Item 1. Business
History
Nanning Tongji Hospital, Inc. ("NTH" or “Tongji Hospital”) was established in Nanning, Guangxi province of the People’s Republic of China ("PRC") by Nanning Tongji Medical Co. Ltd. and an individual on October 30, 2003.
NTH is an assigned hospital for medical insurance in both the city of Nanning and the province of Guangxi. NTH specializes in the areas of internal medicine, surgery, gynecology, pediatrics, emergency medicine, ophthalmology, medical cosmetology, rehabilitation, dermatology, otolaryngology, traditional Chinese medicine, medical imaging, anesthesia, acupuncture, physical therapy, health examination, and prevention.
On December 19, 2006, the officers of NTH established Tongji Healthcare Group, Inc., a Nevada corporation (the "Company"), and Tongji, Inc., a Colorado corporation ("Tongji"), a wholly owned subsidiary of the Company. The Company was authorized to issue 50,000,000 shares of common stock and 20,000,000 shares of preferred stock both with a par value of $0.001.
On December 27, 2006, Tongji acquired 100% of the equity in NTH pursuant to an Agreement and Plan of Merger. The Company issued 15,652,557 shares of its 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.
In March, 2011, Tongji was dissolved pursuant to the laws of Colorado. Unless otherwise provided, references to the “Company” shall hereinafter include the Company and NTH.
Item 1. Business - continued
Corporate Structure
Our present corporate structure is as follows:
Our Business
We operate Tongji Hospital, a general hospital with 105 licensed beds. Tongji Hospital offers care and treatment 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, prevention, and emergency care. Our emergency room is open 24 hours a day and all of our rooms are air conditioned.
Tongji Hospital is certified as a provider of Medicare services by the Nanning municipal government and the Guangxi provincial government. Our Medicare agreements with the Nanning municipal government and the Guangxi provincial government require that we adhere to prescribed standards for patient care and treatment. Maintaining the qualifications for acceptance of Medicare patients is very important as revenue from Medicare patients accounted for 59% of total hospital income in 2016. The Medicare accreditation is valid for only one year and must be renewed on an annual basis.
Because we maintain a facility in excess of 100 beds, we must register with and maintain an operating license from the local Administration of Health. We are subjected to review 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. Currently, we dedicate a very small percentage of our resources to providing free public services.
As is common in China, we generate revenues from providing both medical treatment and the sale of drugs and medications. Approximately 1.5% of the drugs and medications we use in the hospital and sell to our patients in 2016 are purchased from Guangxi Tongji Medicine Co., Ltd., a related company controlled by our Chief Executive Officer, Yunhui Yu, at prevailing market prices pursuant to a supply contract. The rest are from around 22 different suppliers, three of which collectively accounted for more than 85% of our total purchases in 2016.
We generate revenues from 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 from pharmaceutical drug sales are recognized upon the drug being administered to a patient or at the time a prescription is filled for a patient with an executed prescription slip by a registered physician.
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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 of an insurance card). The Company normally receives 90% of the billed amount within 90 days with the remaining 10% upon the Company’s reconciliation by the end of the year. Historically, there have been no significant differences between the amounts the Company bills the government Medicare funds and the amounts collected from the Medicare funds.
Some differences exist 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 on established billing rates less adjustments for contractual allowances. Revenues are recorded based on 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 the 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.
In contrast, 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 on regulations promulgated by the Medicare agencies. We bill the Medicare agencies directly for services provided to patients covered by the Medicare programs. Since we bill the Medicare agencies directly, our gross revenues are not reduced by contractual allowances.
We only deal with the Nanning municipal and the Guangxi provincial Medicare agencies, and 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.
In March 2016, Nanning Tongji Hospital, Inc. sold its construction in progress hospital building to Guangxi Yida Friendship Hospital Management, Inc. for RMB 86,000,000 (approximately $13,000,000). The hospital building is being constructed by Guangxi Construction Engineering Corporation Langdong 8th Group (“Langdong 8th Group”). Costs capitalized primarily consists of payments for construction costs, acquisition cost, land rights cost, development expenditure, professional fees, and capitalized interest. As of the date of disposal, we had accrued approximately $15,000,000 for the construction of the hospital. As a result of the sale, we increased the other receivables to approximately $13,000,000. Concurrently, the remaining balance results in an extraordinary loss in the approximate amount of $2,000,000 in 2016. As of December 31, 2016, we received payment of approximately $5,400,000. We incurred value-added tax (VAT) and other taxes liability of RMB 4,530,000 (approximately $682,227) related to this transaction. The amount is included in other payables.
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.
Item 1. Business - continued
Regulations pertaining to our Business
According to the PRC Regulation of Healthcare Institutions, hospitals shall register with the Administration of Health of the local government to obtain the necessary business license for the provision of hospital services. We received our renewed business license from Nanning City 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.
Customers
The Company had three major customers for the years ended December 31, 2016 and 2015: Nanning Social Insurance Center, Guangxi Province Social Insurance Center, and China UMS. Nanning Social Insurance Center accounted for 49% and 36% of revenue for the years ended December 31, 2016 and 2015, respectively. Guangxi Province Social Insurance Center accounted for 10% and 5% of revenue for the years ended December 31, 2016 and 2015, respectively. China UMS accounted for 12% and 15% of revenue for the years ended December 31, 2016 and 2015, respectively.
Suppliers
The Company purchases the majority of its medicine supplies from three suppliers which collectively accounted for more than 85% of our total purchases in 2016. The rest are from around 22 different suppliers. One of the suppliers, Guangxi Tongji Medicine Co. Ltd., is a related company that our Chief Executive Officer controls and accounted for 1.5% of our total purchases in 2016.
Competition
We compete with eleven government-owned hospitals and three privately owned hospitals in the city of Nanning. We believe that we will be able to effectively compete with them because we:
· Provide advanced medical facilities and a comfortable environment for our patients
· Maintain the highest level of professional healthcare
· Offer competitive prices for medical treatment and drugs and medications.
Marketing
To increase our visibility we built several “Tongji Hospital” signs at locations near our hospital and some busy streets in Nanning city. We also send out our experts and medical team to communities to provide free public services including consultation and medical services to attract customers. Some other marketing activities include media advertising, holiday promotions, telephone services, and reduced fees.
In the future we plan to further strengthen our marketing efforts and improve our brand awareness through advertising in newspapers, magazines and on television. We will continue to focus on community medical service by maintaining good relationships with our communities, and providing quality medical service to the neighborhood residents. We will set up our marketing department and team to focus on specific market and patients. We understand that the key to success is to provide quality services. Marketing expenses for the year ended December 31, 2016 are approximately $2,000. Budgeted marketing expenses for the year ended December 31, 2017 are approximately $9,000 in an effort to improve our brand awareness.
Item 1. Business - continued
PRC Laws and Regulations Affecting Our Business
Healthcare providers in China are required to comply with many laws and regulations at the national and local government levels. These laws and regulations include the following:
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We must register with and maintain an operating license from the local Administration of Health. We are subject to review by the local Administration of Health at least once every three years. If we fail to meet the standards listed below, our license may be revoked.
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The Licensed Physician Act requires that we only hire doctors who have been licensed by the PRC government.
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All drugs and medications used in our hospital must be prepared, transported, and used under the supervision of our internal Commission of Drug Affairs Management.
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All waste materials from our hospital must be properly collected, sterilized, deposited, transported and disposed of. We are required to keep records of the origin, type and amount of all waste materials generated by our hospital.
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We must have at least 20 beds and at least 14 medical professionals on staff, including three doctors and five nurses.
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We must provide medical services in a variety of areas, including: surgery, internal medicine, gynecology, emergency care, ophthalmology, traditional Chinese medicine, medical imaging, and physical therapy.
