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EX-32 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 - HUIHENG MEDICAL, INC.v223755_ex32.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - HUIHENG MEDICAL, INC.v223755_ex31-2.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - HUIHENG MEDICAL, INC.v223755_ex31-1.htm

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

FORM 10-Q

(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2011
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____.

Commission File No. 333-132056

HUIHENG MEDICAL, INC.
(Exact Name of Registrant as Specified in Its Charter)

Nevada
 
20-4078899
(State or Other Jurisdiction
Of Incorporation or Organization)
 
(I.R.S. Employer Identification
Number)
     
Huiheng Building, Gaoxin 7 Street South,
   
Keyuannan Road, Nanshan District,
   
Shenzhen Guangdong, P.R. China 518057
 
N/A
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant’s telephone number, including area code 86-755-25331366

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.

Yes ¨                      No x

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

Yes ¨                      No ¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-3 of the Exchange Act.

Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
¨
Smaller reporting company
x
(Do not check if a smaller reporting company)
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨                      No x
 
As of May 1, 2011, there were 14,030,637 shares of the issuers $0.001 par value common stock outstanding.
 
 
 

 

HUIHENG MEDICAL, INC.

FORM 10-Q INDEX

   
Page
     
PART I – FINANCIAL INFORMATION
  1
Item 1.     Financial Statements
  1
Consolidated Balance Sheets at March 31, 2011(Unaudited) and December 31, 2010
  2
Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
  3
Consolidated Statements of Changes in Stockholders’ Equity and Other Comprehensive Income for the Three Months Ended March 31, 2011 (Unaudited)
  4
Consolidated Statements of Cash Flows for the three Months Ended March 31, 2011 and 2010 (Unaudited)
  5
Notes to the Consolidated Financial Statements (Unaudited)
  6
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
  29
Item 3.     Quantitative and Qualitative Disclosures About Market Risk
  36
Item 4.     Controls and Procedures
  36
     
PART II – OTHER INFORMATION
  36
Item 1.     Legal Proceedings
  36
Item 1A.  Risk Factors
  36
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
  36
Item 3.     Defaults Upon Senior Securities
  36
Item 4.     [Removed and Reserved]
  36
Item 5.     Other Information
  36
Item 6.     Exhibits
  37
Signature Page
  38

 
 

 

In this Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United States dollars and, unless the context otherwise requires, references to “we,” “us,” “our” and the Company refer to Huiheng Medical, Inc. and its consolidated subsidiaries.

This Quarterly Report contains certain forward-looking statements.  When used in this Quarterly Report, statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “may,” “project,” “plan” or “continue,” and similar expressions are intended to identify forward-looking statements.  They also include statements containing anticipated business developments, a projection of revenues, earnings or losses, capital expenditures, dividends, capital structure or other financial terms.

The forward-looking statements in this Quarterly Report are based upon management’s beliefs, assumptions and expectations of our future operations and economic performance, taking into account the information currently available to them.  These statements are not statements of historical fact.  Forward-looking statements involve risks and uncertainties, some of which are not currently known to us that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements.  These forward-looking statements are based on our current plans and expectations and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and our future financial condition and results.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this filing might not occur.  We qualify any and all of our forward-looking statements entirely by these cautionary factors.  As a consequence, current plans, anticipated actions and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on our behalf.  You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented herein.

 
 

 
  
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements

HUIHENG MEDICAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Contents
 
Page(s)
 
Consolidated Balance Sheets at March 31, 2011 (Unaudited) and December 31, 2010
   
2
 
         
Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
   
3
 
         
Consolidated Statement of Changes in Stockholders' Equity and Other Comprehensive Income for the Three Months Ended March 31, 2011 (Unaudited)
   
4
 
         
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010  (Unaudited)
   
5
 
         
Notes to the Consolidated Financial Statements (Unaudited)
 
6 to 28
 

 
1

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN US DOLLARS)
   
March 31, 2011
   
December 31,
 
   
(Unaudited)
   
2010
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash
  $ 49,176     $ 294,542  
Accounts receivable
    5,139,534       8,130,681  
Prepaid expenses
    2,922,404       2,743,602  
Other receivables, net of allowance for doubtful accounts of nil and $757,576 as of March 31, 2011 and December 31, 2010, respectively
    122,266       109,519  
Inventories
    3,118,046       2,832,282  
Total Current Assets
    11,351,426       14,110,626  
                 
ACCOUNTS RECEIVABLE, net of allowance for doubtful accounts of $1,078,601and $1,451,364 as of March 31, 2011 and December 31, 2010, respectively
    8,419,086       11,617,798  
PREPAID EXPENSES, net of current portion
    1,153,147       1,216,841  
INVESTMENT IN AFFILIATE
    198,963       137,032  
PROPERTY, PLANT AND EQUIPMENT, NET
    2,996,183       2,419,348  
LAND USE RIGHT, NET
    954,575       952,057  
INTANGIBLE ASSETS, NET
    11,464,295       962,202  
Total Assets
  $ 36,537,675     $ 31,415,904  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 1,256,464     $ 1,266,774  
Due to related parties
    388,065       385,025  
Income tax payable
    1,152,033       974,328  
Accrued liabilities and other payables
    1,841,175       1,740,226  
Total Current Liabilities
    4,637,737       4,366,353  
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, $0.001 par value; 1,000,000 shares authorized; Designated 300,000 shares of Series A convertible preferred stock; 211,390 shares issued and outstanding with liquidation preference of $7,927,125 at March 31, 2011 and December 31, 2010
    211       211  
Common stock, $0.001 par value; 74,000,000 shares authorized; 23,730,637 shares issued and 14,030,637 shares outstanding at March 31, 2011 and December 31, 2010
    23,731       23,731  
Treasury stock, 9,700,000 common shares, at cost
    (9,700 )     (9,700 )
Additional paid-in capital
    7,498,086       7,498,086  
Statutory surplus reserve
    1,887,166       1,676,867  
Retained earnings
    18,789,023       14,298,693  
Accumulated other comprehensive income
    2,866,454       2,633,236  
Total Huiheng's stockholders' equity
    31,054,971       26,121,124  
Non-controlling interests
    844,967       928,427  
Total Stockholders' Equity
    31,899,938       27,049,551  
Total Liabilities and Stockholders' Equity
  $ 36,537,675     $ 31,415,904  
 
See accompanying notes to the consolidated financial statements.

 
2

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 (IN US DOLLARS)

   
For The Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
REVENUES
  $ 1,663,894     $ 1,400,853  
                 
COST OF REVENUES
    278,137       96,432  
                 
GROSS PROFIT
    1,385,757       1,304,421  
                 
OPERATING EXPENSES:
               
Sales and marketing expenses
    91,223       62,123  
General and administrative expenses
    723,063       495,748  
Research and development costs
    25,392       15,340  
                 
Total Operating Expenses
    839,678       573,211  
                 
OPERATING INCOME
    546,079       731,210  
                 
OTHER INCOME / (EXPENSES)
               
Other income
    1,153,629       -  
Interest income
    88       43  
Gain on the acquisition of equipment and operating rights
    3,019,137       -  
Equity in income / (loss) of affiliate
    60,612       (10,540 )
                 
Total Other Income / (Expenses)
    4,233,466       (10,497 )
                 
NET INCOME BEFORE INCOME TAXES
    4,779,545       720,713  
                 
INCOME TAXES
    169,353       127,427  
                 
NET INCOME BEFORE ATTRIBUTION OF NON-CONTROLLING INTERESTS
    4,610,192       593,286  
                 
NET LOSS ATTRIBUTABLE TO  NON-CONTROLLING INTERESTS
    90,437       63,137  
                 
NET INCOME ATTRIBUTABLE TO HUIHENG’S SHAREHOLDERS
  $ 4,700,629     $ 656,423  
                 
EARNINGS PER SHARE
               
- Basic
  $ 0.34     $ 0.05  
                 
- Diluted
  $ 0.29     $ 0.04  
                 
Weighted Common Shares Outstanding
               
- Basic
    14,030,637       13,935,290  
                 
- Diluted
    16,251,113       16,251,113  

See accompanying notes to the consolidated financial statements.

