UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)





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





For the quarterly period ended March 31, 2011





£
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

None(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(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 S  No £





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes    o  No   o








1








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
£
Accelerated filer
£Non-accelerated filer
£
Smaller reporting company
S





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








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 £    No £








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, 2011, 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





PagePART I.

Financial Information

4Item 1.  Financial Statements (Unaudited).

4Condensed Consolidated Balance Sheets as of  March 31, 2011 (Unaudited) and December 31, 2010.

4Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010 (Unaudited).

5Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited).

6Notes to Condensed Consolidated Financial Statements as of  March 31, 2011 (Unaudited).

7Item 2.  Management’s Discussion and Analysis of Financial Condition or Plan of Operation.

22Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

26Item 4.  Controls and Procedures.

27PART II.

Other Information

30Item 1.  Legal Proceedings.

30Item 1A. Risk Factors.

30Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

30Item 3.  Defaults Upon Senior Securities.

30Item 4.  (Removed and Reserved).

30Item 5.  Other Information.

30Item 6.  Exhibits.

30








PART I. FINANCIAL INFORMATION





Item 1. Financial Statements (Unaudited)












3








TONGJI HEALTHCARE GROUP, INC.CONDENSED CONSOLIDATED BALANCE SHEETSMarch 31, 2011


December 31, 2010(Unaudited)ASSETSCurrent AssetsCash and cash equivalents

$
40,147


$
209,586Accounts receivable, net


393,170



290,821Due from related parties


49,607



47,864Medicine supplies


98,985



42,848Prepaid expenses and other current assets


74,786



70,698Total Current Assets


656,695



661,817Property, Plant and Equipment, net


609,422



630,088Construction in Progress


5,964,647



5,551,527TOTAL ASSETS

$
7,230,764


$
6,843,432LIABILITIES AND SHAREHOLDERS' EQUITYCurrent LiabilitiesAccounts payable and accrued expenses

$
515,195


$
451,253Due to related parties


6,186,608



5,928,509Other payable


263,684



261,592Total Current Liabilities


6,965,487



6,641,354STOCKHOLDERS' EQUITYPreferred stocks; $0.001 par value, 20,000,000 shares authorized and none issued and outstanding


-



-Common stocks; $0.001 par value, 100,000,000 shares authorized and 15,812,191 shares issued and outstanding as of March 31, 2011 and December 31, 2010 respectively


15,812



15,812Additional paid in capital


425,363



424,968Statutory reserve


41,812



41,812Accumulated Deficit


(302,248
)


(363,591
)Accumulated other comprehensive income


84,538



83,077Total Stockholders' Equity


265,277



202,078TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
7,230,764


$
6,843,432The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.








4




TONGJI HEALTHCARE GROUP, INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOMEFOR THE THREE MONTH PERIODS ENDED MARCH 312011


2010OPERATING REVENUEPatient service revenue

$
395,708


$
121,091Other operating revenue


228,281



263,676Total operating revenue


623,989



384,767OPERATING EXPENSESSelling, general and adminstrative expenses


259,653



195,873Medicine and supplies


245,011



254,272Depreciation expenses


38,502



35,592Total operating expenses


543,166



485,737INCOME (LOSS) FROM OPERATIONS


80,823



(100,970
)OTHER INCOME (EXPENSE)Other income (expense)


(289
)


1,768Interest expense, net of income


(19,191
)


(22,808
)Total Other Expense


(19,480
)


(21,040
)INCOME (LOSS) BEFORE INCOME TAXES


61,343



(122,010
)Provision for income taxes


-



-NET INCOME (LOSS)


61,343



(122,010
)Foreign currency translation gain


1,461



30NET COMPREHENSIVE INCOME (LOSS)

$
62,804


$
(121,980
)Net Income (loss) per common stock - Basic and Diluted

$
0.004


$
(0.008
)Weighted average common stock outstandingBasic and Diluted


15,812,191



15,812,191The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.