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We must establish and follow protocols to prevent medical malpractice. The protocols require us to:
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insure that patients are adequately informed before they consent to medical operations or procedures;
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maintain complete medical records which are available for review by the patient, physicians and the courts;
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voluntarily report any event of malpractice to a local government agency;
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support the medical services we provide in any administrative investigation or litigation.
If we fail to comply with applicable laws and regulations, we could suffer penalties, including the loss of our license to operate.
Before we can acquire a hospital or a company in the healthcare field in the PRC, we will be required to submit an application to the PRC Ministry of Commerce. As part of the application we must submit a number of documents, including:
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Our financial statements and the financial statements of the company we propose to acquire,
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A copy of the business license of the company we propose to acquire,
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Evidence that the shareholders of the company we propose to acquire have approved the transaction, and
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An appraisal, conducted by an independent party, of the value of the company we propose to acquire.
Our agreements with the Nanning Municipal and the Guangxi Provincial Medicare Funds require us to:
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Resolve any patient complaints on a timely basis;
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Follow the Basic Medical Treatment Insurance procedures of the City of Nanning and the Province of Guangxi;
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Report any accident to the Medicare Funds within 72 hours;
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Determine if patients are eligible for coverage by the Medicare Funds;
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Control costs by refraining from unnecessary treatments or procedures; and
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Discharge in-patients when their medical condition allows so as not to prolong their stay in the hospital.
Our agreements are renewed annually if approved by the Medicare Funds.
Taxes
In accordance with the relevant tax laws and regulations of PRC, the corporation income tax rate is 25% of net income. The Company incurred no income taxes for the years ended December 31, 2016, 2015 and 2014 due to net losses incurred in each of those three years.
Item 1. Business - continued
In addition, companies in the PRC are required to pay business taxes consisting of 5% of revenue from providing medical treatment, and city construction taxes and educational taxes of 7% and 3%, respectively of the business taxes. The Company was granted an exemption from the local tax bureau from these taxes in April 2010. The tax exempt status will remain effective until notification from the tax bureau.
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. However, the Company may be subject to penalties of approximately $40,000 for failure to file United States income tax returns and Form 5472 from 2006 to 2009. The Company is in the process of requesting penalty abatement from the IRS. The Company is current in its tax filings in the US.
Required Statutory Reserve Funds
In accordance with current Chinese laws, regulations and accounting standards, we are required to set aside as a general reserve at least 10% of our after-tax profits. Appropriations to the reserve account are not required after these reserves have reached 50% of our registered capital. These reserves are created to fund potential operating losses and are not distributable as cash dividends. We are also required to set aside between 5% to 10% of our after-tax profits to the statutory public welfare reserve. In addition, at the discretion of our directors, we may set aside a portion of our after-tax profits for enterprise expansion funds, staff welfare and bonus funds and a surplus reserve. These statutory reserves and funds can only be used for specific purposes and may not be distributed as dividends.
Employees
As of April 14, 2017, we have 95 employees, consisting of 14 licensed physicians and medical professionals, 32 nurses, 7 pharmacists, and 42 employees in administration and finance. None of our employees are represented by a labor union or similar collective bargaining organization. We believe that our relations with our employees are good.
Item 1A.
Item 1A. Risk Factors.
Not applicable.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
All land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants landholders a "land use right" after a purchase price for such "land use right" is paid to the government. The "land use right" allows the holder to use the land for a specified long-term period of time and enjoys all the incidents of ownership of the land. The following are the details regarding our land use rights of the land that we use in our business.
We lease our two hospital buildings, one for in-patient service and the other for out-patient, from Guangxi Tongji Medicine Co., Ltd, a company controlled by our Chief Executive Officer, Yunhui Yu. The lease on the buildings was renewed on March 1, 2015 for a further three-year term with a monthly rent of approximately $4,800. The rate was negotiated at arm’s length.
In March 2016, Nanning Tongji Hospital, Inc. sold its construction in progress hospital building to Guangxi Yida Friendship Hospital Management, Inc. for RMB 86,000,000 (approximately $13,000,000). The hospital building is being constructed by Guangxi Construction Engineering Corporation Langdong 8th Group (“Langdong 8th Group”). Costs capitalized primarily consists of payments for construction costs, acquisition cost, land rights cost, development expenditure, professional fees, and capitalized interest. As of the date of disposal, we had accrued approximately $15,000,000 for the construction of the hospital. As a result of the sale, we increased other receivables to approximately $13,000,000. Concurrently, the remaining balance results in an extraordinary loss of approximately $2,000,000 in 2016. As of December 31, 2016, we have received payment of approximately $5,400,000. We incurred value-added tax (VAT) and other taxes liability of RMB 4,530,000 (approximately $682,227) related to this transaction. The amount is included in other payables.
Item 3.
Item 3. Legal Proceedings
In September 2009, Guangxi Nanning Tingyouyuxiang Commercial Co., Ltd. (“Tingyouyuxiang”) filed a civil suit against NTH in the People’s Court. In the complaint, Tingyouyuxiang asserted a breach of contract claim against NTH, alleging that NTH had failed to make timely and total payment of RMB 5,050,000 (approximately $800,000) under certain Supplement Agreement by and among NTH, Tingyouyuxiang and the Eighth Group of Langdong Village Committee, Nanhu Community Office, Qingxiu District, Nanning City (the “Village Committee”). On December 30, 2009, the People’s Court ruled that NTH shall pay to Tingyouyuxiang damages of RMB 5,050,000 (approximately $800,000) plus interest and the court hearing fee of approximately $320,000. On March 9, 2013, NTH appealed to the Intermediate Court, alleging, among other things, that NTH was never served. On June 6, 2013, the Intermediate Court remanded the case to the People’s Court. On April 16, 2014, the Intermediate Court dismissed Tingyouyuxiang’s appeal and affirmed the decision of the People’s Court. Upon settlement of the lawsuit, the Company had accrued approximately $1,370,000 in settlement payable as of December 31, 2016.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock trades on the OTCQB under the symbol "TONJ". There have been very little trades in our shares of common stock in 2016 and 2015 and no trades in 2014. The table below presents the high and low bid for our common stock for each quarter from January 1, 2016 through December 31, 2016 and from January 1, 2015 through December 31, 2015. These prices reflect inter-dealer prices, without retail markup, markdown, or commission, and may not represent actual transactions.
Holders of Securities
As of April 17, 2017, we had 300 record shareholders and 15,812,191 outstanding shares of common stock. All of our outstanding shares are eligible for sale pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person who is not one of our officers, directors, or principal shareholders, and who has owned their shares for at least six months, may sell their shares without limitation in the public market.
Holders of common stock are entitled to receive dividends as may be declared by our Board of Directors. The Board of Directors is not obligated to declare a dividend and it is not anticipated that dividends will ever be paid.
During the year ended December 31, 2016, we did not purchase any shares of our common stock from third parties in a private transaction or as a result of any purchases in the open market. None of our officers or directors, or any of our principal shareholders purchased any shares of our common stock, on our behalf, from third parties in a private transaction or as a result of purchases in the open market during the year ended December 31, 2016.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. - continued
Dividends
We have not declared or paid any cash dividends on our common stock since our inception, and our board of directors currently intends to retain all earnings for use in the business for the foreseeable future. Any future payment of dividends will depend upon our results of operations, financial condition, cash requirements and other factors deemed relevant by our board of directors. There are currently no restrictions that limit our ability to declare cash dividends on its common stock and we do not believe that there are any that are likely to do so in the future.
Recent Sales of Unregistered Securities
We did not issue any unregistered securities during the fiscal year 2016.