 
3

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
(IN US DOLLARS)
 
   
Series A Preferred Stock
   
Common Stock
   
Treasury Stock
   
Additional
   
Statutory
         
Accumulated Other
   
Total Huiheng's
   
Non-
   
Total
       
   
Number of
         
Number of
         
Number of
         
Paid-in
   
Surplus
   
Retained
   
Comprehensive
   
Stockholders'
   
controlling
   
Stockholders'
   
Comprehensive
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Reserve
   
Earnings
   
Income
   
Equity
   
Interests
   
Equity
   
Income
 
Balance, December 31, 2010
    211,390     $ 211       23,730,637     $ 23,731       (9,700,000 )   $ (9,700 )   $ 7,498,086     $ 1,676,867     $ 14,298,693     $ 2,633,236     $ 26,121,124     $ 928,427     $ 27,049,551     $ -  
                                                                                                                 
Net income / (loss)
    -       -       -       -       -       -       -       -       4,700,629       -       4,700,629       (90,437 )     4,610,192       4,610,192  
                                                                                                                 
Foreign currency translation gain
    -       -       -       -       -       -       -       -       -       233,218       233,218       6,977       240,195       240,195  
                                                                                                                 
Appropriation of statutory surplus reserve
    -       -       -       -       -       -       -       210,299       (210,299 )     -       -       -       -       -  
Balance, March 31, 2011
    211,390     $ 211       23,730,637     $ 23,731       (9,700,000 )   $ (9,700 )   $ 7,498,086     $ 1,887,166     $ 18,789,023     $ 2,866,454     $ 31,054,971     $ 844,967     $ 31,899,938     $ 4,850,387  
 
See accompanying notes to the consolidated financial statements

 
4

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN US DOLLARS)

   
For The Three Months
 
   
Ended,
 
   
March 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income before attribution of non-controlling interests
  $ 4,610,192     $ 593,286  
Net loss attributable to non-controlling interests
    90,437       63,137  
Total Huiheng's net income
    4,700,629       656,423  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation of property, plant and equipment
    50,376       60,647  
Loss on write off of fixed assets
    27,833       -  
Amortization of land use right
    4,978       4,794  
Amortization of intangible assets
    130,156       20,633  
Recovery of bad debts
    (1,143,326 )     -  
Equity in (income)/loss of affiliate
    (60,612 )     10,540  
Gain on the acquisition of the equipment and operating rights
    (3,019,137     -  
Non-controlling interest
    (90,437 )     (63,137 )
Changes in assets and liabilities:
               
Accounts receivable
    (910,268 )     (496,000 )
Prepaid expenses
    70,181       (91,029 )
Other receivables
    (200,998 )     13,533  
Inventories
    (285,764 )     (165,928 )
Accounts payable
    (10,310 )     (102,830 )
Income tax payable
    177,705       67,383  
Accrued liabilities and other payables
    100,949       46,045  
Net cash used in operating activities
    (458,045 )     (38,926 )
Cash flows from investing activities:
               
Purchase of property, plant and equipment
    (1,642 )     (2,791 )
Net cash used in investing activities
    (1,642 )     (2,791 )
Net decrease in cash
    (459,687 )     (41,717 )
Effect on change of exchange rates
    214,321       3,325  
Cash as of January 1
    294,542       84,962  
Cash as of March 31
  $ 49,176     $ 46,570  
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Income tax paid
  $ -     $ 60,109  

Non-Cash Investing and Financing Transactions:
 
Acquisition of medical equipment and certain operating rights from a customer in lieu of outstanding accounts and other receivables of $8,246,416.
 
See accompanying notes to the consolidated financial statements.

 
5

 
 
HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 1 - ORGANIZATION AND OPERATIONS

Huiheng Medical, Inc. (“the Company” or “Huiheng”), formerly known as Mill Basin Technologies, Limited (“Mill Basin”), is a China-based medical device company that, through its subsidiaries, designs, develops and markets radiation therapy systems used for the treatment of cancer.  The Company is a Nevada holding company and conducts all of its business through operating subsidiaries in China and a subsidiary in the US (Portola Medical, Inc), which holds the rights to certain patents.

The Company's common stock is listed on the Over-the-counter Bulletin Board ("OTCBB") market and traded under the symbol "HHGM".
 

Acquisition of Medical Accelerator Systems and Operating Right of Medical Centers

On March 30, 2011, a subsidiary of the Company, Tibet Changdu Huiheng Development Co., Ltd. (“Changdu Huiheng”) acquired from its major customer, Shenzhen Jiancheng Investment Co., Ltd. (“Jiancheng”), medical equipment, specifically, medical accelerator systems and certain operating rights for which Jiancheng owns in four medical centers which utilize these medical accelerator systems. The medical centers are located in different hospitals in PRC and provide radiotherapy treatments to local patients utilizing the services of these medical accelerator systems which are operated by the medical centers. Such operating rights give Changdu Huiheng the right to share in the net income. The operating rights of medical centers last for seven to ten years from the date of acquisition.

 
6

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include all accounts of the Company and its wholly-owned and majority-owned subsidiaries.  All material inter-company balances and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and footnotes required by GAAP for complete consolidated financial statements. All adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the consolidated financial statements have been included. Nevertheless, these consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements contained in its Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on April 15, 2011. The results of operation for the three months ended March 31, 2011, are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

Summary of significant accounting policies

Estimates

The preparation of the financial statements in accordance with US GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the years. Significant items subject to such estimates and assumptions include the recoverability of the carrying amount and the estimated useful lives of long-lived assets; valuation allowances for receivables and realizable values for inventories. Actual results could differ from those estimates in consolidation.

Accounts receivable

Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts, sales returns, trade discounts and value added tax. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable.   The Company performs ongoing credit evaluations of its customers' financial conditions. The Company provided an allowance of $1,078,601 and $1,451,364 for doubtful accounts as of March 31, 2011 and December 31, 2010, respectively.

 
7

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)

Summary of significant accounting policies (…/Cont'd)

Accounts receivable (…/Cont’d)

Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

The ultimate collection of the Company’s accounts receivable may take more than one year, and any portion of accounts receivable expected to be collected in more than one year is reflected as noncurrent, net of allowance for doubtful accounts relating to that portion of the receivables. The bifurcation between current and noncurrent portions of accounts receivable is based on management’s estimate and predicated on historical collection experience.

Accounts receivables from the Company's major customer amounting to $7,482,858 were utilized as consideration for the acquisition of certain medical equipment and certain operating rights.

Inventories

The Company values inventories, consisting of work in process and raw materials, at the lower of cost or market.  Cost of material is determined on the weighted average cost method. Cost of work in progress includes direct materials, direct production cost and an allocated portion of production overhead.

The final steps of assembly of our products, including installation of radioactive service materials, are completed at customer locations. Accordingly, the Company generally does not carry finished goods inventory.

Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated depreciation.  Expenditures for major additions and betterments are capitalized.  Maintenance and repairs are charged to general and administrative expenses as incurred. Depreciation of property, plant and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives ranging from three to twenty years. Building improvements are amortized on a straight-line basis over the estimated useful life.  Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations. The estimated useful lives of the assets are as follows:

 
Estimated Life (Years)
Buildings and building improvements
3 to 20
Production equipment
3 to 5
Medical radiotherapy equipment
7 to 10
Furniture fixtures and office equipment
3 to 5
Motor vehicles
5 to 10

 
8

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)

Summary of significant accounting policies (…/Cont'd)

Land use right

Land use right is recorded at cost less accumulated amortization. Under ASC 350 "Intangibles, Goodwill and Other," land use right is classified as a definite lived intangible asset and is amortized over its useful life. According to the laws for the PRC, the government owns all of the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the PRC government. The Company's land use right is amortized using the straight-line method over the lease term of 50 years.
 