5




TONJI HEALTHCARE GROUP, INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE THREE MONTH PERIODS ENDED MARCH 312011


2010Cash flows from operating activities:Net income (loss)

$
61,343


$
(122,010
)Adjustments to reconcile net income (loss) toNet cash provided by (used in) operating activities:Depreciation and amortization


38,502



35,592Increase/(decrease)  in assets and liabilities:Accounts receivable


(100,208
)


63,882Medical supplies


(55,690
)


15,763Prepaid expense and other current assets


(3,636
)


8,013Accounts payable and accrued expenses


60,927



11,961Unearned revenue


-



(27,831
)Other payables


457



(182
)Net Cash Provided By (Used in) Operating Activities


1,695



(14,812
)Cash flows from investing activities:Acquisitions of fixed assets


(13,981
)


-Construction in progress


(377,235
)


(215,564
)Due from related parties


(1,439
)


1,123Net Cash Used in Investing Activities


(392,655
)


(214,441
)Cash flows from financing activities:Payments of capital lease


-



(90,377
)Due to related parties


220,367



313,663Net Cash Provided by Financing Activities


220,761



223,286Effects of foreign currency translation


760



17Net decrease in Cash and Cash Equivalents


(169,439
)


(5,950
)Cash and Cash Equivalents-Beginning of Period


209,586



103,909Cash and Cash Equivalents-Ending of Period

$
40,147


$
97,959Cash Paid During the Period for:Income taxes

$
-


$
-Interest paid

$
-


$
23,114The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


6
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011




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 an assigned hospital for medical insurance in City of Nanning and Guangxi Province. NTH contains specialties 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, the officers of NTH filed Articles of Incorporation in the State of Nevada which was approved on December 19, 2006 to create Tongji Healthcare Group, Inc. a Nevada corporation (the "Company") and also established Tongji, Inc., a Colorado corporation ("Tongji") a wholly owned subsidiary of the Company.  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 Pursuant to the acquisition of NTH, it became the wholly owned subsidiary of Tongji. The Company incorporated with 50,000,000 shares of common stock and 20,000,000 shares of preferred stock both with a par value of $0.001. The Company 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. 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 shareholders 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.





According to the PRC Regulation of Healthcare Institutions, hospitals shall be subject to register with the Administration of Health of the local government to obtain their license for hospital service operation. The Company received its renewed operation license from Nanning's government in November of 2007, and this license remains valid until the next scheduled renewing date of November, 2020.





Other existing regulations having material effects on the Company's business include those dealing with physician's licensing, usage of medicine and injection, public security in health and medical advertising.





As the Company maintains a facility with an excess of 100 beds, they must have their 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. The Company has a very small percentage of their service for this area.








NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The accompanying unaudited condensed consolidated financial statements of 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. These condensed consolidated financial statements should be read in conjunction with the audited financial statements at December 31, 2010 as filed in the Company 10-K filed with the Commission on April 15, 2011.


7
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


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 financial statements. The 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 December 31, 2010 financials included in the 10-K filed on April 15, 2011.





In June 2009 the FASB established the Accounting Standards Codification (“Codification” or “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented. All accounting references have been updated and therefore, all FASB references have been replaced with ASC references.





PRINCIPLES OF CONSOLIDATION





The consolidated financial statements include the accounts of Tongji Healthcare Group, Inc. and its wholly owned subsidiary Nanning Tongji Hospital, Inc. All significant 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”) and is not protected by the Federal Deposit Insurance Corporation (FDIC) insurance or any other similar insurance. Cash held in China amounted to $40,147 at March 31, 2011. Give the current economic environment and the financial conditions of the banking industry there is a risk that deposits may not be readily available or covered by such insurance. The Company has had no loss on excess cash in domestic or foreign banks in past years.







8
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011




NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued





USE OF ESTIMATES





The preparation of these condensed 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 amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed 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 to the financial statements. The more significant estimates and assumptions by management include among others: useful lives and residual values of fixed assets, valuation of inventories, accounts receivable,  and stock based compensation, The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.





TRANSLATION ADJUSTMENT





The Company’s primary country of operations is The People’s Republic of China (“PRC”). The financial position and results of operations of the Company’s China operation are determined using the local currency Renminbi (“RMB”) as the functional currency. The results of operations denominated in foreign currency are remeasured at the average rate of exchange during the reporting period. The average rates of exchange from Dollars to RMB were 6.57 to 1 and 6.84 to 1 for the three months ended March 31, 2011 and 2010 or a 3.9% change, respectively. As of March 31, 2011, should the exchange rate of Dollars to RMB fluctuate by 1%, the Company would expect the impact on its financial statements to be approximately a $600 exchange gain or loss for each 1% change in the exchange rate. As of March 31, 2011, we do not anticipate significant impact on its financial statements due by the change of the exchange rate of Dollars to RMB.





Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at the balance sheet date. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (“US Dollars”) are dealt with as a separate component within stockholders’ equity. Translation adjustments net of tax totaled $1,461 and $30, for the three months ended March 31, 2011 and 2010, respectively.





REVENUE RECOGNITION





The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin 104 (ASC 605). Service revenue is recognized at the date services has been rendered, when a formal arrangement exists, the price is fixed or determinable, 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 the individuals as well as third-party payers, including PRC government programs and insurance providers, under which the hospital is paid based upon several methodologies including established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Revenues are recorded at estimated net amounts due from patients, third-party payers and others for healthcare services provided at the time the service is provided. Revenues for pharmaceutical drug sales are recognized upon the drug being administered to a patient or at the time a prescription is filled for a patient that contain an executed prescription slip by a registered physician.





Revenues are recorded at estimated net amounts due from patients and government Medicare funds. The Company's accounting system calculates the expected amounts payable by the government Medicare funds. The Company bills for services provided to Medicare patients through a medical card (the US equivalent to an insurance card). There has not been significant differences between the amounts the Company bills the government Medicare funds and the amounts collected from the Medicare funds.


9
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued





ACCOUNTS RECEIVABLE





Accounts receivable are recorded at the estimated net realizable amounts from government units, insurance companies and patients. Generally, the third-party payers reimburse the Company on a 30-day cycle, so collections for the Company has historically not been considered to be an area that exposes the Company to additional risk. Hospital staff does perform verification of patient coverage prior to examinations and/or procedures taking place.





For any Medicare patient who visits the hospital that is qualified for acceptance, the hospital will only include the portion that the social insurance organization in the accounts receivable and collects the self-pay portion in cash at the time of the service. At times, the pre-determined rate the hospital will charge may be different than the approved Medicare rate, thus the likelihood of some bad debt can occur. Management continues to evaluate this estimate on an ongoing basis.





The Company has established a reserve for uncollectible of approximately $60,000 as of March 31, 2011 and December 31, 2010.





FAIR VALUE OF FINANCIAL INSTRUMENTS





The Company applies the provisions of accounting guidance, FASB ASC Topic 825 that 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, 2011 and 2010 the fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other payables approximated 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





Effective January 1, 2009, the FASB ASC Topic 825 “Financial Instruments,” requires disclosure about fair value of financial instruments.





The FASB ASC Topic 820, Fair Value Measurements and Disclosures, clarifies the definition of fair value for financial reporting, 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, warrant derivative liability, 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).





10
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
  The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring 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 at 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





CONCENTRATIONS, RISKS, AND UNCERTAINTIES





All of the Company’s operation is 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. Also, the success of the Company’s operations are subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, price of medicine, competition, governmental and political conditions, and changes in regulations. Because the Company is dependent on domestic market in 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 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 a lower of weighted average cost or market basis.   Inventory includes product cost, inbound freight, warehousing costs and vendor allowances not included as a reduction of advertising expense. The management compares the cost of inventories with the market value and allowance is made for writing down their inventories to market value, if it is lower.





PREPAID EXPENSES AND OTHER CURRENT ASSETS





Prepaid expenses and other current assets consisted of the following as of March 31, 2011 and December 31, 2010





March 31, 2011


December 31, 2010Other receivable

$
11,643


$
15,315Advance to suppliers


63,143



55,383Total

$
74,786


$
70,698





PROPERTY AND EQUIPMENT





Property and equipment are stated at cost.  Depreciation is computed over the estimated useful lives of the related asset type using the straight-line method for financial statement purposes. 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 property or equipment is disposed, the cost and related accumulated depreciation and amortization are removed from the accounts and any gain or loss is included in other income or expenses.


11
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued





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 and readiness for use of the project, the cost of construction-in-progress is to be transferred to fixed assets, at which time depreciation will commence. As of March 31, 2011, the Company has incurred and capitalized into construction-in-progress $5,964,647 of costs and $0 of capitalized interest.  The estimated cost to be incurred in 2011 and 2012 to complete the project is approximately $2,733,000.





ADVERTISING COSTS





The Company expenses the costs associated with advertising as incurred. Advertising expenses (credits) for the three month periods ended March 31, 2011 and 2010 of $3,470 and $2,671, respectively are included in selling and promotional expenses in the statements of income. Advertising costs include marketing brochures and an advertising campaign to the public.





IMPAIRMENT OF LONG-LIVED ASSETS





The Company’s long-lived assets and other assets (consisting of property and equipment and purchased intangible assets) are reviewed for impairment in accordance with the guidance of the 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, including property, plant and equipment and intangible 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 as 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 period ended March 31, 2011.