Item 6.
Item 6. Selected Financial Data.
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of such financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate these estimates, including those related to useful lives of real estate assets, bad debts, impairment, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates. The analysis set forth below is provided pursuant to applicable SEC regulations and is not intended to serve as a basis for projections of future events. See “Cautionary Statement Regarding Forward Looking Statements” above.
Overview
NTH or Tongji Hospital was established in Nanning City Guangxi Province of PRC by Guangxi Tongji Medical Co. Ltd. and an individual on October 30, 2003.
NTH is a designated hospital for medical insurance in City of Nanning and Guangxi Province. NTH specializes in the areas of internal medicine, surgery, gynecology, pediatrics, emergency medicine, ophthalmology, medical cosmetology, rehabilitation, dermatology, otolaryngology, traditional Chinese medicine, medical imaging, anesthesia, acupuncture, physical therapy, health examination, and prevention.
On December 27, 2006, we, through our wholly-owned subsidiary, Tongji, Inc., a Colorado company, acquired 100% of the equity in NTH pursuant to an Agreement and Plan of Merger. 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.
We have two sources of operating revenues: in-patient service revenues and out-patient service revenues. In addition to provide 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 local government established charges. Revenues are recorded at estimated net amounts due from patients or third-party payers. Revenues from pharmaceutical drug sales are recognized upon the drug being administered to a patient or at the time a prescription by a registered physician is filled.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
Patient revenues are recorded based on pre-established rates set by the local government. The Company bills for services provided to Medicare patients through a medical card (the US equivalent of an insurance card). Historically, there have been no significant differences between the amounts the Company has billed the government Medicare funds and the amounts collected from the Medicare funds.
Comparison of Years Ended December 31, 2016 and 2015
Operating Revenue
Operating revenue for the year ended December 31, 2016, which resulted primarily from in-patient services and out-patient services, was $1,934,032, a decrease of $441,544 or 19%, as compared with the operating revenue of $2,375,576 for the year ended December 31, 2015. Our in-patient service revenue was $1,110,228 for the year ended December 31, 2016, as compared to $1,098,044 for the year ended December 31, 2015 , a slight increase of $12,184 or 1%.
Our out-patient service revenue was $823,804 for the year ended December 31, 2016, a decrease of $453,728 or 36% as compared to $1,277,532 for the year ended December 31, 2015. The decrease of out-patient service was primarily due to the closure of our personnel medical care department and resignation of doctors from our out-patient department, resulting in fewer patients being treated.
Operating Expenses
Operating expenses were $2,486,062 for the year ended December 31, 2016, a decrease of $348,296 or 12% as compared to $2,834,358 for year 2015. The decrease is primarily due to the decrease of approximately $154,000 in impairment loss, the decrease of approximately $177,000 in medicine and supplies, and the decrease of approximately $100,000 in salary and fringes offset by the increase of approximately $100,000 in depreciation and amortization expense.
Loss from Operations
Operating loss was $552,030 for the year ended December 31, 2016, an increase of $93,248 or 20% as compared with operating loss of $458,782 for the year ended December 31, 2015. The increase is primarily due to the decrease in out-patient revenue.
Interest Expense
Interest expense in 2016 was $454,843 an increase of $283,049 or 17% as compared to $171,794 in the year 2015. The increase was primarily due to discontinued interest capitalization due to sale of construction in progress.
Income Taxes
The Company is subject to PRC income tax rate of 25%. The Company had a net operating loss for the years 2016 and 2015. Therefore we established no provision for income taxes for both years.
The Company accrued tax penalties of approximately $41,000 for not filing the US income tax returns between 2006 and 2009. The Company is otherwise current with its required US tax filings. 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 foreign operations indefinitely.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
Net Loss
As a result of the foregoing, we had a net loss of $973,489 for the year ended December 31, 2016, an increase of $384,932 or 65% compared with a net loss of $588,557 for the year ended December 31, 2015.
Liquidity and Capital Resources
The following shows our material sources and uses of cash during the periods presented:
Overview
We had net working capital deficit of $6,745,663 on December 31, 2016, which is a decrease of $12,408,291 over a net working capital deficit of $19,153,954 on December 31, 2015.
As we discussed above, we incurred a loss from operations of $522,030 for the year ended December 31, 2016, compared to a loss from operations of $458,782 for the year ended December 31, 2015. We incurred a net loss of $973,489 for the year ended December 31, 2016, compared to a net loss of $558,557 for the year ended December 31, 2015.
Cash and Going Concern
Our cash was $10,300 at the beginning of the year ended December 31, 2016 and increased to $47,597 by the end of the year, an increase of $37,297 or 362%. We have a negative working capital of $6,745,663, an accumulated deficit of $7,206,416, and a stockholders’ deficit of $6,162,728 as of December 31, 2016. 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. 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 2017, 3) plan to increase sales revenue with additional medical equipment, 4) the company intend to get more funds from a related party controlled by our CEO to complete the construction of the new hospital. No assurances can be given that the steps taken will provide necessary capital for the Company to continue its 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.
Net Cash Provided by Operating Activities
Net cash provided in operating activities was $384,356 for the year ended December 31, 2016, an increase of $426,260 as compared to cash used by operations of $41,904 for the year of 2015. Factors that contributed to the increase in cash provided by operating activities are primarily due to an increase of approximately $728,000 and $133,000 in changes in other payables and accounts receivable, respectively. The $3,053,000 increase in operating loss was largely offset by the loss from disposal of construction in progress of approximately $2,667,000.
Net Cash Used in Investing Activities
Net cash provided in investing activities was $4,676,432 for the year ended December 31, 2016, an increase of $5,518,479 from $842,047 used for the year of 2015. The increase was primarily attributable to the sale of the construction in progress hospital building.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
Net Cash Provided by Financing Activities
Net cash used by financing activities was $5,021,064 for the year ended December 31, 2016, a decrease of $5,906,149 as compared to $885,085 provided in 2015. The difference was primarily attributable to the payment to the related parties after the sale of the construction of the new hospital building.
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.
In March 2016, Nanning Tongji Hospital, Inc. sold its construction in progress hospital building to Guangxi Yida Friendship Hospital Management, Inc. for RMB 86,000,000 (approximately $13,000,000). The hospital building is being constructed by Guangxi Construction Engineering Corporation Langdong 8th Group (“Langdong 8th Group”). Costs capitalized primarily consists of payments for construction costs, acquisition cost, land rights cost, development expenditure, professional fees, and capitalized interest. As of the date of disposal, we had accrued approximately $15,000,000 for the construction of the hospital. As a result of the sale, we increased other receivables by approximately $13,000,000. Concurrently, the remaining balance results in an extraordinary loss of approximately $2,000,000 in 2016. As of December 31, 2016, we have received payment of approximately $5,400,000. We incurred value-added tax (VAT) and other taxes liability of RMB 4,530,000 (approximately $682,227) related to this transaction. The amount is included in other payable.
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.
Contractual Obligations and Off-Balance Sheet Arrangements
We do not have any off-balance sheet items reasonably likely to have a material effect on our financial condition.
Critical Accounting Policies and Estimates
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin 104 (ASC 605). Service revenue is recognized once all of the following have occurred and services were rendered: a formal arrangement exists, the price is fixed or determinable and collection is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
The Company generates revenue from individual patients as well as third-party payers, including PRC government programs and insurance providers, under which the hospital is paid based upon government established charge rates. Revenues for pharmaceutical drug sales are recognized upon the drug being administered to a patient.