Intangible assets

The Company’s intangible assets include patent, pending patents applications and operating rights.  The Company accounts for its intangible assets pursuant to FASB ASC Subtopic 350-30, “General Intangibles Other Than Goodwill.” Under ASC 350-30-35, intangibles with definite lives are amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Accordingly, the Company amortizes the patent over their remaining legal term of 20 years and the operating rights over the contractual period from seven to ten years, on a straight-line basis.

Investment in affiliate

The Company owns a 50% equity interest of Beijing Yuankang Kbeta Nuclear Technology Company, Ltd ("Beijing Kbeta") and accounts for the investment using the equity method of accounting. The equity method is utilized as the Company has the ability to exercise significant influence over the investee, but does not have a controlling financial interest. If circumstances indicate that the carrying value of the Company's investment in Beijing Kbeta may not be recoverable, the Company would recognize an impairment loss by writing down its investment to its estimated net realizable value if management concludes such impairment is other than temporary.

We have invested in Beijing Kbeta since it provides the Company the ability to install and replace the Cobalt 60 radioactive sources used in our gamma treatment systems products.

 
9

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)

Summary of significant accounting policies (…/Cont'd)

Impairment of long-lived assets

Long-lived assets, which include tangible assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of, if any, are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. At March 31, 2011 and December 31, 2010, the Company determined that there was no impairment of value.

Fair value of financial instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of financial assets and liabilities, such as cash, accounts receivable, current income tax assets, prepaid expenses and other current assets, accounts payable, income taxes payable, accrued expenses and other current liabilities, approximate their fair values because of the short maturity of these instruments and market rates of interest.

Revenue recognition

The Company generates revenue primarily from sales of medical equipment and the sale of maintenance and support services. Revenue is recognized as follows:

(i)
Sales of medical equipment

The Company recognizes revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. The sales price of the medical equipment includes the training services, which generally take about 1 month. These services are ancillary to the purchase of medical equipment by customers and are normally considered by the customers to be an integral part of the acquired equipment. As training services do not have separately determinable fair values, the Company recognizes revenue for the entire arrangement upon customer acceptance, which occurs after delivery and installation.

 
10

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)

Summary of significant accounting policies (…/Cont'd)

Revenue recognition (…/Cont’d)

(i)
Sales of medical equipment (…/Cont’d)

In the PRC, value added tax (“VAT”) of 17% on invoiced amounts is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities.

Pursuant to the laws and regulations of the PRC, Shenzhen Hyper Technology Co., Limited ("Shenzhen Hyper") (a subsidiary of the Company) is entitled to a refund of VAT on the sales of self-developed software embedded in medical equipment. The VAT refund represents the amount of VAT collected from customers and paid to the authorities in excess of 3% of relevant sales. The amount of VAT refund is calculated on a monthly basis. As the refund relates directly to the sale of self-developed software that is embedded in the Company’s products, the Company recognizes the VAT refund at the time the product is sold. The amount is included in the line item "Revenues" in the consolidated statements of income and is recorded on an accrual basis.

The medical equipment sold by the Company has embedded self-developed software which can also be sold on a standalone basis.

(ii)
Sales of maintenance and support services

The Company also provides comprehensive post-sales services to certain distributors for medical equipment used by hospitals. These contracts are negotiated and signed independently and separately from the sales of medical equipment. In accordance with the agreements, the Company provides comprehensive services including replace of Cobalt 60 radioactive sources, additional training to users of the medical equipment, maintenance of medical equipment, software upgrades and consulting. Fees for these services are recognized over the life of the contract on a monthly basis.

(iii)
Operating rights revenue

On March 14, 2011, Changdu Huiheng signed the contract with Jiancheng whereby, March 30, 2011 was the effective date of completing the acquisition and with January 1, 2011 as being the effective date of recognizing the operating income from the medical center of Liaochang Hospital of Traditional Chinese Medicine and March 1, 2011 as being the effective date of recognizing the operating income from the other three medical centers. Changdu Huiheng acquired certain operating rights of four medical centers which operate with these medical accelerator systems in different hospitals providing radiotherapy treatment services. Pursuant to the operating rights, Changdu Huiheng will share a percentage of the net income derived from the radiotherapy services provided by each medical center. The net income will be calculated by deducting the related costs from the revenue of each medical center.

The operating rights of medical centers will last for seven to ten years from the date of acquisition. Net income after deducting the related expenses incurred in medical centers is shared between the Company and the hospitals.

 
11

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont'd)

Summary of significant accounting policies (…/Cont'd)

Government tax refund

Pursuant to a tax incentive policy provided by the Tibet Finance Bureau, Tibet Changdu Huiheng Development Co., Ltd (“Changdu Huiheng”), a subsidiary of the Company, is eligible for the following tax refunds for five (5) consecutive years commencing from September 2006:

 
(i)
Annual income tax payment in excess of $137,000 (RMB 900,000) will be refundable.
 
(ii)
31% of business tax payments will be refunded if annual business tax payment in excess of $152,000 (RMB 1.0 million).
 
(iii)
38.75% of VAT payments will be refunded if annual VAT payment in excess of $228,000 (RMB 1.5 million).

The Company records these tax refunds as other income when the refunds are confirmed and paid by Tibet Finance Bureau.

Warranty

The Company provides a product warranty to its customers to repair any product defects that occur generally within twelve months from the date of sale. The Company's purchase contracts generally allow the customer to withhold up to 10% of the total purchase price for the duration of the warranty period and included in Accounts receivable. Based on the limited number of actual warranty claims and the historically low cost of such repairs, the Company has not recognized a liability for warranty claims, but rather recognizes such cost when product repairs are made.

Research and development costs

Research and development costs are charged to expense as incurred. Research and development costs mainly consist of salary for the research and development staff and material costs for research and development. The Company incurred $25,392 and $15,340 for the three months ended March 31, 2011 and 2010, respectively.

Income taxes

The Company accounts for income taxes under ASC 740 "Income Taxes." Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

 
12

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont'd)

Summary of significant accounting policies (…/Cont'd)

Income taxes (…/Cont’d)

During 2008, the Company adopted ASC740 "Income Taxes," which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

Foreign currency translation

Assets and liabilities of foreign subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rate of exchange prevailing during the period. The related transaction adjustments are reflected in "Accumulated other comprehensive income / (loss)" in the equity section of the consolidated balance sheet.

   
March 31, 2011
   
March 31, 2010
   
December 31, 2010
 
                   
As of period ended RMB :USD exchange rate
    6.5483       6.8259       6.6000  
Average period for the 3 months ended RMB :USD exchange rate
    6.5738       6.8262       -  

Cash

Cash consists of cash on hand and at banks. Substantially all of the Company's cash is held with financial institutions located in the PRC. Management believes that these major financial institutions are of high credit quality.

Share-based compensation

The Company awards stock options and other equity-based instruments to its employees, directors and consultants and provides employees the right to purchase common stock (collectively "share-based payments"), pursuant to stockholder approved plans.  Compensation costs related to such awards is measured based on the fair value of the instrument on the grant date and is recognized on a straight-line basis over the requisite service period, which generally equals the vesting period.  All of the Company's stock-based compensation is based on grants of equity instruments and no liability awards have been granted.

During 2009, the Company adopted a stock option plan (the "Plan") for selected employees, directors, consultants to promote the success of the Company's business by offering these individuals an opportunity to acquire an ownership interest in the Company.  The Plan provides both for direct awards of shares and for the granting of options to purchase shares as determined by the Administrator at the time of the grant. Under the Plan, 1,566,666 shares have been reserved for awards.