12
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


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.


INCOME TAXES





The Company adopts FASB ASC Topic 740, "Income Taxes,” which 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 the relevant tax laws and regulations of PRC and US, the corporation income tax rate would typically be 33% in the PRC. The Company has received a waiver (duty free certificate) from the taxing authorities in the PRC for corporate enterprise income tax for the year ended 2004 through 2006. Effective 2007, the Company will be taxed at the rate of 33%.





July 2006 the FASB issued 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.  Under ASC Topic 740-10, 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.





As a result of the implementation of FASB ASC Topic 740-10, the company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by ASC Topic 740-10.  The Company recognized no material adjustments to liabilities or stockholders’ equity in lieu of the implementation.  The adoption of FIN 48 did not have a material impact on the Company’s financial statements.




In accordance with the relevant tax laws and regulations of PRC and US, the corporation income tax rate would typically be 33% in the PRC. The Company has received a waiver (duty free certificate) from the taxing authorities in the PRC for corporate enterprise income tax for the year ended 2004 through 2006. Effective 2007, the Company was taxed at the rate of 33%.





13
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued





Beginning January 1, 2008, the new Enterprise Income Tax (EIT) law will replace the existing laws for Domestic Enterprises (DES) and Foreign Invested Enterprises (FIEs). The new standard EIT rate of 25% replaced the 33% rate currently applicable to both DES and FIEs.





In addition, companies in the PRC are required to pay business taxes consisting of 5% of income they derive from providing medical treatment and city construction taxes, and educational taxes are based on 7% and 3% of the business taxes, and the Company had accrued these taxes for 2005. The Company has received notification that they are exempt from these taxes for the years ending 2006 through 2008. The company become normal taxpayer in 2009 and need to pay the above taxes. On April 2010, the Company was granted the exempt status from these taxes and the exempt period was retroactive back to January 1, 2009 until further change.




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.




COMMITMENTS AND CONTINGENCIES





Certain conditions may exist as of the date the 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 in the Company’s financial statements. 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.





SEGMENT REPORTING





FASB ASC Topic 280, "Segment Reporting", requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. FASB ASC Topic 280 has no effect on the company’s consolidated financial statements as the company consists of one reportable business segment. All revenue is from customers in People’s Republic of China. All of the company’s assets are located in People’s Republic of China.





STATEMENT OF CASH FLOWS





In accordance with FASB ASC Topic 230, "Statement of Cash Flows," cash flows from the Company's operations is 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.





14
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued





EMPLOYEE BENEFIT COSTS





According to Chinese regulations on pensions, a company contributes to a defined contribution retirement plan organized by the municipal government in the province in which the Company’s subsidiary is registered and all qualified employees 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 binomial pricing 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 condensed consolidated statement of operations and other comprehensive income. 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 $395 and $0 for the three months ended March 31, 2011 and 2010, respectively.





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 of $62,804 and a loss of $121,980 for the three months periods ended March 31, 2011 and 2010, 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 $84,538 and $83,077 as of March 31, 2011 and December 31, 2010, respectively.





RECENT ACCOUNTING PRONOUNCEMENTS





In December 2010, the FASB issued ASC Topic 720 "Other Expenses": Fees Paid to the Federal Government by Pharmaceutical Manufacturers (SEC Update). The purpose of this Update is to address questions concerning how pharmaceutical manufacturers should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act. The Company does not expect the provisions of ASC Topic 720 to have a material effect on the financial position, results of operations, or cash flows of the Company.





In August 2010, Accounting Standards Update (“ASU”) 2010-24 was issued.  This update amends ASC Topic 954-450 to require that anticipated insurance settlements from malpractice claims not be offset against the accrual for the malpractice claim.  The Company management believes that this pronouncement will not have a material effect on its financial statements.




In August 2010, ASU 2010-23 was issued.  This amends ASC Topic 954 to require the disclosure of charity care be disclosed at cost.  The Company management believes that this pronouncement will not have a material effect on its financial statements.




In May, 2010, the FASB issued ASC Topic 830 "Foreign Currency": Foreign Currency Issues: Multiple Foreign Currency Exchange Rates (SEC Update). The purpose of this Update is to codify the SEC Staff Announcement made at the March 18, 2010 meeting of the FASB Emerging Issues Task Force (EITF) by the SEC Observer to the EITF. The Staff Announcement provides the SEC staff’s view on certain foreign currency issues related to investments in Venezuela. The Company does not expect the provisions of ASC Topic 830 to have a material effect on the financial position, results of operations, or cash flows of the Company.