Patient revenues are recorded based on pre-established rates set by the local government. The Company bills for services provided to Medicare patients through a medical card (the US equivalent of an insurance card). There have not been significant differences between the amounts the Company has billed the government Medicare funds and the amounts collected any other revenue recognition criteria, as described above, has been met from the Medicare funds.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
IMPAIRMENT OF LONG-LIVED ASSETS
The Company applies the provisions of FASB Topic ASC 360, “Property, Plant, and Equipment”, issued by the Financial Accounting Standards Board ("FASB"). The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. 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 subject to periodic amortization, 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. No impairment loss recorded in 2016.
BASIC AND DILUTED EARNINGS PER SHARE
Earnings per share is calculated in accordance with the FASB Topic ASC 260. 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.
The Company granted an option to purchase 100,000 shares of common stock to the Company’s CFO on March 31, 2011. Due to the net loss incurred in 2016 and 2015, the stock option has an antidilutive effect, therefore the option was not considered in the weighted average number of common shares outstanding calculation.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management's plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Financial Statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Tongji Healthcare Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Tongji Healthcare Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, statement of changes in stockholders’ deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that we considered appropriate under the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tongji Healthcare Group, Inc. and Subsidiaries as of December 31, 2016 and 2015 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, these conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
/s/ Anton & Chia, LLP
Newport Beach, California
April 17,
The accompanying notes are an integral part of these consolidated financial statements.
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1 - ORGANIZATION
Nanning Tongji Hospital, Inc. ("NTH") was established in Nanning in the province of Guangxi of the People’s Republic of China ("PRC") by the Nanning Tongji Medical Co. Ltd. and an individual on October 30, 2003.
NTH is a designated hospital for medical insurance in the city of Nanning and Guangxi province. NTH specializes in the areas of internal medicine, surgery, gynecology, pediatrics, emergency medicine, ophthalmology, medical cosmetology, rehabilitation, dermatology, otolaryngology, traditional Chinese medicine, medical imaging, anesthesia, acupuncture, physical therapy, health examination, and prevention.
On December 19, 2006, NTH filed Articles of Incorporation in the State of Nevada to establish Tongji Healthcare Group, Inc. (the "Company"). On the same day, Tongji, Inc., a wholly owned subsidiary of the Company, was incorporated in the State of Colorado. Tongji Inc. was dissolved on March 25, 2011.
On December 27, 2006, Tongji Inc. acquired 100% of the equity in NTH pursuant to an Agreement and Plan of Merger, pursuant to which NTH became a wholly owned subsidiary of Tongji. The Company was authorized to issue 50,000,000 shares of common stock, par value $0.001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share. The Company issued 15,652,557 shares of common stock to the stockholders of NTH in exchange for 100% of the issued and outstanding shares of common stock of NTH. Thereafter and for purposes of these consolidated financial statements the "Company" and "NTH" are used to refer to the operations of Nanning Tongji Hospital Co. Ltd. The acquisition of NTH was accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of NTH obtained control of the consolidated entity. Accordingly, the reorganization of the two companies was recorded as a recapitalization of NTH, with NTH being treated as the continuing operating entity.
According to the PRC Regulation of Healthcare Institutions, hospitals are subject to registration with the health department of the local government to obtain business license for hospital services. We received our renewed business license from Nanning municipal government in November 2007, and this license is valid until November, 2020. Other existing regulations having material effects on our business include regulations dealing with physician's licensing, usage of medicine and injection, and public security in health and medical advertising.
NTH must register with and maintain an operating license from the local health department, due to the fact that NTH currently maintains a facility with over 100 beds. NTH is subject to review by the local health department at least once every three years. If NTH fails to meet their standards, NTH’s business license may be revoked. NTH is also obligated to provide free services or dispatch our physicians or other employees in the event of a need for public assistance. NTH dedicates a very small percentage of its resources to providing free public services.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United States of America. The consolidated financial statements include Tongji Healthcare, Inc. and its wholly owned subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. Our policy is to consolidate all subsidiaries in which a greater than 50% voting interest is owned and all variable interest entities to which we had a variable interest and effectively control the entity.
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. All of the Company’s cash is held in bank accounts in the PRC and is not protected by Federal Deposit Insurance Corporation (FDIC) insurance or any other similar insurance. Cash held in China amounted to $47,597 as of December 31, 2016. Given the current economic environment and the financial condition of the banking industry, there is a risk that the deposits may not be readily available or covered by such insurance. The Company has had no loss of cash in domestic or foreign banks in past years. As of December 31, 2016 and 2015, we have no cash equivalents.
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
USE OF ESTIMATES
The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported assets and liabilities, disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of net revenues and expenses during the reporting period. Actual results may differ from those estimates and such differences may be material. The more significant estimates and assumptions by management include, among others, useful lives and residual values of equipment, valuation of medical supplies, accounts receivable, stock based compensation, accrued expense, construction in progress, intangibles, and deposits, and allowance for bad debt. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
TRANSLATION ADJUSTMENT
The Company's functional currency is the Chinese Renminbi (RMB). The reporting currency is that of the US Dollar. Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income and expenditures are translated at the average exchange rate of the year. The RMB is not freely convertible into foreign currency and all foreign currency exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollar at the rates used in translation.
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the financial statements were as follows:
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin 104 (ASC 605). Service revenue is recognized once all of the following have occurred and services were rendered: a formal arrangement exists, the price is fixed or determinable and collection is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
The Company generates revenue from individual patients as well as third-party payers, including PRC government programs and insurance providers, under which the hospital is paid based upon government established charge rates. Revenues for pharmaceutical drug sales are recognized upon the drug being administered to a patient.
Patient revenues are recorded based on pre-established rates set by the local government. The Company bills for services provided to Medicare patients through a medical card (the US equivalent of an insurance card). There have not been significant differences between the amounts billed to the government Medicare funds and the amounts collected. Any other revenue recognition criteria, as described above, have been met from the Medicare funds.
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
ACCOUNTS RECEIVABLE
Accounts receivable are recorded at the estimated net realizable amounts from government fund, insurance companies and patients. Collections have not been considered an area that exposes the Company to additional risk as hospital staff verifies patient coverage prior to examinations and/or procedures.
For any Medicare patient who visits the hospital and are qualified for acceptance, the hospital will only include the portion that the social insurance organization will pay in the accounts receivable and collects the self-pay portion in cash at the time of service. Management continues to estimate the likelihood of bad debt on an ongoing basis.
The Company has estimated a bad debt allowance of approximately $28,000 and $30,000 as of December 31, 2016 and 2015, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company applies the provisions of FASB ASC Topic 825, which requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of December 31, 2016 and 2015 the fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, related party receivable and payable, capital lease payable, 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.
FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, “Fair Value Measurements and Disclosures, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.
Various inputs are considered when determining the fair value of the Company’s investments, and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
●
Level 1 - observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
●
Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).
●
Level 3 - significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or non-recurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The Company had no financial assets and liabilities carried at fair value on a recurring basis.
The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
CONCENTRATIONS, RISKS, AND UNCERTAINTIES
All of the Company’s operations are located in the PRC. There can be no assurance that the Company will be able to successfully continue to operate and failure to do so would have a material adverse effect on the Company’s financial position, results of operations and cash flows. In addition, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, the price of medicine, competition, governmental and political conditions, and changes in regulations. Because the Company is dependent on the domestic market of the PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject to risk of restrictions on the transfer of funds, domestic policy changes, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.
CONTINGENCIES
Certain conditions may exist as of the date the consolidated financial statements are issued. These conditions may result in a future loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a material loss will be incurred and the amount of the liability can be estimated, then the estimated liability would be accrued. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
MEDICAL SUPPLIES
Medical supplies include both western and traditional Chinese medicine, are valued on the lower of weighted average cost or market basis. Inventory includes product cost and inbound freight. Management compares the cost of medical supplies with the market value and allowance is made for writing down their inventories to market value, if such value is lower.