 
13

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont'd)

Summary of significant accounting policies (…/Cont'd)

Share-based compensation (…/Cont’d)

The Company has elected to use the calculated value method to account for the options issued in 2009.  The Company used its historical closing price of March 31, 2011 to estimate volatility.  Using the Black-Scholes-Merton option pricing model, management has determined that the options issued in 2009 have a calculated value of $0.5117 per share.  Total compensation cost associated with these options was $14,049 over the three-year service period that began on the grant date. Compensation cost for the three months ended March 31, 2011 and 2010 was $2,342 and $2,342 respectively. Such amount had not been recorded as it was considered immaterial.

The assumptions used and the weighted average calculated value of options are as follows for the three months ended March 31, 2011:

Risk-free interest rate
    1.88 %
Expected dividend yield
    -  
Expected volatility
    153.59 %
Expected life in years
    3.4  
Service period in years
    3  
Weighted average calculated value of options granted
  $ 0.5117  

The following is an analysis of options to purchase shares of the Company’s stock issued and outstanding as of March 31, 2011:

         
Weighted Average
 
   
Options
   
Price
 
             
Options granted on June 6, 2009
    30,000     $ 5  
Exercised
    -          
Expired/cancelled
    -          
Options outstanding, as at December 31, 2010
    30,000          
Granted
    -          
Exercised
    -          
Expired/cancelled
    -          
Options outstanding, as at March 31, 2011
    30,000          

As of March 31, 2011, options for 20,000 shares at a weighted average exercise price of $5.00 were vested and exercisable.  These options have a weighted average remaining contractual term of 1 year.  Compensation cost of approximately $4,684 had not yet been recognized on non-vested awards. The weighted average period over which it is expected to be recognized is 1 year.

 
14

 
 
HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont'd)

Summary of significant accounting policies (…/Cont'd)

Other comprehensive income

The Company has adopted ASC 220 "Comprehensive Income." This statement establishes rules for the reporting of other comprehensive income and its components.  Other comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statements of Income and the Consolidated Statement of Changes in Stockholders' Equity.

Earnings per share

The value of basic earnings per share is computed on the basis of the weighted-average number of shares of our common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of our common stock plus the effect of dilutive potential common shares outstanding during the period using the if-converted method. Dilutive potential common shares include Series A Convertible Preferred Stock.

The following table sets forth the computation of basic and diluted net income per common share:

   
For the Three Months Ended March 31,
 
   
2011
   
2010
 
             
Net income attributable to Huiheng’s shareholders
  $ 4,700,629     $ 656,423  
                 
Weighted average outstanding shares of common stock
    14,030,637       13,935,290  
Dilutive effect of Convertible Preferred Stock
    2,220,476       2,315,823  
Diluted weighted average outstanding shares
    16,251,113       16,251,113  
                 
Earnings per common share:
               
Basic
  $ 0.34     $ 0.05  
Diluted
  $ 0.29     $ 0.04  

For the three months ended March 31, 2011, the stock option plan granted in June 2009 to purchase 30,000 common shares were not included in diluted earnings per share because the effect would be anti-dilutive.

Commitments and contingencies

The Company is subject to lawsuits, investigations and other claims related to operations, product, taxing authorities, environmental and other matters out of the normal course of business and is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses and fess. A determination of the amount of reserves and disclosures required, if any, for these contingencies are made after considerable analysis of each individual issue. The Company accrues for contingent liabilities when an assessment of the risk of loss is probable and can be reasonably estimated. The Company discloses contingent liabilities when the risk of loss is reasonably or portable.

 
15

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont'd)

Summary of significant accounting policies (…/Cont'd)

Commitments and contingencies (…/Cont’d)

All of the Company’s operations are carried out and all of its assets are located in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency fluctuation and remittances and methods of taxation, among other things.

Financial instruments with characteristics of both liabilities and equity

The Company accounts for its Series A Preferred Stock in accordance with ASC 480 "Distinguishing Liabilities from Equity" and ASC 815 "Derivatives and Hedging." We have determined that our Series A Preferred Stock is not mandatorily redeemable. Accordingly, the Company accounts for the Preferred stock as permanent equity.

Non-controlling interest in consolidated financial statements

In December 2007, the FASB issued authoritative guidance related to non-controlling interests in consolidated financial statements, which was an amendment of ARB No. 51. This guidance is set forth in Topic 810 in the Accounting Standards Codification (ASC 810). ASC 810 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This accounting standard is effective for fiscal years beginning after December 15, 2008. The Company adopted the presentation and disclosure requirements of ASC 810 retrospectively to the December 31, 2008 financial statements.

Fair value measurements

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 -
Quoted prices in active markets for identical assets or liabilities.
Level 2 -
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 -
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.

 
16

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont'd)

Summary of significant accounting policies (…/Cont'd)

Fair value measurements (…/Cont’d)

The carrying values of cash and cash equivalents, accounts receivable, and accounts payable, approximate fair values due to their short maturities.

There was no asset or liability measured at fair value on a non-recurring basis as of March 31, 2011 and December 31, 2010.

Impact of new accounting standards

We describe below recent pronouncements that have had or may have a significant effect on our financial statements. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, or disclosures.

In January 2010, the FASB issued ASU 2010-6, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The adoption of ASU 2010-6 will not have a material impact on our consolidated financial statement disclosures.
 
In December, 2010, the FASB amended its view on performing step two of a goodwill impairment analysis. The amendment does not prescribe a specific method of calculating the carrying value of a reporting unit in the performance of step one of the goodwill impairment test and requires entities with a zero or negative carrying value to assess, considering qualitative factors such as those listed in Accounting Standards Codification (ASC) 350-20-35-30 Intangibles - Goodwill and Other, whether it is more likely than not that a goodwill impairment exists. If an entity concludes that it is more likely than not that a goodwill impairment exists, the entity must perform step two of the goodwill impairment test. For public entities, these amendments are effective for impairment tests performed during entities' fiscal years that begin after December 15, 2010. The Company does not believe the adoption of this amendment will have a material effect on its financial statements.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

 
17

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)
 
NOTE 3 - ACQUISITION OF MEDICAL ACCELERATOR SYSTEMS AND OPERATING RIGHTS

On March 30, 2011, a subsidiary of the Company, Changdu Huiheng acquired from its major customer, Jiancheng, medical equipment, specifically, medical accelerator systems and the operating rights of four medical centers which utilize these medical accelerator systems. The medical centers are located in different hospitals in PRC and provide radiotherapy treatments to local patients. Changdu Huiheng will share a percentage of net income with the hospitals from each medical center effective January 1, 2011 for one medical center and March 30, 2011 for three medical centers.

The consideration of the acquisition of the medical equipment and operating rights were approximately $8.25 million (RMB 54,000,000) and settled by offsetting the accounts receivable from Jiancheng. The cost of medical accelerator systems and operating rights were based on the fair value estimated by an independent appraisal firm which amounted in the aggregate to $11,277,310.

At the completion of acquisition during the period, the medical accelerator systems are recognized as medical radiotherapy equipment under property, plant and equipment category. The assets were recorded at fair value which amounted to $650,238 and depreciated with straight-line method over the estimated useful life ranging from seven to ten years.

The operating rights were recognized as intangible assets in the total amount of $10,627,072 and amortized on straight-line basis over the contractual period from seven to ten years.

As a result of the acquisition of assets, the Company has recognized a gain on the acquisition amounting to $3,019,137 representing the difference between the fair value of assets acquired versus the amount of accounts receivable offset.
 