In April 2010, the FASB issued ASC Topic 740 "Income Taxes" : Accounting for Certain Tax Effects of the Health Care Reform Acts (SEC Update). The purpose of this Update is to address questions concerning how pharmaceutical manufacturers should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act. The Company does not expect the provisions of ASC Topic 740 to have a material effect on the financial position, results of operations, or cash flows of the Company.





15
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


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 cash flows of 169,439, negative working capital of $6,308,792, and an accumulated deficit of $302,248 as of March 31, 2011.  In view of the accumulated losses, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and succeed in its future operations, The 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 be unable 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 continue actively seeking additional funding, such as making the major shareholders contribute additional capital  3) plan to increase sales revenue with better service and advertising control 4) better control of  operating expenses, to increase the profitability.








NOTE 3- PROPERTY & EQUIPMENT





Property & equipment as of March 31, 2011 and December 31, 2010 comprised of the following:





Estimated Useful Lives (Years)

March 31, 2011


December 31,2010Office equipment
5-10

$
82,241


$
76,140Medical equipment
5


1,335,331



1,318,680Fixtures
10


118,924



118,203Vehicles
5


42,510



42,246Total property and equipments



1,579,006



1,555,269Less accumulated depreciation



(969,584)



(925,181)Property and equipment, net


$
609,422


$
630,088





Depreciation expense charged to operations was $38,502 and $35,592 for the three month periods ended March 31, 2011 and 2010, respectively.








NOTE 4- CONSTRUCTION IN PROGRESS





As of March 31, 2011 and December 31, 2010, the Company’s construction in progress amounted to $5,964,647 and $5, 551,527 respectively. It consists of payments for construction costs, acquisition cost, land rights cost, development expenditure, and professional fees for a new hospital on leased land. The Company is required to make total payments of approximately $7,587,300 for construction costs during the construction phase. The company is also responsible for payments in excess of $7,587,300. The land lease term will start in September 2011. The new hospital is expected to be finished in 2012.


The Company will amortize the cost of the hospital over the life of the land lease.


16
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


NOTE 5- MAJOR SUPPLIERS AND CUSTOMERS





The Company had one supplier that accounted for 68% and 64% of purchase for the three month period ended March 31, 2011 and 2010. Accounts payable to this major supplier was $612,669 and $460,841 as of March 31, 2011 and 2010.





The Company had two major customers for the three month period ended March 31, 2011 and 2010: Nanning Social Insurance Center and Guangxi Province Social Insurance Center. Nanning Social Insurance Center accounted for 41% and 39% of revenue for the three months ended March 31, 2011 and 2010. Guangxi Province Social Insurance Center accounted for 11% and 14% of revenue for the three months ended March 31, 2011 and 2010.





As of March 31, 2011 and 2010, accounts receivable due from Nanning Social Insurance Center was approximately $304,800 and $256,000 respectively. As of March 31, 2011 and 2010, accounts receivable due from Guangxi Province Social Insurance Center was approximately $47,000 and $48,000 respectively.








NOTE 6- CAPITAL LEASE OBLIGATIONS:





Deferred Gain on Sale and Lease Back





The total gain on sale and lease back was $346,393. According to FASB ASC Topic 840 "Accounting for Leases" this gain is deferred and amortized over the Lease term of 36 months. Accordingly, $0 and $27,831 were amortized for the three month period ended March 31, 2011 and 2010 respectively.





There was no deferred revenue outstanding as of March 31, 2011 and December 31, 2010.








NOTE 7- OTHER PAYABLE





Other payable as of March 31, 2011 and December 31, 2010 consists of the following:





March 31, 2011


December 31,2010Advance from customers

$
-


$
13,577Welfare payable


54,576



69,285Other payable


209,108



178,730Total

$
263,684


$
261,592











17
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


NOTE 8- STOCKHOLDERS' EQUITY





Preferred Stock





As of March 31, 2011 and December 31, 2010, 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, 2011.





Common Stock





As of March 31, 2011 and December 31, 2010, 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 People’s Republic of China (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 of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “Statutory common welfare fund”, which is established for the purpose of providing employee facilities and other collective benefits to the Company’s employees; and





iv.
Allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.





Pursuant to the new Corporate Law effective on January 1, 2006, there is now only one "Statutory surplus reserve" requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.