EQUIPMENT
Equipments are recorded at cost. Depreciation is computed over the estimated useful lives of the related asset type using the straight-line method. Maintenance and repairs are expensed as incurred and the costs of additions and betterments that increase the useful lives of the assets are capitalized. When equipment is disposed, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in other income or expenses.
CONSTRUCTION-IN-PROGRESS
A hospital facility currently under development is accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including land rights cost, development expenditure, and professional fees capitalized during the course of construction for the purpose of financing the project. Upon completion of the project, the cost of construction-in-progress will be transferred to fixed assets, at which time depreciation will commence.
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
ADVERTISING COSTS
The Company expenses the costs associated with advertising as incurred. Advertising expenses for the twelve month periods ended December 31, 2016 and 2015 of approximately $2,000 and $5,000 are included in selling expenses in the consolidated statements of operations. Advertising costs include marketing brochures and a public advertising campaign.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company’s long-lived assets are reviewed for impairment in accordance with the guidance of FASB Topic ASC 360, “Property, Plant, and Equipment”, and FASB ASC Topic 205 “Presentation of Financial Statements”. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets for recoverability at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary. No impairment loss recorded in 2016.
BASIC AND DILUTED EARNINGS PER SHARE
Earnings per share (EPS) is calculated in accordance with the FASB ASC Topic 260, “Earnings Per Share.” Basic net income (loss) per share is based upon the weighted average number of common shares outstanding. Diluted net income (loss) per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Potentially dilutive securities to purchase 100,000 shares of common stock were not included in the calculation of the diluted earnings per share as their effect would be anti-dilutive for the year ended December 31, 2016. During the year ended December 31, 2016, the average market price of the common stock during the year was less than the exercise price of the stock options and the Company was in net loss position. Accordingly, the stock options were anti-dilutive and have not been included in the calculation of diluted earnings per share.
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 consolidated 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.
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
In accordance with ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB ASC Topic 740”, which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the consolidated financial statements. Tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities or deferred tax asset valuation allowance.
The Company has made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by ASC 740-10 and has not recognized any material uncertain tax positions.
In addition, companies in the PRC are required to pay business taxes consisting of 5% of income they derive from providing medical treatment, as well as city construction taxes and educational taxes which are 7% and 3%, respectively, of the business taxes. In April 2010, the Company was granted an exemption from these taxes until further notice from the tax bureau.
The Company had accrued approximately $40,000 for failure to file US tax returns and Form 5472 between the years 2006 to 2009. The Company is current with its required filings. In addition, the Company does not accrue United States income taxes on unremitted earnings from foreign operations, as it is the Company’s intention to invest these earnings in the foreign operations indefinitely.
EMPLOYEE BENEFIT COSTS
The Company contributes to a defined contribution retirement plan organized by the municipal government in the province in which the Company’s subsidiary is registered. The Company contributes for qualified employees that are eligible to participate in the plan. Contributions to the plan are calculated at 30% of the employees’ salaries above a fixed threshold amount; employees contribute 8% and the Company’s subsidiary contributes the balance of 22%. The Chinese government is responsible for the benefit liability to retired employees. The Company has no other material obligation for the payment of retirement beyond the annual contribution.
STOCK-BASED COMPENSATION
For purposes of determining the variables used in the calculation of stock compensation expense under the provisions of FASB ASC Topic 505, “Equity” and FASB ASC Topic 718, “Compensation - Stock Compensation,” we perform an analysis of current market data and historical Company data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black Scholes model. Depending upon the number of stock options granted, any fluctuations in these calculations could have a material effect on the results presented in our consolidated statement of operations. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our consolidated financial statements.
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with FASB ASC Topic 220 “Comprehensive Income," which established standards for reporting and displaying comprehensive income and its components in a consolidated financial statement that is displayed with the same prominence as other consolidated 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 loss equals net loss plus or minus adjustments for currency translation. Total comprehensive loss represents the activity for a period net of related tax and was a loss of $3,289,461 and $469,452 for the years ended December 31, 2016 and 2015, 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 $587,508 and $236,115 as of December 31, 2016 and 2015, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management's plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements
GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has negative working capital of $6,745,663, an accumulated deficit of $7,206,416, and shareholders’ deficit of $6,162,728 as of December 31, 2016. 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.
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Management has taken certain restructuring steps to provide the necessary capital to continue its operations. These steps included: 1) disposal of the construction-in-progress new hospital. 2) plan to convert existed related parties’ loans into equity, 3) plan to increase sales revenue with additional medical equipment, No assurances can be given that the steps taken will provide necessary capital for the Company to continue its operations.
NOTE 3 - EQUIPMENT
Equipment as of December 31, 2016 and 2015 comprised the following:
NOTE 4 - CONSTRUCTION IN PROGRESS
In March 2016, Nanning Tongji Hospital, Inc. sold its construction in progress hospital building to Guangxi Yida Friendship Hospital Management, Inc. for RMB 86,000,000 (approximately $13,000,000). The hospital building is being constructed by Guangxi Construction Engineering Corporation Langdong 8th Group (“Langdong 8th Group”). Costs capitalized primarily consists of payments for construction costs, acquisition cost, land rights cost, development expenditure, professional fees, and capitalized interest. As of the date of disposal, we had accrued approximately $15,000,000 for the construction of the hospital. As a result of the sale, we increased other receivables to approximately $13,000,000. Concurrently, the remaining balance results in an extraordinary loss in the approximate amount of $2,000,000 in 2016. As of December 31, 2016, we received payment of approximately $5,400,000. We incurred value-added tax (VAT) and other taxes liability of RMB 4,530,000 (approximately $682,227) related to this transaction. The amount is included in other payables.
NOTE 5 - LAWSUIT SETTLEMENT PAYABLE
In September 2009, Guangxi Nanning Tingyouyuxiang Commercial Co., Ltd. (“Tingyouyuxiang”) filed a civil suit against NTH in the People’s Court. In the complaint, Tingyouyuxiang asserted a breach of contract claim against NTH, alleging that NTH had failed to make timely and total payment of RMB 5,050,000 (approximately $800,000) under certain Supplement Agreement by and among NTH, Tingyouyuxiang and the Eighth Group of Langdong Village Committee, Nanhu Community Office, Qingxiu District, Nanning City (the “Village Committee”). On December 30, 2009, the People’s Court ruled that NTH shall pay to Tingyouyuxiang damages of RMB 5,050,000 (approximately $800,000) plus interest and the court hearing fee approximately $320,000. On March 9, 2013, NTH appealed to the Intermediate Court, alleging, among other things, that NTH was never served. On June 6, 2013, the Intermediate Court remanded the case to the People’s Court. On April 16, 2014, the Intermediate Court dismissed Tingyouyuxiang’s appeal and affirmed the decision of the People’s Court. Upon settlement of the lawsuit, the Company had accrued approximately $1,370,000 in settlement payable as of December 31, 2016.
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 6 - MAJOR SUPPLIERS AND CUSTOMERS
The Company purchases the majority of its medicine supplies from three suppliers which accounted for more than 85% of our total purchases in 2016. The rest are from around 22 different suppliers. One of the suppliers, Guangxi Tongji Medicine Co. Ltd., a related company that our Chief Executive Officer controls accounted for 1.5% of our total purchases in 2016.
The Company had three major customers for the years ended December 31, 2016 and 2015: Nanning Social Insurance Center, Guangxi Province Social Insurance Center, and China UMS. Nanning Social Insurance Center accounted for 49% and 36% of revenue for the years ended December 31, 2016 and 2015, respectively. Guangxi Province Social Insurance Center accounted for 10% and 5% of revenue for the years ended December 31, 2016 and 2015, respectively. China UMS accounted for 12% and 15% of revenue for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, accounts receivable due from Nanning Social Insurance Center was approximately $200,000, which accounts for over 70% of the total accounts receivable.