Acquisition information which translated at closing rate of March 30, 2011 is presented as follows:

Name of hospital
 
Contractual
period
 
Value of medical
accelerator systems
   
Value of operating
rights
   
Total
 
Dali 60 Military Hospital of China
 
93 months
  $     $ 3,398,096     $ 3,398,096  
Liaocheng Hospital of Traditional Chinese Medicine
 
84 months
    283,713       1,523,050       1,806,763  
Heze Huici Hospital
 
108 months
    193,691       3,379,463       3,573,154  
Lianyungang Shengan Hospital
 
116 months
    172,834       2,326,463       2,499,297  
Total
      $ 650,238     $ 10,627,072     $ 11,277,310  
 
 
18

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)
 
NOTE 4 – INVENTORIES

At March 31, 2011 and December 31, 2010, inventories consisted of the following:

   
March 31, 2011
   
December 31, 2010
 
             
Raw materials
  $ 474,144     $ 578,071  
Work-in-progress
    2,643,902       2,254,211  
    $ 3,118,046     $ 2,832,282  

Final assembly of our products, including installation of radioactive source materials, is conducted on site at our customers' locations. Our products are not considered to be finished good (available for sale in the normal course of business) until such time as the source material is installed in the units.

NOTE 5 – PREPAID EXPENSES

At March 31, 2011 and December 31, 2010, prepaid expenses consisted of the following:

   
March 31, 2011
   
December 31, 2010
 
             
Advances made to suppliers
  $ 2,629,198     $ 2,452,693  
Construction in progress paid on behalf of landlord (a) - current portion
    293,206       290,909  
    $ 2,922,404     $ 2,743,602  
                 
Non-current portion (a)
  $ 1,153,147     $ 1,216,841  

(a)
Under an agreement signed with the landlord, Shenzhen Hyper will make payment for the construction in progress of the building in advance on behalf the landlord. Meanwhile, Shenzhen Hyper signed a rental agreement with the landlord to rent the building for 20 years at about $24,400 (RMB160,000) per month. The balance of the amount due from the landlord will be used and amortized as rental expenses incurred by Shenzhen Hyper.

The expected amortization of construction in progress for the next five years and thereafter is as follows:

For the year ended
     
December 31,
     
2011
  $ 219,904  
2012
    293,206  
2013
    293,206  
2014
    293,206  
2015
    293,206  
Thereafter
    53,625  
Total
  $ 1,446,353  

 
19

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 6 – OTHER RECEIVABLES

At March 31, 2011 and December 31, 2010, other receivables, net, consisted of the following:

   
March 31, 2011
   
December 31, 2010
 
Other receivables
           
- loan or advance to staff for business travelling
  $ 58,256     $ 38,758  
- utilities and rental deposits
    1,527       1,515  
- prepaid expenses made by director
    3,054       3,030  
- others (net of allowance for doubtful accounts of nil and $757,576)
    59,429       66,216  
    $ 122,266     $ 109,519  
  
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

At March 31, 2011 and December 31, 2010, property, plant and equipment, net, consisted of the following:

   
March 31, 2011
   
December 31, 2010
 
             
Buildings and building improvements
  $ 2,585,324     $ 2,565,072  
Production equipment
    708,450       702,900  
Medical radiotherapy equipment
    650,238       -  
Furniture, fixture and office equipment
    395,837       422,616  
Motor vehicles
    195,280       193,750  
      4,535,129       3,884,338  
Less: Accumulated depreciation
    (1,538,946 )     (1,464,990 )
    $ 2,996,183     $ 2,419,348  

For the three months ended March 31, 2011 and 2010, depreciation expenses were $50,376 and $60,647, respectively.

NOTE 8 - LAND USE RIGHT

Land use right represents prepaid lease payments to the Local Government for land use right held for a period of 50 years from January 20, 2009 to December 26, 2058 in Wuhan, People's Republic of China. Land use right is amortized using the straight-line method over the lease term of 50 years. The amortization expense for the three months ended March 31, 2011 and 2010 was $4,978 and $4,794, respectively.

 
20

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 9 – INTANGIBLE ASSETS

At March 31, 2011 and December 31, 2010, intangible net assets consisted of the following:
 
   
March 31, 2011
   
December 31, 2010
 
             
Patent technology in Shenzhen Hyper (a)
  $ 1,527,114     $ 1,515,152  
Patent technology in Portola Medical, Inc.(b)
    250,000       250,000  
Operating rights (c)
    10,627,072       -  
Less: Accumulated amortization
    (939,891 )     (802,950 )
    $ 11,464,295     $ 962,202  

(a)
Patent represents a patent technology for the production of a component of the radiation treatment system. Pursuant to the patent certificate, the patent is valid for 20 years from the application date, May 1999. The amortization expenses for the three months ended March 31, 2011 and 2010 were $21,425 and $20,633, respectively.

(b)
Patent acquired in Portola Medical, Inc. (“Portola”). The amortization expenses for three months ended March 31, 2011 and 2010 were $3,125 and nil, respectively. Patent technology is utilized in the production of medical equipment and is amortized over its estimated useful life of 20 years.

(c)
Operating rights represents the contractual rights of receiving net income from four medical centers which utilize the medical accelerator systems owned by Changdu Huiheng, which have been acquired from Jiancheng on March 30, 2011. The operating rights were acquired from its major customer and are amortized over contractual periods ranging from 7 to 10 years. These operating rights are amortized over their contractual periods by straight-line method and the amortization expenses for three months ended March 31, 2011 was $105,606.

For the three months ended March 31, 2011 and 2010, amortization expenses amounted to $130,156 and $20,633, respectively. The expected amortization which was based on the closing rate as of March 31, 2011 for the next five years and thereafter is as follows:

   
Patent technology 
in Portola
   
Patent technology in
Shenzhen Hyper
   
Operating rights in
Changdu Huiheng
   
Total
 
For the year ended
                       
December 31,
                       
2011
  $ 9,375     $ 64,526     $ 954,155     $ 1,028,056  
2012
    12,500       86,035       1,272,207       1,370,742  
2013
    12,500       86,035       1,272,207       1,370,742  
2014
    12,500       86,035       1,272,207       1,370,742  
2015
    12,500       86,035       1,272,207       1,370,742  
Thereafter
    181,250       293,950       4,478,071       4,953,271  
Total
  $ 240,625     $ 702,616     $ 10,521,054     $ 11,464,295  

 
21

 
 
HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 10 – ACCRUED LIABILITIES AND OTHER PAYABLES

At March 31, 2011 and December 31, 2010, accrued liabilities and other payables consisted of the following:

   
March 31, 2011
   
December 31, 2010
 
             
Accrued expenses - operating
  $ 332,639     $ 311,342  
Accrued payroll and welfare
    281,868       181,255  
Value added tax, other taxes payable and surcharges
    1,116,687       1,170,646  
Customer deposits
    109,981       76,983  
    $ 1,841,175     $ 1,740,226  

NOTE 11 – NON-CONTROLLING INTEREST

Non-controlling interest included in the Company’s balance sheets as of March 31, 2011 and December 31, 2010 represents 25% of equity interest in Shenzhen Hyper.

Net loss attributable to non controlling interest

   
March 31, 2011
   
December 31, 2010
 
             
Balance at beginning period
  $ 928,427     $ 1,111,027  
Effect for the current period/year
               
- Net loss
    (90,437 )     (215,574 )
- Foreign currency translation loss
    6,977       32,974  
Balance at end of period
  $ 844,967     $ 928,427  

NOTE 12 – DUE TO RELATED PARTIES

A summary of related party payables at March 31, 2011 and December 31, 2010 is as follows:

Amounts due to related parties at March 31, 2011 and December 31, 2010 represent the remaining balance due to a former shareholder of Allied Moral Holdings Limited ("Allied Moral"), a subsidiary of the Company, pursuant to the 2007 share redemption as well as advances related to the acquisition of Changdu Huiheng.

In June 2010, the cash consideration of $260,000 and related expenses amounting to $30,000 for acquiring the new subsidiary, Portola Medical Inc, were paid directly by the director, Hui Xiaobing on behalf of the Company. As of March 31, 2011, such director is owed $362,459.