As of March 31, 2011, the Company had accumulated deficits of $302,248. Therefore, the Company did not appropriate reserve for the statutory surplus reserve for the three months period ended March 31, 2011.
  Stock Option





Stock-based compensation amounted to $395 and $0 in the three months ended March 31, 2011 and 2010, respectively.





On March 3, 2011, an option to purchase 100,000 shares of common stock was granted to a company officer. The option vests  in three 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 binomial valuation model to be $15,400.   The valuation was based on the assumptions noted in the following table.





18
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


NOTE 8- STOCKHOLDERS' EQUITY - continued




Expected volatility


105
%Expected dividends


0
%Stock price

0.24Expected term (in years)

3 yearsRisk-free rate


1.32
%





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

Expensed2011

$
3,8682012


5,1332013


5,1332014


871Thereafter


-Total

$
15,005





The following table summarizes stock option activity in the Company's stock-based compensation plans for the three months ended March 31, 2011.




Number of

Shares


Weighted

Average

Exercise

Price


Aggregate

Intrinsic Value

(in thousands)


Number of

Shares

ExercisableOutstanding at January 1, 2011


-


$
-


$
-



-Granted


100,000



0.24



-



-Exercised


-



-Cancelled/expired


-



-Outstanding at March 31, 2011


100,000


$
0.24


$
-



-








NOTE 9- PROVISION FOR INCOME TAXES





In accordance with the relevant tax laws and regulations of PRC, the corporate income tax rate is 25%. As noted, the corporate income tax was 0% due to the Company's receipt of a waiver (tax relief) from the PRC government as they acquired a previous government-owned hospital privatized it and improved it.





The tax provision is as follows:





Three month period endedMarch 31,2011


2010PRC Tax

$
-


$
-Current tax provision in U.S.

$
-


$
-





19
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


NOTE 9- PROVISION FOR INCOME TAXES - continued





Had the tax exemption not been in place for the three month period ended March  31, 2011 and 2010, the Company estimates the following proforma financial statement impact:





Three month period ended March 31,2011


2010Net income/( loss) before tax provision, as reported

$
61,343


$
(122,010
)Less tax provision not exempted


-



-Less tax (provision) benefit  exempted


(15,336
)


30,503Proforma net income/( loss)

$
46,007


$
(91,507
)Proforma net income/ loss per shareBasic and diluted

$
.003


$
(.005
)








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 or warrants 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:





Income


Shares


Per Share(Numerator)


(Denominator)


AmountUS$





US$For the three months ended March 31, 2011:Net income


61,343Basic EPS income available to common shareholders


61,343



15,812,191



0.004Effect of dilutive securities:Diluted EPS income available to common shareholders


61,343



15,812,191



0.004For the three months ended March 31, 2010:Net loss


(122,010)Basic EPS loss available to common shareholders


(122,010)



15,812,191



(0.008)Effect of dilutive securities:Options


-



-Diluted EPS loss available to common shareholders


(122,010)



15,812,191



(0.008)








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 shareholders. The advanced amounts accrue interest at a rate of 1.5% per annum. The amount of receivable as of March 31, 2011 and December 31, 2010 was $49,607 and $47,864 respectively. Interest income for the three months periods ended March 31, 2011 and 2010 were approximately $185 and $161, respectively.


20
 
 TONGJI HEALTHCARE GROUP, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011


NOTE 11- RELATED PARTY TRANSACTIONS AND COMMITMENTS - continued





The Company has entered into an agreement with the Chairman and the shareholder 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, 2011 and December 31, 2010, $6,186,608 and $5,928,509 were payable to these related parties respectively.  Interest expenses for the three month periods ended March 31, 2011 and 2010 were $19,376 and $23,114, 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 payments are $2,502 (RMB16,439).  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 January 2012. 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 lease term will start on September, 2011. The annual lease payments will gradually increase each year. Based on the exchange rate at December 31, 2010, minimum future lease payments are as follows:





Related Party


Non-Related Party


Total1-5 years

$
149,650


$
2,329,916


$
2,479,5666-10 years


29,930



2,699,744



2,729,67411-15 years


-



3,069,572



3,069,57216-20 years


-



3,350,641



3,350,641Total

$
179,580


$
11,449,873


$
11,629,453









































21





Item 2.       Management’s Discussion and Analysis or Plan of Operation.