NOTE 7 - CAPITAL LEASE OBLIGATIONS
Sale and Lease Back
On March 25, 2011, the Company completed a financing arrangement with an independent third party to sell and leaseback certain machinery and equipment. The net carrying value of the machinery and equipment sold was $262,683. The machinery and equipment was sold for $371,517, of which $334,365 was received in cash and $37,152 was held as refundable deposit. The transaction has been accounted for as a financing arrangement, wherein the property remains on the Company’s books and will continue to be depreciated. A financing obligation in the amount of $371,517, representing the proceeds, has been recorded under “Capital Lease Payable” in the Company’s Balance Sheet, and is being reduced based on payments under the lease. The lease was not completed as no payment was made in 2016. At December 31, 2016, lease payable was approximately $100,000.
In October 2011, the Company entered into an agreement to lease certain machinery and equipment that are classified as capital leases. The cost of equipment under capital leases of approximately $1,430,000 is included in the Balance Sheet as property, plant, and equipment at December 31, 2016. Those equipment are to be placed in service upon usage approval from the Chinese government and hiring qualified personnel. As of December 31, 2016, the Company still had not received the approval. Accumulated impairment loss of the leased equipment at December 31, 2016 was approximately $1,366,000. Capital Lease Payable was approximately $420,000 including accrued interest payable of approximately $30,000 as of December 31, 2016.
NOTE 8 - SHORT-TERM LOAN
In December 2015, the Company borrowed approximately $620,000 from an unrelated party at 1% interest rate. The loan was paid off in full in 2016.
NOTE 9 - OTHER PAYABLES
Other payable as of December 31, 2016 and 2015 consists of the following:
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 10 - STOCKHOLDERS' DEFICIT
Preferred Stock
As of December 31, 2016 and 2015, 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 December 31, 2016 and 2015.
Common Stock
As of December 31, 2016 and 2015, the Company has 50,000,000 shares of common stock authorized with a par value of $0.001.
Statutory Reserves
As stipulated by the Company Law of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following:
i.
Making up cumulative prior years’ losses, if any;
ii.
Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;
iii.
Allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.
As of December 31, 2016, the Company had accumulated deficits of $7,206,416. Therefore, the Company did not appropriate any fund for the statutory surplus reserve for the year ended December 31, 2016.
Stock Option
No stock-based compensation recorded for the years ended December 31, 2016 and 2015, respectively.
On March 3, 2011, an option to purchase 100,000 shares of common stock was granted to the Company’s CFO. The option vests in three equal installments starting on the first anniversary of grant and subsequent anniversaries thereafter, at an exercise price equivalent to the closing price per share of common stock on the date of grant.
The fair value of the option award is estimated on the date of grant using the Black Scholes model to be $15,400. The valuation was based on the assumptions noted in the following table.
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.
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 10 - STOCKHOLDERS' DEFICIT - continued
The following table summarizes stock option activity in the Company's stock-based compensation plans for the years ended December 31, 2016.
There were no options granted, exercised or cancelled/expired during the twelve month period ended December 30, 2016. The above options were fully vested in 2014.
NOTE 11 - INCOME TAX
At December 31, 2016 and 2015, based on the weight of available evidence, management determined that it was unlikely that the Company's deferred tax assets would be realized and have provided for a full valuation allowance associated with the net deferred tax assets.
The Company periodically analyzes its tax positions taken and expected to be taken and has determined that since inception there has been no need to record a liability for uncertain tax positions. The Company classifies income tax penalties and interest, if any, as part of selling, general and administrative expenses in the accompanying statements of operations. There was no accrued interest or penalties as of December 31, 2016 and 2015.
The Company is neither under examination by any taxing authority, nor has it been notified of any impending examination. The Company's tax years for its Federal and State jurisdictions which are currently open for examination are the years of 2012 - 2016.
China
Under the Law of People’s Republic of China on Enterprise Income Tax (“EIT Law”), which was effective from January 1, 2008, domestically-owned enterprises and foreign-invested enterprises are subject to a uniform tax rate of 25%. As of December 31, 2016, the PRC entities have net operating losses carry forward of $32 million that begin expiring in 2035. The potential benefit of the Company’s net operating losses has not been recognized in these financial statements because it is more likely-than-not it will not utilize the net operating losses carried forward as it does not expect to generate sufficient taxable income in future or the amount involved is not significant.
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 12 - RELATED PARTY TRANSACTIONS AND COMMITMENTS
Due from/to Related Parties
The Company entered into agreements with Guangxi Tongji Medicine Co. Ltd. whereby the Company from time to time will advance amounts to assist them in their operations. The advanced amounts accrue interest at a rate of 1.5% per annum. The amount receivable as of December 31, 2016 and December 31, 2015 was $48,145 and $43,524, respectivelyAs of December 31, 2016 and 2015, total due from all related parties amounted to $185,365 and $198,676, respectively.
The Company entered into an agreement with the Chairman and a stockholder of the Company, Nanning Tongji Chain Pharmacy Co. Ltd., Guangxi Tongji Medicine Co. Ltd., and Nanning Tongji Electric Coating Factory, whereby the Company from time to time will be advanced amounts to assist them in their operations. The advanced amounts accrue interest at a rate of 1.5% per annum. As of December 31, 2016 and December 31, 2015, $12,005,569 and $12,412,841 were payable to these related parties, respectively. Interest expenses for the year ended December 31, 2016 and 2015 were $237,536 and $234,274, respectively. As of December 31, 2016 and 2015, total due to all related parties amounted to $10,371,235 and $15,645,347, respectively.
Rental Commitments
On March 1, 2015, the Company renewed the lease agreement for their hospital with Guangxi Tongji Medicine Co. Ltd that expires in December 2014. Monthly lease payment under the new lease is approximately $4,800. The lease will expire on February 28, 2018. Based on the exchange rate at December 31, 2016, minimum future lease payments are as follows:
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
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 December 31, 2016, 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 December 31, 2016 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 December 31, 2016, 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.
Based on our evaluation, we have determined that our disclosure controls and procedures were not effective in that we did not design, implement, or maintain effective entity-level controls related to our control environment, resulting in an absence of independence and financial expertise on the Board of Directors. We do not have an Audit Committee or a formalized internal audit function, limiting our ability to provide effective oversight of our management.
Item 9A. Controls and Procedures - continued
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 a 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 a material weakness.
2017 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 2016.
●
Continue to engage the services of qualified consultants with China GAAP, U.S. GAAP and SEC reporting experience to support our financial reporting and SOX compliance requirements, including assistance with the following:
o
Remediating identified material weaknesses;
o
Monitoring our internal control over financial reporting on an ongoing basis;
o
Managing our period-end financial closing and reporting processes; and
o
Identifying and resolving non-routine or complex accounting matters.
●
Complete the implementation of, and related training for our 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 our 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 quarter that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following are our officers and directors as of the date of this prospectus. All our officers and directors are residents of the PRC except Mr. Eric Zhang and, therefore, it may be difficult for investors to effect service of process within the U.S. upon them or to enforce judgments against them obtained from the U.S. courts.
The following table sets forth certain information concerning our directors and executive officers:
Yunhui Yu is our founder and has been our Chief Executive Officer, President and one of our directors since October 2003. Since October 1999 Mr. Yu has also been the Chief Executive Officer and a director of Guangxi Tongji Medicine Co., Ltd., an affiliated company which operates pharmacies in China. Mr. Yu received his bachelor's degree in medicine from the First Military Medical University of the People's Liberation Army of China in August 1984. Mr. Yu holds a license as a physician from the Chinese Ministry of Health. The Board has concluded that Mr. Yu is qualified to serve on the Board because he is familiar with our business and capable of identifying strategic priorities and executing our business strategy.
