered as of the date of this Current Report. The Company believes that the liquidated damages are excessive and intends to vigorously defend the lawsuit. Pending a court decision, the Company had accrued approximately $160,000 as of May 15, 2012. 

Item 1A. 
Risk Factors.
 
Not Applicable.
 
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.

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
 
Exhibit No.  Title of Document
3.1
Articles of Incorporation (1)
3.2
Bylaws (1)
10.1
Employment Contracts (1)
10.2
Hospital Lease (1)
10.3
Agreement with Guangxi Tongji Medicine Co., Ltd. (1)
10.4
Agreement for Medicare Service - The Management Center of Social Medical Treatment Insurance of Nanning (1)
10.5
Agreement for Medicare Service - Social Security Department of Guangxi Zhuang Municipality (1)
31.1
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
32.2
Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
101.INS
XBRL Instance Document (3)
101.SCH
XBRL Taxonomy Extension Schema Document (3)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (3)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (3)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (3)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (3)
 
(1) Incorporated by reference to the same exhibit filed with our registration statement on Form SB-2 (File No. 333-140645).
 
(2) The Exhibit attached to this Form 10-Q shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.   

(3) Attached as Exhibits 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in XBRL (eXtensible Business Reporting Language):  (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income and Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text.  The XBRL-related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.  

 
28

 

 



 SIGNATURES

Pursuant to the requirements of the securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
TONGJI HEALTHCARE GROUP, INC.
   
 Date: May 15, 2012   
By:  
  /s/ Yunhui Yu
 
Yunhui Yu
President and Chief Executive Officer
(Principal Executive Officer)



 Date: May 15, 2012   
By:  
  /s/ Eric Zhang
 
Eric Zhang
Chief Financial Officer
 (Principal Financial Officer)



 
 
 
 
 
 
 
 
 29

PINX:TONJ Quarterly Report 10-Q Filling

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PINX:TONJ Quarterly Report 10-Q Filing - 3/31/2012
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