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 Peoples Republic of China ("PRC") by the 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 contains specialties 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. 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 the wholly owned subsidiary of Tongji Healthcare Group, Inc. as Tonji, Inc. was dissolved.  We have been in the business of operating hospitals and providing healthcare services in Nanning, Guangxi Province of the People’s Republic of China.   Unless otherwise provided, all references to “the Company”, “us”, “we” refer to Tongji Healthcare Group, Inc. and its subsidiary, Nanning Tongji Hospital, 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, with NTH being treated as the continuing operating entity.





According to the PRC Regulation of Healthcare Institutions, hospitals shall be subject to register with the Administration of Health of the local government to obtain business license for hospital services. We received our renewed business license from Nanning's government in November of 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.
 
 Because we maintain a facility with an excess of 100 beds, we must register with and maintain an operating license from the local Administration of Health. We are subject to be reviewed by the local administration of health 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 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, patient service revenue and other revenue (namely pharmaceutical drug sales).   About 50% 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 on a supply contract. The rest are from around 30 different suppliers, none of them consisting of more than 10% of our total purchases.





22





Item 2.       Management’s Discussion and Analysis or Plan of Operation-continued





The Company generates revenue from the individuals as well as third-party payers, including PRC government programs and insurance providers, under which the hospital is paid based upon several methodologies including established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Revenues are recorded at net amounts due from patients, third-party payers and others for healthcare services provided at the time the service is provided. Revenues for pharmaceutical drug sales are recognized upon the drug being administered to a patient or at the time a prescription is filled for a patient that contain an executed prescription slip by a registered physician.





Revenues are recorded at net amounts due from patients and government Medicare funds. The Company's accounting system calculates the expected amounts payable by the government Medicare funds. The Company bills for services provided to Medicare patients through a medical card (the US equivalent to an insurance card). The Company normally receives 90% of the billed amount within 90 days with the remaining 10% upon approval by the end of the year by the PRC government. However, there have not been significant differences between the amounts the Company bills 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 which provide that patients with health insurance will be charged reduced rates for healthcare services. Reduced rates are also charged for Medicare and Medicaid patients. Although the patient is billed for the services provided by the hospital at the higher rate normally charged to patients without insurance the amount billed is 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 which 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 adjustments for contractual allowances. Revenues are recorded based upon the amounts due from the patients and third-party payors, 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 payor arrangements are based upon the payment terms specified in the related contractual agreements. Third-party payor 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 payors, 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 China is different from that in the United States. Private medical insurance is not generally available to the Chinese 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 to which we are entitled based upon regulations promulgated by the Medicare agencies. We bill the Medicare agencies directly for services provided to patients coved by the Medicare programs.


23





Item 2.       Management’s Discussion and Analysis or Plan of Operation-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 March 31, 2011





Material changes of items in our Statement of Operations for the three months ended March 31, 2011, as compared to the three months ended March 31, 2010, are discussed below.





Operating Revenues –Operating revenue for the three months ended March 31, 2011, which resulted primarily from patient services revenue and other operating revenue (out-patient service and pharmaceutical drug sales), were $623,989 an increase of 62% as compared with the operating revenue of $384,767 in the same period of prior year. The increase was mainly from the patient services sector, where a new department was added. Other operating revenue from out-patient service and pharmaceutical drug sales of $228,281 during the quarter ended March 31, 2011 represents a 13% decrease from the comparable period in 2010.  This decrease was attributable primarily to more emphasis being placed on in patient services as compared with out-patient service and pharmaceutical drug sales.





Selling, general and administrative expenses –Selling, general and administrative expenses increased by $63,780 or 32% from $195,873 for the three-month period ended March 31, 2010 compared to $259,653 for the three-month period ended March 31, 2011.  This increase was due to significant expense increase in salary, maintenance, and office expenses.





Medicine and supplies costs- Medicine and supplies costs decreased by $9,261 or 4% from $254,272 during the three months ended March 31, 2010 to $245,011 during the three months ended March 31, 2011.   This decrease was due decreased in revenue from pharmaceutical drug sales.





Depreciation Expense –Depreciation expense increased to $38,502 from $35,592 during the three month periods ended March 31, 2011 and 2010, respectively.  The increase was primarily due to the recapitalization of an asset.





Interest Expense –Interest expense for the three-month period ended March 31, 2011 were $19,376 as compared to $23,114 for the three-month period ended March 31, 2010, which were related to debts to related parties and capital lease obligation.