Eric Zhang is a Certified Public Accountant, licensed in California. Mr. Zhang has been our Chief Financial Officer since March 2011. Mr. Zhang graduated with a Master of Science in Taxation from Golden Gate University in 2004. He obtained his Bachelor of Business Administration from California State University in Los Angeles in 2000. He is the managing partner at Chan & Zhang LLP, a public accounting firm in Los Angeles since December 2004. Meanwhile, Mr. Zhang served as the controller of China PharmaHub Corp. on a part-time basis from January 2010 to December 2010. He served as staff accountant at C.G. Uhlenberg LLP from July 2003 to December 2004 and at Homer Chan Tax & Consultant, Inc. from January 2000 to June 2003. Mr. Zhang was the Honorable Chairman of Business Advisory Committee of National Republican Congressional Committee (year 2005) and Businessman of the Year in 2005 honored by the Business Advisory Committee of National Republican Congressional Committee. Mr. Zhang is also a Personal Financial Specialist and an Enrolled Agent.
Jinsong Zhang has been our Chief Administrative Officer since February 2006. Between August 2000 and January 2006 Mr. Zhang was a director in the Naning New & High Tech Industrial Development Zone administration commission. Mr. Zhang received his bachelor's degree in engineering from the Electronic Engineering Institute of the People’s Liberation Army in August 1987.
Jialin Zhang has been one of our vice presidents since October 2004. In October 2006 Mr. Zhang became one of our directors. Between 1964 and October 2004, Mr. Zhang was a surgeon at several hospitals, including the People's Hospital of Du'an County and the Red Cross Hospital. Mr. Zhang received his bachelor's degree from Guangxi Medicine University in August 1964 and holds a license as physician from the Chinese Ministry of Health. Mr. Zhang is qualified to serve on the Board based on his education and extensive experience in the medial practice.
Xiangwei Zeng has been one of our vice presidents since March 2005. In October 2006 Mr. Zeng became one of our directors. Between 2000 and December 2004, Mr. Zeng was the director of physicians at the Guanxi Medicine University Hospital. Mr. Zeng received his bachelor's degree from Guangxi Medicine University in July of 1967 and holds a license as a physician from the Chinese Ministry of Health. Mr. Zeng is qualified to serve on the Board because of his past experience in managing another hospital and his education background.
Item 10. Directors, Executive Officers and Corporate Governance - continued
Term of Office
Directors serve in such capacity until the next annual meeting of our stockholders and until their successors have been elected and qualified. Our officers serve at the discretion of our Board of Directors, until their death, or until they resign or have been removed from office. There are no family relationships among our executive officers and directors.
Director Qualifications
Directors are responsible for overseeing the Company’s business consistent with their fiduciary duty to the stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. Our Board believes that there are general requirements for service on the Board that are applicable to directors and that there are other skills and experience that should be represented on the Board as a whole but not necessarily by each director. The Board considers the qualifications of director and director candidates individually and in the broader context of the Board’s overall composition and the Company’s current and future needs.
Qualifications for All Directors
In its assessment of each potential candidate, including those recommended by the stockholders, the Board will consider the nominee’s judgment, integrity, experience, independence, understanding of the Company’s business or other related industries and such other factors it determines are pertinent in light of the current needs of the Board. The Board also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company.
The Board requires that each director be a recognized person of high integrity with a proven record of success in his or her field. Each director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all directors, the Board conducts interviews of potential director candidates to assess intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially.
Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole
The Board has identified particular qualifications, attributes, skills and experience that are important to be represented on the board as a whole, in light of the Company’s current needs and its business priorities. The Board believes that it should include some directors with a high level of financial literacy and some directors who possess relevant business experience as a Chief Executive Officer or a President or like position. Marketing is the core focus of our business and the Company seeks to develop and deploy the world’s most innovative and effective marketing and technology. Therefore, the Board believes that marketing and technology experience should be represented on the Board. The Company is involved in the medical and healthcare business in the PRC. Therefore the Company’s business also requires compliance with a variety of regulatory requirements and relationships with various governmental entities. The board believes that governmental, political or diplomatic expertise should be represented on the Board.
Set forth below are a chart and a narrative disclosure that summarize the specific qualifications, attributes, skills and experiences described above. An “X” in the chart below indicates that the item is a specific reason that the director has been nominated to serve on the Company’s Board. The lack of an “X” for a particular qualification does not mean that the director does not possess that qualification or skill. Rather, an “X” indicates a specific area of focus or expertise of a director on which the board currently relies.
Item 10. Directors, Executive Officers and Corporate Governance - continued
Yunhui Yu
Mr. Yu has over 20 years’ experience in the medical field, having managed Guangxi Tongji Medicine Co., Ltd., an affiliated company involved in the pharmaceutical industry for that period of time. In his role as Chief Executive Officer there and with the Company, he possesses the requisite marketing experience and Chief Executive experience. Additionally, with his bachelor’s degree in medicine and physician license, he possesses the requisite medical/healthcare experience.
Jialin Zhang
Mr. Zhang has been a surgeon at several hospitals and holds a bachelor’s degree from Guangxi Medicine University in August 1964 and holds a license as physician from the Chinese Ministry of Health. Mr. Zhang is qualified to serve on the Board based on his education and extensive experience in the medial practice.
Xiangwei Zeng
Mr. Zeng has four years’ experience as a director of physicians at the Guanxi Medicine University Hospital. Accordingly, he has the requisite managerial, governmental and governmental experience for his position as director. His many years of service as a physician and his educational background further supplement his medical and healthcare experience.
Save as otherwise reported above, none of our directors hold directorships in other reporting companies.
There are no family relationships among our directors or officers.
Directors or Executive Officers involved in Bankruptcy or Criminal Proceedings
To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:
●
Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
●
Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
●
Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
●
Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
●
Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Board Committees
Audit Committee
We have not yet appointed an audit committee. At the present time, we believe that the members of Board of Directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. We do, however, recognize the importance of good corporate governance and intend to appoint an audit committee comprised entirely of independent directors, including at least one financial expert, in the near future.
Item 10. Directors, Executive Officers and Corporate Governance - continued
Compensation Committee
We do not presently have a compensation committee. Our board of directors currently acts as our compensation committee.
Nominating Committee
We do not presently have a nominating committee. Our board of directors currently acts as our nominating committee.
Material Changes to the Procedures by which Security Holders May Recommend Nominees to the Board of Directors
There have been no material changes to the procedures by which security holders may recommend nominees to the Board of Directors.
Code of Ethics
We do not presently have a code of ethics. However, we intend to adopt such a code of ethics in the future.
Meetings
During the fiscal year of 2016, our Board of Directors had 0 meetings, including meetings that were held by means of a conference telephone call, but excluding actions taken by unanimous written consent.
Board Leadership Structure and Role in Risk Oversight
Yunhui Yu is our Chairman and Chief Executive Officer. We do not have any independent directors. The Board believes that the Company’s Chief Executive Officer is best situated to serve as Chairman of the Board because he is the director most familiar with our business and industry and the director most capable of identifying strategic priorities and executing our business strategy. In addition, having a single leader eliminates the potential for confusion and provides clear leadership for the Company. We believe that this leadership structure has served the Company well.
Our Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding the Company’s assessment of risks. The Board of Directors focuses on the most significant risks facing us and our general risk management strategy, and also ensures that risks undertaken by us are consistent with the Board of Directors’ appetite for risk. While the Board of Directors oversees the Company, our management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing the Company and that our board leadership structure supports this approach.
