TONGJI HEALTHCARE GROUP, INC. – 10-Q – 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

Tongji Healthcare Group, Inc. (the "Company") was incorporated in Nevada on December 19, 2006. On December 27, 2006, the Company, through its wholly-owned subsidiary, Tongji, Inc., a Colorado company, acquired 100% of the equity in Nanning Tongji Hospital, Inc. ("NTH" or "Tongji Hospital") 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 NTH. 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.

<p>NTH was established in Nanning city, Guangxi province of the Peoples' 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 both Nanning city 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.

According to the PRC Regulation of Healthcare Institutions, hospitals are required to register 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.

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 public services.

We have two sources of operating revenues: in-patient service revenues and out-patient service revenues. In addition to providing services to our patients, we also sell pharmaceutical drugs to our patients. Revenues from such sales are included in either our in-patient service revenues or our out-patient service revenues. 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 the rates established by the local government. 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.

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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.

We had two major suppliers for the six month period ended June 30, 2013 and one major supplier for the six month period ending June 30, 2012: Guangxi East Dragon Century Pharmaceutical Co., Ltd.and Guangxi Tongji Medicine Co. Ltd., a related party with common major stockholders. Medicine purchased from Guangxi East Dragon Century Pharmaceutical Co., Ltd. accounted for 20% and 11% of all medicine purchases for six month period ended June 30, 2013 and 2012. Medicine purchased from Guangxi Tongji Medicine Co. Ltd. accounted for 18% and 71% of all medicine purchases for six month period ended June 30, 2013 and 2012.

We had one major customer for the six month period ended June 30, 2013 and 2012: Nanning Social Insurance Center. Nanning Social Insurance Center accounted for 18% and 22% of revenue for the six month periods ended June 30, 2013 and 2012.

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 (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.

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

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 June 30, 2013 and 2012

Material changes of items in our Statement of Operations for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, are discussed below.

Operating Revenue - Operating revenue for the three month period ended June 30, 2013, which resulted primarily from in-patient service revenue and out-patient revenue, was $627,986, a decrease of $116,270 or 16%, as compared with the operating revenue of $744,256 for the same period of 2012. Our out-patient service revenue was $340,114 for the three month period ended June 30, 2013, as compared to $327,949 for the same period in 2012, an increase of $12,165. The out-patient service revenue remained fairly flat with a slight increase of 4%. Our in-patient service revenue was $287,872 for the three month period ended June 30, 2013 as compared to $416,307, a decrease of $128,435 or 31% as compared to the same period in 2012. The decrease in the in-patient service revenue was primarily due to a change in the Municipal Health Insurance regulations. Starting at the end of 2012, Municipal Health Insurance requires that the hospitals stop waiving co-insurance payments from patients. This has discouraged patients from using our in-patient services and greatly impacted the admission headcount in the in-patient service sector.

Operating Expenses - Operating expenses were $584,212 for the three month period ended June 30, 2013, a decrease of $159,663 or 21% as compared to $743,875 for the same period of 2012. The decrease was primarily due to a decrease of approximately of $76,000 in medicine and supplies sales resulting from the decrease of in-patient services and a decrease of approximately of $87,000 in depreciation expenses, offset by an increase of approximately $3,349 in other operating expense.

Income from Operations - Operating income was $43,774 for the three month period ended June 30, 2013, an increase of $43,393 as compared to an operating income of $381 for the same period of 2012. The primary reasons for the increase are the aforementioned changes in operating revenue and operating expenses.

Interest Expense - Interest expense for the three-month period ended June 30, 2013 was $88,783 as compared to $34,462 for the three-month period ended March 31, 2012, an increase of $54,321 or 158%. The increase was primarily due to the increase in related party loan and contingent liability.

Net Loss - As a result of the forgoing, the Company had a net loss of $37,775 during the quarter ended June 30, 2013, compared to a net loss of $24,868 for the comparative period in 2012, an increase of $44,267.

Results of Operation - Six months ended June 30, 2013

Material changes of items in our Statement of Operations for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, are discussed below.

Operating Revenue - Operating revenue for the six month period ended June 30, 2013, which resulted primarily from in-patient service revenue and out-patient revenue, was $1,113,565, a decrease of $266,184 or 19%, as compared with the operating revenue of $1,379,747 for the same period of 2012. Our out-patient service revenue was $575,636 for the six month period ended June 30, 2013, as compared to $614,185 for the same period in 2012, a decrease of $38,549 or 6%. The decrease was primarily the result of a decrease in average daily out-patient service revenue per patient. Our in-patient service revenue was $537,927 for the six month period ended June 30, 2013 as compared to $765,562, a decrease of $227,635 or 30% as compared to the same period in 2012. The decrease in the in-patient service revenue was primarily due to a change in the Municipal Health Insurance regulations. Starting at the end of 2012, Municipal Health Insurance requires that the hospitals stop waiving co-insurance payments from patients. This has discouraged patients from using our in-patient services and greatly impacted the admission headcount in the in-patient service sector.