As a result of forgoing, the Company had a net income of $61,343 during the first quarter of 2011, compared to a net loss of $122,010 for the first quarter of a year ago.





Trends, Events and Uncertainties





The China Ministry of Health, as well as other related agencies, has proposed changes to the prices 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 ever be implemented or when they may take effect.





24





Item 2.       Management’s Discussion and Analysis or Plan of Operation-continued





We are in the process of cooperating with Guangxi Construction Engineering Corporation Langdong 8th Group in building a new 600-bed hospital in Nanning, China. We expect the new hospital to be completed by January 2012. The hospital is being constructed by Guangxi Construction Engineering Corporation Langdong 8th Group and, when completed, will be leased by us for a twenty-year term.  The lease payment will start on September 2011. The annual lease payments will gradually increase each year. Our agreement with Langdong 8th Group requires us to make payments of approximately $7,587,000 for construction cost to Langdong 8th Group during the construction phase.  As of March 31, 2011 we had paid $5,964,647 towards this amount. We borrowed most of the paid funds from our related company Guangxi Tongji Medicine Co., Ltd. When the new hospital is complete, we will continue to operate our existing hospital.





We plan to acquire other hospitals and companies involved in the healthcare industry in the People’s Republic of China 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.





Accounting Estimates





In the United States most hospitals have contracts with health insurance companies, which provide that patients with health insurance will be charged reduced rates for healthcare services. Reduced rates are also charged for Medicare and Medicaid patients. Although the patient is billed for the services provided by the hospital at the higher rate normally charged to patients without insurance the amount billed is 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 which 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 fewer adjustments for contractual allowances. Revenues are recorded based upon the estimated amounts due from the patients and third-party payors, 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 payor arrangements are based upon the payment terms specified in the related contractual agreements. Third-party payor contractual payment terms are generally based upon predetermined rates per diagnosis, per diemrates, 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 payors, 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 China is different than that in the United States. Private medical insurance is not generally available to the Chinese 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 to which we are entitled based upon regulations promulgated by the Medicare agencies. We bill the Medicare agencies directly for services provided to patients coved by the Medicare programs. Since we bill the Medicare agencies directly, our gross revenues are not reduced by contractual allowances.





25





Item 2.       Management’s Discussion and Analysis or Plan of Operation-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.


Liquidity and Capital Resources





The following shows our material sources and (uses) of cash during the periods presented: Three Month Periods Ended March 31, 2011 and 2010:





2011


2010Cash provided by/(used in) operating activities

$
1,695


$
(14,812
)Cash (used in) investing activities

$
(392,655)


$
(214,441
)Cash provided by financing activities

$
220,761


$
223,286





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, which is now under construction.  Financing of operations has come primarily from advances from related parties.  We are dependent on related parties to provide working capital and pay for the Company’s management team until such time as we reach a profitable level of operations.  There can be no assurances that related parties will continue to provide additional working capital.  Without additional working capital, we may be forced to cease operations and liquidate.





Based on the exchange rate at December 31, 2010, minimum future lease payments are as follows:





Related Party


Non-Related Party


Total1-5 years

$
149,650


$
2,329,916


$
2,479,5666-10 years


29,930



2,699,744



2,729,67411-15 years


-



3,069,572



3,069,57216-20 years


-



3,350,641



3,350,641Total

$
179,580


$
11,449,873


$
11,629,453





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.





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Item 4.       Controls and Procedures.





Evaluation of our 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, 2011, 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, 2011 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.





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, 2011, 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, 2011.





27





Item 4.       Controls and Procedures - continued




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, 2011, 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.





2011 Planned Remediation





As financial conditions permit, we plan to take the following actions to improve our internal control over financial reporting, including actions to remediate those material weaknesses identified in 2010.





·
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:








28





Item 4.       Controls and Procedures - continued




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.








29





PART II - OTHER INFORMATION





Item 1.
Legal Proceedings.





There is no material legal proceeding pending against us.




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.
(Removed and Reserved).




Item 5.
Other Information





Not applicable.





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.
SEC Ref. No.
Title of Document1
31.1
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 20022.
31.2
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 20023
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*4
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*
 
 *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.







30











SIGNATURES





In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.








Date: May 19, 2011





TONGJI HEALTHCARE GROUP, INC.By:
/s/ Yunhui YuYunhui Yu

President and Chief Executive Officer

(Principal Executive Officer)











By:
/ s/ Eric ZhangEric Zhang

Chief Financial Officer

(Principal Financial Officer)
































31