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TONGJI HEALTHCARE GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

Edgar Online, Inc.

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 on October 30, 2003 in Nanning city Guangxi province of the People's Republic of China ("PRC") by Guangxi Tongji Medical Co. Ltd. and an individual. We have been in the business of operating hospitals and providing healthcare services in Nanning city, Guangxi province in the PRC. 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.

NTH is a designated hospital for medical insurance in 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 interest in NTH pursuant to an Agreement and Plan of Merger. 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. 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 are 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 municipal government in November 2007, and this license is valid until November, 2020. Other existing regulations having material effects on our business include regulations dealing with physician's licensing, usage of medicine and injection, and public security in health and medical advertising.

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We must register with and maintain an operating license from the local health department due to the fact that we currently maintain a facility with over 100 beds. We are subject to review by the local health department at least once every three years. If we fail to meet their standards, our business 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, generating from our in-patient services and out-patient services. About 47% 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 53% comes from other suppliers. Two of these other suppliers are responsible for more than 28% of our total purchases.

Our revenues come from individuals as well as third-party payers, including PRC government programs and insurance providers, under which the hospital is paid based upon local 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 billed the government Medicare funds and the amounts collected from the Medicare funds.

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.





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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

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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 September 30, 2012

Material changes of items in our Statement of Operations for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011, are discussed below.

Operating Revenues - Operating revenue for the three-month period ended September 30, 2012, resulting primarily from in-patient services and out-patient services, was $700,210, a decrease of $3,120, as compared to the operating revenue of $703,330 for the three-month period ended September 30, 2011.The operating revenue remined fairly flat with a slight decrease of 0.44% compared to the same period in 2011.

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Operating Expenses - Operating expenses were $1,638,251 for the three-month period ended September 30, 2012, an increase of $940,887, or 135% as compared to $697,364 for the same period in 2011. This increase was primarily due to an increase of approximately $1,120,000 in contingency loss and a decrease of approximately $120,000 in depreciation expenses.

Income (Loss) from Operations - Operating loss was $938,041 for the three-month period ended September 30, 2012, as compared to an operating income of $5,966 for the same period in 2011. The primary reasons are the aforementioned changes in contingency loss and depreciation expenses.

Interest Expense - Interest expense for the three-month period ended September 30, 2012 increased by $12,332, or 32%, to $51,027 from $38,695 for the three-month period ended September 30, 2011. The increase was primarily due to an increase in loans from related parties and capital lease obligation.

Net Income/Loss - As a result of the forgoing, the Company had a net loss of $983,040 during the quarter ended September 30, 2012, compared to a net loss of $22,846 for the comparative period in 2011.

Results of Operation - Nine months ended September 30, 2012

Material changes of items in our Statement of Operations for the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011, are discussed below.

Operating Revenues - Operating revenue for the nine-month period ended September 30, 2012, which resulted primarily from in-patient services and out-patient services, was $2,079,957, representing an increase of $173,013, or 9% as compared to the operating revenue of $1,906,944 for the nine-month period ended September 30, 2011. The increase was primarily due to an increase in average service revenue per patient where more services were offered in both in-patient and out-patient service departments in the nine months ended September 30, 2012 as compared to the same period in 2011.





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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Operating Expenses - Operating expenses were $3,092,304 for the nine-month period ended September 30, 2012, representing an increase of $1,197,972, or 63% as compared to $1,894,332 for the same period in 2011. This increase was primarily due to an increase of approximately $110,000 in cost of medicine supplies, an increase of approximately $40,000 in administrative expenses, an increase of approximately $1,120,000 in contingency loss, an increase of approximately $23,000 in depreciation expense offset by a decrease of approximately $112,000 in other operating expenses.


Income (Loss) from Operations - The Company had an operating loss of $1,012,347
for the nine-month period ended September 30, 2012, as compared to an operating
income of $12,612 for the same period in 2011. The primary reasons are the
aforementioned changes in operating revenues and operating expenses where the
increase in operating revenues of $173,013 is less than the increase in
operating expenses of $1,197,972.
.
Interest Expense - Interest expense for the nine-month period ended September
30, 2012 was $126,659 as compared to $84,732 for the nine-month period ended
September 30, 2011. The increase was primarily due to an 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 $1,111,662 for the nine-month period ended September 30, 2012, compared to a net loss of $45,730 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.

We are in the process of building a new 600-bed hospital in Nanning city. We expect the new hospital to be completed in February 2013. The hospital is being constructed by Guangxi Construction Engineering Corporation Langdong 8th Group ("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. Annual lease payments will increase every year. Our agreement with Langdong 8th Group obligates 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 September 30, 2012, we had paid approximately $10,920,000 for the construction of the hospital. We borrowed most of the funds from our related company Guangxi Tongji Medicine Co., Ltd. On top of what we had paid for the hospital construction, we estimate the additional costs to complete the project to be $2,700,000. We will continue to operate our existing hospital after the completion of the new 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.