 
22

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 13 – STOCKHOLDERS' EQUITY

The Company has authorized 74,000,000 shares of Common stock for issuance. Prior to the share exchange in 2007, Mill Basin had 10,150,000 shares of its common stock outstanding.  In contemplation of the share exchange, Mill Basin shareholders contributed 9,700,000 common shares to treasury, resulting in 450,000 shares of Mill Basin's common stock outstanding immediately prior to the share exchange. As of March 31, 2011 and December 31, 2010, 23,730,637 shares were issued of which 9,700,000 are deemed treasury shares contributed from Mill Basin's shareholders, and 14,030,637 shares outstanding.

The Company has authorized 1,000,000 shares of Preferred stock, with 300,000 shares designated as Series A convertible preferred stock. As of March 31, 2011 and December 31, 2010, 211,390 shares were issued and outstanding with a liquidation preference of $7,927,125.

Series A Conversion

There were no conversions of the Series A Preferred stock into common stock during three months ended March 31, 2011.

Statutory surplus reserve

In accordance with PRC Company Law, Changdu Huiheng is required to appropriate at least 10% of the profit to the statutory surplus reserve.  Appropriation to the statutory surplus reserve by Changdu Huiheng is based on profits arrived at under PRC accounting standards for business enterprises for each year, after offsetting any prior year's losses.

Appropriation to the statutory surplus reserve must be made before distribution of dividends to owners.  The appropriation is required until the statutory surplus reserve reaches 50% of the equity.  This statutory surplus reserve is not distributable in the form of cash dividends.

As of March 31, 2011, the Company established and segregated its retained earnings and the amount for the Statutory Surplus Reserve of $1,887,166.

 
23

 
 
HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 14 – SEGMENT REPORTING

The Group has three reportable segments: products, services and operating rights.

The following table presents information about the Company's operating segments for the three months ended March 31, 2011 and 2010:
   
For the Three months ended March 31,
 
   
2011
   
2010
 
Revenues:
           
Products
  $ -     $ -  
Services
    1,557,379       1,400,853  
Operating rights
    106,515       -  
    $ 1,663,894     $ 1,400,853  
                 
   
March 31, 2011
   
March 31, 2010
 
Operating income:
               
Products
  $ -     $ -  
Services
    1,359,540       1,277,803  
Operating rights
    (5,726     -  
      1,353,814       1,277,803  
Corporate expenses
    (807,735 )     (546,593 )
Operating income
  $ 546,079     $ 731,210  

NOTE 15 – OTHER INCOME

The following table presents information about the Company's other income for the three months ended March 31, 2011 and 2010:
 
   
For the Three months ended March 31,
 
   
March 31, 2011
   
March 31, 2010
 
             
Recovery of bad debts
  $ 1,143,326     $ -  
Others
    10,303       -  
    $ 1,153,629     $ -  

Provision for bad debts of $382,731 in accounts receivable and $760,595 in other receivables are reversed during the period due to the settlement of agreement signed by Changdu Huiheng and the major customer Jiancheng.

 
24

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 16 – INCOME TAXES

Huiheng Medical, Inc. is a non-operating holding company. All of the Company’s income before income taxes and related tax expenses are from PRC sources. The Company's PRC subsidiaries file income tax returns under the Income Tax Law of the People's Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws.

Income tax expense for three months ended March 31, 2011 and 2010 amounted to $169,353 and $127,427, respectively.

As Changdu Huiheng, Huiheng’s subsidiary, is located in the western area in the PRC and is within the industry specified by relevant laws and regulations of the PRC, the tax rate applicable to Changdu Huiheng is 15% (2010: 15%).

Wuhan Kangqiao is a high-tech enterprise with operations in an economic-technological development area in the PRC. Therefore, the applicable tax rate is 25%.

Shenzhen Hyper is a high-tech manufacturing company located in the Shenzhen special economic region. Therefore, the applicable tax rate is also 15% (2010:15%). According to local tax regulation, Shenzhen Hyper is entitled to a tax-free period for the first two years, commencing from the first profit-making year and a 50% reduction in state income tax rate for the next six years.

A reconciliation of the expected income tax expense to the actual income tax expense for three months ended March 31, 2011 and 2010 are as follows:

   
For the Three months ended Mar 31,
 
   
2011
   
2010
 
             
Income before income taxes
  $ 4,779,545     $ 720,713  
                 
Expected PRC income tax expense at statutory tax rate of 25%
    1,194,886       180,178  
Non-deductible expenses
    93,321       58,459  
Income tax exempted
    (1,118,854 )     (111,210 )
Income tax expense
  $ 169,353     $ 127,427  

The PRC tax system is subject to substantial uncertainties and has been subject to recently enacted changes. The interpretation and enforcement of which are also uncertain. The Company remains open to examination by the major jurisdictions to which the Company is subject to, in this case, the PRC tax authorities.

No deferred tax liability has been provided as the amount is deemed immaterial.

 
25

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 17 – CONCENTRATION OF CREDIT RISK

Customers' concentrations

Customers accounting for 10% or more of the Group's net revenue for the three months ended March 31, 2011 and 2010 are as follows:
 
   
2011
   
2010
 
   
%
   
%
 
Customer A
    53 %     54 %
Customer B
    31 %     35 %
Customer C
    10 %     11 %

Three customers accounted for 94% and three customers accounted for 100% of revenue for the three months ended March 31, 2011 and 2010, respectively. These customers also accounted for 93% and 84% of accounts receivable as of March 31, 2011 and 2010, respectively. As a result, a termination in relationship with or a reduction in orders from any of these customers could have a material impact on the Company’s results of operations and financial condition.

Except as disclosed above, no other single customer accounted for 10% or more of the Group's net revenue for the periods ended March 31, 2011 and 2010.

Other credit risks

As of March 31, 2011, all of the Company’s cash and cash equivalents were held by major financial institutions located in the PRC, none of which were insured or collateralized. However, management believes those financial institutions are of high credit quality and has assessed the loss arising from the non-insured cash and cash equivalents from those financial institutions to be immaterial to the consolidated financial statements. Therefore, no loss in respect of the cash and cash equivalent were recognized as of March 31, 2011.
 
NOTE 18 - OPERATING LEASE COMMITMENTS

As of March 31, 2011, the total future minimum lease payments under non-cancellable operating leases in respect of premises, which were based on the closing rate as of March 31, 2011, are as follows:

For the year ended
     
December 31,
     
2011
  $ 219,904  
2012
    293,206  
2013
    293,206  
2014
    293,206  
2015
    293,206  
Thereafter
    3,469,603  
TOTAL
  $ 4,862,331  

 
26

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 19 – CONDENSED PARENT COMPANY FINANCIAL INFORMATION

The Company records its investment in subsidiaries under the equity method of accounting as prescribed in ASC Topic 323, “Investments – Equity Method and Joint Ventures.” Such investment and long-term loans to subsidiaries are presented on the balance sheet as “Investments in subsidiaries” and the income of the subsidiaries is presented as “Equity in income of subsidiaries” on the statement of income.

These supplemental condensed parent company financial statements should be read in conjunction with the notes to the Company’s Consolidated Financial Statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.

As of March 31, 2011 and December 31, 2010, there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except as separately disclosed in the Company’s Consolidated Financial Statements, if any.
 