Our Board of Directors is responsible to approve all related party transactions. We have not adopted written policies and procedures specifically for related person transactions.
Limitations on Liability
Article K of our Articles of Incorporation provides that no director shall have liability to us or to our stockholders or to other security holders for monetary damages for breach of fiduciary duty as a director; provided, however, that such provisions shall not eliminate or limit the liability of a director for monetary damages for: (i) any breach of the director's duty of loyalty to the Company or to its shareholders or other security holders; (ii) acts or omissions of the director not in good faith or which involve intentional misconduct or a knowing violation of the law by such director; (iii) acts by such director as specified by Nevada law; or (iv) any transaction from which such director derived an improper personal benefit. Consequently, our directors may not be personally liable for monetary damages regarding their duties as directors.
Section 16(a) Beneficial Ownership Reporting Compliance
As of the date of this report, we are not subject to Section 16(a) of the Securities Exchange Act of 1934.
Executive Compensation
The following table sets forth information with respect to the compensation of each of the named executive officers for services provided in all capacities to the Company and its subsidiaries in the fiscal years ended December 31, 2016 and 2015 in their capacity as such officers. Mr. Yunhui Yu, our Chief Executive Officer, President and one of our directors receive no additional compensation for his services as director. No other executive officer or former executive officer received more than $100,000 in compensation in the fiscal years reported below.
Stock Options
On March 3, 2011, we entered into an Employment Agreement with our Chief Financial Officer, Eric Zhang, pursuant to which, Mr. Zhang received options to purchase 100,000 shares of the Company's common stock, vesting in three equal installments starting on March 3, 2013, with an exercise price of $0.24. Other than disclosed herein, we have not granted any stock options to any of our officers or directors and do not have any stock option plans in effect as of December 31, 2016. In the future, we may grant stock options to our officers, directors, employees or consultants.
Long-Term Incentive Plans
We do not provide our officers or employees with pension, stock appreciation rights, long-term incentive or other plans and have no intention of implementing any of these plans for the foreseeable future.
Employee Pension, Profit Sharing or other Retirement Plans
We do not have a defined benefit, pension plan, profit sharing or other retirement plan, although we may adopt one or more of such plans in the future.
Compensation of Directors
Our directors do not receive any compensation pursuant to any standard arrangement for their services as directors.
Employment Agreements
On March 3, 2011, we entered into an Employment Agreement with our Chief Financial Officer, Eric Zhang. Pursuant to the Employment Agreement, Mr. Zhang will receive (i) an annual salary of $25,000 ($50,000 if the Company is listed on national exchanges), and (ii) options to purchase 100,000 shares of the Company's common stock, which will vest in three equal installments starting on March 3, 2013, with an exercise price of $0.24. The Employment Agreement has a term of three years and has been tentatively extended through June 30, 2016.
Compensation Discussion and Analysis
We strive to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations, including Nanning Xiehe Hospital and Nanning Women Hospital. We use this information to calculate the average salary of executive officers with similar roles and responsibilities. We then adjust the average salary by comparing the profitability of our peer companies.
It is not uncommon for PRC private companies in the PRC to have base salaries as the sole form of compensation. The base salary level is established and reviewed based on the level of responsibilities, the experience and tenure of the individual and the current and potential contributions of the individual. The base salary is compared to the list of similar positions within comparable peer companies and consideration is given to the executive’s relative experience in his or her position. Base salaries are reviewed periodically and at the time of promotion or other changes in responsibilities.
We plan to implement a more comprehensive compensation program, which takes into account other elements of compensation, including, without limitation, short and long term compensation, cash and non-cash, and other equity-based compensation such as stock options. We expect that this compensation program will be comparable to the programs of our peer companies and aimed to retain and attract talented individuals.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information with respect to the beneficial ownership of our voting securities by (i) any person or group owning more than 5% of any class of voting securities, (ii) each director, (iii) our chief executive officer and chief financial officer and (iv) all executive officers and directors as a group as of April 17, 2017.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. - continued
* Less than 1 %
(1)
In determining beneficial ownership of our common stock as of a given date, the number of shares shown includes shares of common stock which may be acquired on exercise of warrants or options or conversion of convertible securities within 60 days of that date. In determining the percent of common stock owned by a person or entity on April 17, 2017, (a) the numerator is the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of warrants or options and conversion of convertible securities, and (b) the denominator is the sum of (i) the total shares of common stock outstanding on April 17, 2017 (15,812,191), and (ii) the total number of shares that the beneficial owner may acquire upon conversion of the preferred and on exercise of the warrants and options. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares.
(2)
Liyu Chen is the wife of Yunhui Yu and she beneficially owns 3,000,000 shares of our common stock or 18.9%. Ownership of shares of our common stock by Mr. Yu does not include ownership of shares of our common stock by Ms. Chen. Likewise, ownership of shares of our common stock by Ms. Chen does not include ownership of shares of our common stock by Mr. Yu.
(3)
Represents options to purchase 100,000 shares of our common stock at an exercise price of $0.24 per share.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Due from/to Related Parties
The Company entered into agreements with Guangxi Tongji Medicine Co. Ltd. whereby the Company from time to time will advance amounts to assist them in their operations. The advanced amounts accrue interest at a rate of 1.5% per annum. The amount receivable as of December 31, 2016 and December 31, 2015 was $48,145 and $43,524, respectivelyAs of December 31, 2016 and 2015, total due from all related parties amounted to $185,365 and $198,676, respectively.
The Company entered into an agreement with the Chairman and a stockholder of the Company, Nanning Tongji Chain Pharmacy Co. Ltd., Guangxi Tongji Medicine Co. Ltd., and Nanning Tongji Electric Coating Factory, whereby the Company from time to time will be advanced amounts to assist them in their operations. The advanced amounts accrue interest at a rate of 1.5% per annum. As of December 31, 2016 and December 31, 2015, $12,005,569 and $12,412,841 were payable to these related parties, respectively. Interest expenses for the year ended December 31, 2016 and 2015 were $237,536 and $234,274, respectively. As of December 31, 2016 and 2015, total due to all related parties amounted to $10,371,235 and $15,645,347, respectively.
Item 13. Certain Relationships and Related Transactions, and Director Independence. - continued
Rental Commitments
On March 1, 2015, the Company renewed the lease agreement for their hospital with Guangxi Tongji Medicine Co. Ltd that expires in December 2014. Monthly lease payment under the new lease is approximately $4,800. The lease will expire on February 28, 2018. Based on the exchange rate at December 31, 2016, minimum future lease payments are as follows:
Independent Directors
None of our Board of Directors holds any directorships in other reporting companies and does not qualify as an “independent director” under the Rules of NASDAQ, Marketplace Rule 4200(a)(15).
Item 14.
Item 14. Principal Accounting Fees and Services.
We were billed by our current independent public accounting firms Anton & Chia, LLP, for the following professional services they performed for us during the years ended December 31, 2016 and 2015 as set forth in the table below.
Our Board of Directors pre-approves all audit and non-audit services performed by the Company's auditor and the fees to be paid in connection with such services.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
*Filed herewith.
**Furnished herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Yunhui Yu
President, Chief Executive Officer
April 17,
Yunhui Yu
and Chairman (Principal Executive Officer)
/s/ Eric Zhang
Chief Financial Officer
April 17, 2017
Eric Zhang
(Principal Financial and Accounting Officer)
/s/ Xiangwei Zeng
Vice President and a Director
April 17, 2017
Xiangwei Zeng
/s/ Jialin Zhang
Vice President and a Director
April 17,
Jialin Zhang