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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

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.

Liquidity and Capital Resources

We generally finance our operations through our operating profit and borrowings from related parties. As of September 30, 2012, 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 table shows our material sources and (uses) of cash during the nine month periods ended September 30, 2012 and 2011:

                                                        2012              2011

  Cash provided by (used in) operating activities   $     185,513     $   (345,085)

  Cash (used in) investing activities               $ (1,828,392)     $ (3,008,004)

  Cash provided by financing activities             $   1,644,008     $  3,207, 687


By 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 of the new hospital. Financing of operations comes primarily from advances from related parties. We will have to rely on related parties loans for working capital and the payment to our management 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 payable and accrued liabilities, and other payables.

Net cash provided by operating activities was $185,513 for the nine months ended September 30, 2012, which is primarily attributable to our net loss of $1,111,662, adjusted by depreciation expense of $139,638, an increase in accounts payable and accrued expenses of $165,354, a decrease in accounts receivable of $103,240, and an increase in contingent liability of $957,554. Net cash used in operating activities was $345,085 for the nine months ended September 30, 2011, which is primarily attributable to our net loss of $45,730, adjusted by depreciation expense of $116,781, a decrease in accounts payable and accrued expenses of $117,871, a decrease in prepaid expense and other current assets of $286,654, a decrease in accounts receivable of $117,871, and an increase in other payables of $205,627.

Net cash provided by operating activities was $185,513 for the nine months ended September 30, 2012, an increase of $530,598 from $345,085 net cash used in operating activities for the same period in 2011. The increase was primarily due to an increase in accounts payable and accrued expenses of $283,225, an increase of $957,554 in contingent liability, an increase of $276,133 in prepaid expense and other current assets, offset by a decrease in net loss of $1,065,932 and other payable of $73,495.

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 $1,828,392 for the nine months ended September 30, 2012, which is primarily attributable to an increase in the cost of the construction in progress of $1,811,953. Net cash used in investing activities was $3,008,004 for the nine months ended September 30, 2011, which is primarily attributable to an increase in the cost of the construction in progress of $2,759,361.

Net cash used in investing activities was $1,828,392 for the nine months ended September 30, 2012, a decrease of $1,179,612 from $3,008,004 net cash used in investing activities for the same period in 2011. The decrease was primarily due to slower construction progress of the new hospital.




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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Financing Activities

Net cash provided by financing activities primarily consists of proceeds from related party loans.

Net cash provided by financing activities was $1,644,008 for the nine months ended September 30, 2012, which is primarily attributable to an increase in proceeds from related party loans of $1,871,403, offset by repayment of capital lease of $227,395.

Net cash provided by financing activities was $3,207,687 for the nine months ended September 30, 2011, which is primarily attributable to an increase in proceeds from related party loans of $2,887,302 and an increase in proceeds from notes payable of $369,891.

Working Capital

Working capital is current liabilities deducted from current assets.

Our working capital was negative $11,992,466 for the nine months ended September 30, 2012, as compared with negative $9,849,936 for the year ended December 31, 2011, which is primarily attributable to an increase in the amount of $106,201 in accounts receivable, and increase in the amount of 166,278 in accounts payable and accrued expenses, an increase of $1,921,904 in due to a related parties, and an increase in other payables of $135,246.

Rental Commitments

The Company entered into a lease agreement with Guangxi Tongji Medicine Co. Ltd for their hospital that expires December 2014. The monthly lease payment is approximately $2,500. The Company also in the process of 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 Guangxi Construction Engineering Corporation Langdong 8th Group and, when completed, hospital building will be leased to the Company for a twenty-year term. The annual lease payments will increase every year.

Based on the exchange rate of 6.31 at September 30, 2012, our estimated minimum lease payments for 20 years in the future are as follows:

                          Related Party       Non-Related Party            Total
          1-5 years     $        70,241     $         1,962,336     $  2,032,577
          6-10 years                  -               2,808,989        2,808,989
          11-15 years                 -               3,204,621        3,204,621
          16-20 years                 -               3,552,777        3,552,777
          Total         $        70,241     $        11,528,723     $ 11,598,964



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 $11,992,466, an accumulated deficit of $1,693,403, and a shareholders' deficit of $1,113,702as of September 30, 2012. The Company's ability to operate as a going concern 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 operate on a going concern.

Our management has taken certain restructuring steps to provide necessary capital to continue 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 equipment. No assurances can be given that the steps taken will provide necessary capital for the Company to continue its operations.





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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Off-Balance Sheet Arrangements

We do not have any off-balance sheet items reasonably likely to have a material effect on our financial condition.

Wordcount: 3776



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