   
As of March 31,
   
As of December 31,
 
   
2011
   
2010
 
             
CONDENSED BALANCE SHEETS
           
             
Investments in subsidiaries
  $ 31,998,438     $ 27,145,551  
                 
Total Assets
  $ 31,998,438     $ 27,145,551  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Other payable
  $ 98,500     $ 96,000  
                 
Total Current Liabilities
    98,500       96,000  
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, $0.001 par value; 1,000,000 shares authorized; Designated 300,000 shares of Series A convertible preferred stock; 211,390 shares issued and outstanding with liquidation preference of $7,927,125 at March 31, 2011 and December 31, 2010
    211       211  
Common stock, $0.001 par value; 74,000,000 shares authorized; 23,730,637 shares issued and 14,030,637 shares outstanding at March 31, 2011 and December 31, 2010
    23,731       23,731  
Treasury stock, 9,700,000 common shares, at cost
    (9,700 )     (9,700 )
Additional paid-in capital
    7,498,086       7,498,086  
Statutory surplus reserve
    1,887,166       1,676,867  
Retained earnings
    18,789,023       14,298,693  
Accumulated other comprehensive income
     Foreign currency translation gain
    2,866,454       2,633,236  
Total Huiheng's stockholders' equity
    31,054,971       26,121,124  
Non-controlling interests
    844,967       928,427  
Total Stockholders' Equity
    31,899,938       27,049,551  
Total Liabilities and Stockholders' Equity
  $ 31,998,438     $ 27,145,551  

 
27

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN US DOLLARS)

NOTE 19 – CONDENSED PARENT COMPANY FINANCIAL INFORMATION (…/Cont’d)

CONDENSED STATEMENT OF INCOME
 
For three months ended March 31,
 
   
2011
   
2010
 
             
General and administrative expenses
  $ (94,847 )   $ (31,619 )
Equity in income of subsidiaries
    4,795,476       688,042  
Net income
  $ 4,700,629     $ 656,423  
                 
CONDENSED STATEMENT OF CASH FLOWS
 
For three months ended March 31,
 
    2011     2010  
                 
Net cash used in operating activities
  $ -     $ -  
Net cash used in investing activities
    -       -  
Net cash provided by financing activities
    -       -  
Cash, beginning of period
    -       -  
Cash, end of period
  $ -     $ -  

 
28

 

Item 2.  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 should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report.  In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report. See also Risk Factors contained in our Form 10-K for the year ended December 31, 2010.

OVERVIEW

We are a China-based medical equipment company that develops, designs and markets radiation therapy systems used for the treatment of cancer.  We currently have five products: the Super Gamma System (“SGS”), the Body Gamma Treatment System (“BGTS”), OPEN Stereotactic Gamma-ray Radiotherapy System, the Head Gamma Treatment System (“HGTS”) and a multileaf collimator device (“MLC”) used in conjunction with a linear accelerator. In addition to providing radiotherapy equipment, we also offer our customers comprehensive post-sales services for our products as well as products manufactured by others.  These services include radioactive cobalt source replacement and disposal, medical expert training, clinical trial analysis, patient tumour treatment analysis, software upgrades and patient care consulting. Although our primary business is the sale of radiation therapy systems, due to current economic conditions, our revenue from services have exceeded our revenues from the sale of products. For the three months ended March 31, 2011 and 2010, we had no sales of products and all revenue is related to our service contracts.
 
We currently sell our products primarily to a small number of hospital equipment investors in China, who install our systems in hospitals or clinics.  We also offer comprehensive post-sales services for our medical equipment to our customers.  The service contracts are negotiated and signed independently and separately from the sales of medical equipment.  Our post-sales services include radioactive cobalt source replacement and disposal, medical expert training, clinical trial analysis, patient tumor treatment analysis, product maintenance, software upgrades, and consulting.  Due to the poor economy during the past years, there has been a decrease in the sales of our products and the majority of our total revenues is attributed to service contract revenue. In addition, in China, before our radiotherapy equipment may be installed, each hospital or clinic must obtain approval from the Ministry of Health and the local provincial government. The obligation to obtain approval from the Ministry of Health and the local provincial government is the responsibility of our customer, who is usually a third party hospital equipment financing company and a distributor of our equipment. As part of the application process, however, we will assist in responding to technical questions raised from time to time. Questions raised during the process can include ensuring that equipment has been approved by the SFDA, that the equipment meets the specifications stated and that the equipment has been properly installed. Because there is no standard application and approval procedure, the processing time for obtaining approval from the local provincial government will vary from province to province. Based on our prior experience the time from application to final installation of our radiotherapy equipment is as follows:
 
 
·
Once the sale contract has been signed, the hospital or clinic will submit an application for approval with the Ministry of Health and local provincial government for the installation of our radiotherapy equipment.  Depending on the priority of and interest of the local provincial government, obtaining the Ministry of Health and local provincial government approval by our customers has taken from as fast as 3 months to as long as 24 months. Unfortunately there is no set time frame in which the local regulatory authorities must respond. As such, the length of the approval process varies dramatically from province to province as each local province has its own approval process and what it deems to be a priority at the local level.

 
·
After both regulatory approvals have been obtained from the Ministry of Health and local provincial government, and assuming the hospital or clinic has properly prepared the facility for installation, it typically takes us 1 to 2 months to install and test our products.
 
As a result, our ability to sell, install and recognize revenue for sales of our radiotherapy equipment through our customers is largely dependent on the customer’s and hospital’s ability to obtain approval by the Ministry of Health and the local provincial government.

 
29

 
  
Our expansion plans include broadening our product offering.  Our research and development team is focused on developing and producing technologically advanced radiotherapy and GTS products.  We currently have 42 patents issued in the PRC, three patents in the U.S., one patent in the European Union, one patent in Sweden and additional patents applications pending.  Our SGS, BGTS and GTS products are approved for use in China by the State Food and Drug Administration (“SFDA”), an agency of the Ministry of Healthcare of the PRC.

Further, we have sought to expand our product offering.  On June 7, 2010, we completed the acquisition of Portola Medical, Inc. whose primary asset consists of its rights to develop, manufacture and sell an adjustable Multi-Catheter Source Applicator which is intended to provide brachytherapy when a physician chooses to deliver intracavitary radiation to the surgical margins following lumpectomy of breast cancer.  Portola Medical is in its initial stages and we plan to market and sell this product in the United States and in Asia.

In addition, we are currently in the process of planning for the expansion of our Wuhan facility.  Our proposed construction of the Wuhan facility is currently pending governmental approval of the facility blue prints, which contemplate an approximately 27,000 m2 facility to be used for research, development and production of our current and future products.  Due to the uncertainty of timing in the approval process, we do not currently have an expected timeframe for commencing construction of this facility, and construction will also be dependent on the availability of funding.

Our future research and development efforts will focus on developing an advanced magnetic resonance imaging (“MRI”) device and an industrial linear accelerator (“LINAC”) unit used for, among other things, preserving food through irradiation.  Currently, we have temporarily suspended the development of these two projects due to changing market conditions and lack of funding available for these projects.  We will pursue these projects pending availability of funding for future research and development.

RECENT DEVELOPMENTS
 
On March 30, 2011, through our subsidiary Tibet Changdu Huiheng Development Ltd., we entered into four separate Transfer Agreements with Shenzhen Jiancheng Investment Co., Ltd., an entity organized under the laws of China (“Jiancheng”). Jiancheng is one of our largest customers. Prior to the execution of the Transfer Equipment, Jiancheng owed us approximately $17 million (RMB 110,720,000) in accounts receivable. Under the terms of the Transfer Agreements, we purchased for an aggregate of approximately $8.25 million (RMB 54,000,000) (“Purchase Price) medical equipment, specifically, medical accelerator systems located at four different medical centers that we had previously sold to Jiancheng (the “Equipment”) and certain operating rights which gives us the right to share with the hospitals in the net income derived from the radiotherapy services provided by each medical center. The Transfer Agreements closed on March 30, 2011. 

The consideration of the acquisition of the medical equipment and operating rights were approximately $8.25 million (RMB 54,000,000) and settled by offsetting the accounts receivable from Jiancheng. The cost of medical accelerator systems and operating rights were based on the fair value estimated by an independent appraisal firm which amounted in the aggregate of $11,277,310.