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

Operating Expenses - Operating expenses were $1,122,458 for the six month period ended June 30, 2013, a decrease of $331,595 or 23% as compared to $1,454,053 for the same period of 2012. The decrease was primarily due to a decrease of approximately of $169,883 in medicine and supplies sales resulting from the decrease of in-patient services and a decrease of approximately of $174,042 in depreciation expenses, offset by an increase of approximately $12,330 in other operating expense.

Loss from Operations - Operating loss was $8,895 for the six month period ended June 30, 2013, a decrease of $65,411 as compared to an operating loss of $74,306 for the same period of 2012. The primary reasons for the increase are the aforementioned changes in operating revenue and operating expenses.

Interest Expense - Interest expense for the six month period ended June 30, 2013 was $133,682 as compared to $75,632 for the three-month period ended March 31, 2012, an increase of $58,050 or 77%. The increase was primarily due to the increase in related party loan and contingent liability.

Net Loss - As a result of the forgoing, the Company had a net loss of $127,963 during the quarter ended June 30, 2013, compared to a net loss of $128,622 for the comparative period in 2012, a decrease of $659 or 1%.

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 building in Nanning city on leased land. We expect the new hospital building to be completed by the middle of 2014. The hospital building is being constructed by Guangxi Construction Engineering Corporation Langdong 8th Group ("Langdong 8th Group"). The lease payments for the land will start after the construction is completed. Annual lease payments for the land 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 June 30, 2013, we had paid approximately $11,839,000 for the construction of the hospital. We borrowed most of the funds from our related company Guangxi Tongji Medicine Co., Ltd. In addition to what we had paid for the hospital building construction, we estimate the additional costs to complete the project to be $1,700,000. We will continue to operate in our existing hospital buildings after the completion of the new hospital building.

We plan to acquire other hospitals and companies involved in the healthcare industry in the PRC using cash and shares of 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. Additional capital may not be available to us, or if available, on acceptable terms, in which case we would not be able to acquire other hospitals or businesses in the healthcare industry.

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.

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

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.

Liquidity and Capital Resources

We generally finance our operations through our operating profits 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 we have 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 six month periods ended June 30, 2013 and 2012:

                                                         2013             2012     Cash provided by (used in) operating activities   $  (32,194)$     203,914     Cash (used in) investing activities               $ (465,421)$ (1,628,965)     Cash provided by financing activities             $   445,855$   1,425,698                                             25

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

The Company carefully monitors and controls the amount of cash used to fund operating activities. However, substantial funds are required to fund the construction costs on the new hospital building and a lawsuit settlement (see Note 5 to the Financial Statements accompanying this Report). Financing of operations has come primarily from advances from related parties. We are dependent on related parties to provide working capital and pay our 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 used in operating activities primarily consists of net loss, 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 payables.

Net cash used in operating activities was $32,194 for the six months ended June 30, 2013, an increase of $236,108 or 116%, as compared with the net cash provided by operating activities of $203,914 for the same period in 2012. The increase in net cash used in operating activities was primarily due to the decrease in depreciation expense of approximately $173,000 for the six month period ended June 30, 2013.

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 $465,421for the six months ended June 30, 2013, a decrease of $1,163,544or 71%, as compared with the net cash used in investing activities of $1,628,965 for the same period in 2012. The decrease in net cash used in investing activities was primarily due to a decrease of approximately $1,197,000 in construction in progress because the construction of the new hospital building is close to the final stage.

Financing Activities

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

Net cash provided by financing activities was $445,855 for the six months ended June 30, 2013, a decrease of $979,843 or 69%, as compared with the net cash provided by financing activities of $1,425,698 for the same period in 2012. The decrease was primarily attributable to less funding needs because the construction of the new hospital building is close to the final stage.

Working Capital

Working capital is current liabilities deducted from current assets.

Our working capital was negative $13,243,846 for the six months ended June 30, 2013, as compared with negative $12,264,823 for the year ended December 31, 2012, which is primarily attributable to additional financial assistance of approximately $854,000 from related parties to fund the construction of the new hospital and the lawsuit settlement.

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

Rental Commitments

The Company has entered into a lease agreement for its hospital building with Guangxi Tongji Medicine Co. Ltd that expires in December 2014. The monthly lease payment is approximately $2,500. The Company is also in the process of cooperating with Langdong 8th Group in building a new 600-bed hospital building in Nanning, China. Management expects the new hospital building to be completed by the middle of 2014. The hospital building is being constructed by Langdong 8th Group and the land will be leased by the Company for a twenty-year term starting from the date the building is completed. The annual lease payments for the land will gradually increase each year. Based on the exchange rate at June 30, 2013, minimum future lease payments for the land are as follows:

                          Related Party       Non-Related Party         Total           1-5 years     $        47,875     $         2,309,609     $  2,357,484           6-10 years                  -               2,952,740        2,952,740           11-15 years                 -               3,357,225        3,357,225           16-20 years                 -               3,664,633        3,664,633           Total         $        47,875$        12,284,207$ 12,332,082    Going Concern 

The accompanying consolidated financial statements have been prepared in conformity with US GAAP, which contemplate continuation of the Company as a going concern. However, the Company has negative working capital of $13,243,846, an accumulated deficit of $1,913,299, and a stockholders' deficit of $1,363,514 as of June 30, 2013. 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.

Off-Balance Sheet Arrangements

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