At the completion of acquisition during the period, the medical accelerator systems are recognized as medical radiotherapy equipment under property, plant and equipment category. The assets were recorded at fair value which amounted to $650,238 and depreciated with straight-lined method over the estimated useful life ranging from seven to ten years.

The operating rights were recognized as intangible assets in the amount of $10,627,072 and amortized on straight-line basis over the contractual period from seven to ten years.

As a result of this acquisition of assets, the Company has recognized a gain on the acquisition amounting to $3,019,137 representing the difference between the fair value of assets acquired versus the amount of accounts receivable offset.

Acquisition information which translated at closing rate of March 31, 2011 is presented as follows:
 
Medical Center
  Appraised Value    
Purchase Price 
(US Dollars)
 
Dali 60 Military Hospital of China   $ 3,398,096     $ 2,290,671  
Liaocheng Hospital of Traditional Chinese Medicine     1,806,763     $ 1,374,403  
Heze Huici Hospital     3,573,154     $ 2,748,805  
Lianyungang Shengan Hospital     2,499,297     $ 1,832,537  
Total   $ 11,277,310     $ 8,246,416  
 
 
30

 

RESULTS OF OPERATIONS

Comparison of three months ended March 31, 2011 and 2010

The following table sets forth certain information regarding our results of operation.

   
Three Months Ended March 31
 
   
2011
   
2010
 
Statements of Operations Data
           
Revenues
    1,663,894       1,400,853  
Cost of Revenues
    278,137       96,432  
Gross Profit
    1,385,757       1,304,421  
Operating Expenses
               
Sales and marketing expenses
    91,223       62,123  
General and administrative expenses
    723,063       495,748  
Research and development costs
    25,392       15,340  
Other income/(expense)
    4,233,466       (10,497 )
Income from operation before income tax expenses
    4,779,545       720,713  
Income tax expenses
    169,353       127,427  
Net income before attribution of non-controlling interests
    4,610,192       593,286  

Operating revenues

For the three months ended March 31, 2011, revenues amounted to $1,663,894, an increase of $263,041 compared to $1,400,853 for the same period of the prior year.  This increase was mainly due to the fact that we re-purchased our equipment located at four medical centers from our client Jiancheng and obtained the operating rights derived from such equipment during March, 2011, which contributed $106,515 to operating revenue.  We acquired such equipment from Jiancheng in exchange for the cancellation of approximately $8.25 million (RMB 54,000,000) of related accounts receivable due to us from Jiancheng.   In addition, during the three months ended March 31, 2011 we entered into two more service contracts than we did in the same period of the prior year.

Revenues from product sales, services, operating rights, and tax refunds and subsidies are broken down below.

There was no revenue from product sales for the three months ended March 31, 2011, representing no change from the amount of product sales for the same period of the prior year.  No units were installed in the three months ended March 31, 2011, nor were any units installed in the three months ended March 31, 2010.  The lack of any unit installation was due primarily to two factors: (i) the first quarter of the year is typically the lowest season for our business (due partially to the occurrence of the Chinese New Year), and (ii) the unit sales process took longer than expected in the quarter.

Revenues from services were $1,557,379 for the three months ended March 31, 2011, representing an increase of $156,526 compared to $1,400,853 in revenue from services from the same period of the prior year.  Revenues from services increased as we had two more service contracts during the three months ended March 31, 2011 than what we did in the same period of the prior year.

On March 30, 2011, through our subsidiary Changdu Huiheng we acquired certain operating rights of four medical centers which operate with these medical accelerator systems in different hospitals providing radiotherapy treatment services. Pursuant to the operating rights, Changdu Huiheng will receive a percentage of net income derived from the radiotherapy services provided by each medical center. Further, we are not required to provide any services or resources under the operating rights. Revenues from operating rights were $106,515 for the three months ended March 31, 2011. No revenues from operating rights were received during the same period of the prior year.

 
31

 

Revenue Backlog

Revenue backlog represents the total amount of unrecognized revenue associated with existing purchase orders for our products.  Any deferral of revenue recognition is reflected in an increase in backlog as of the end of that period.  The backlog as of March 31, 2011 amounted to $9.01 million, representing a decrease of $2.75 million or 23%, compared to $11.76 million as of March 31, 2010.  The backlog has decreased but remained in place in large part due to the newly installation in the last quarter of 2010 and regulatory approval delays concerning clients’ facility preparation as necessary to install our products, which caused some of the units to stay in our backlog longer than we expected.  Subject to any further delays in obtaining regulatory approval, we anticipate that the installation of the first SGS-I in Peru will be completed by 2011.

The purchase orders are not cancellable, but are subject to certain conditions, including but not limited to, the customers’ obtaining regulatory approval from their local government for the installation and operation of our products.  We expect the purchase orders comprising the revenue backlog to be installed during 2011.

Below is a summary of our revenue backlog broken down by product, unit price, quantity and total amount owed as of March 31, 2011, based on an exchange rate of  RMB 6.5483 per dollar:

Products 
  
Unit Price 
(RMB)
  
  
Quantity
  
  
Total Amount 
(RMB)
  
  
Value of Backlog 
(USD)
  
SGS-I
   
9,000,000
     
2
     
18,000,000
    $
2,748,805.03
 
SGS-I
   
14,000,000
     
1
     
14,000,000
    $
2,137,959.47
 
SGS-I
   
14,000,000
     
1
     
14,000,000
    $
2,137,959.47
 
LINAC
   
6,500,000
     
2
     
13,000,000
    $
1,985,248.08
 
Total
           
6
     
59,000,000
    $
9,009,972.05
 

Cost of Revenues

For the three months ended March 31, 2011, the total cost of revenues amounted to $278,137, an increase of $181,705 compared to $96,432 for the same period of the prior year.  This increase was due to the additional cost of revenue from service revenues and the increase of business tax.

Gross Margin

As a percentage of total revenues, the overall gross margin decreased to 83.28% for the three months ended March 31, 2011 as compared with 93.12% for the same period in the prior year. This decrease was due to the fact that revenues from service contributed a much higher gross margin than revenue from operating rights. Revenues for the three months ended March 31, 2011 contains service and operating rights while they only contained service fee for the same period of the prior year.

 
32

 

Operating Expenses

Sales and marketing expenses

Sales and marketing expenses mainly consist of salaries and related expenses for personnel engaged in sales, marketing and customer support functions and costs associated with advertising and other marketing activities. 

 Sales and marketing expenses were $91,223 for the three months ended March 31, 2011, an increase of $29,100 compared with $62,123 for the same period of the prior year.  The increase was the result of more marketing activity during this period compared with the same period of the prior year.

General and administrative expenses

General and administrative expenses amounted to $723,063 for the three months ended March 31, 2011, representing an increase of $227,315, or 46%, compared to $495,748 for the same period of the prior year.  The increase in general and administrative expenses primarily resulted from an increase in personnel and intangible asset amortization.

Research and development expenses

Research and development expenses are comprised primarily of employee compensation, materials consumed and experiment expenses for specific new product research and development, and any expenses incurred for research for advanced technologies.  Research and development expenses were $25,392 for the three months ended March 31, 2011, an increase of $10,052 compared to $15,340 in the same period of the prior year.  This increase was primarily due to the fact that the Company incurred more expenses related to research and development during the three months ended March 31, 2011, as we expect to launch our new products at the end of this year or early next year.

Income Tax Provision

For the three months ended March 31, 2011, the Company’s income tax provision was $169,353 compared to $127,427 for the same period of the prior year, representing an increase of $41,926.  The increase in income tax was due to the increase of revenue from service and operating rights during the three months ended March 31, 2011 compared to the same period of the prior year.

Net Income

For the three months ended March 31, 2011, the Company’s net income amounted to $4,700,629, an increase of $4,044,206 compared to $656,423 for the same period of the prior year.  This increase was attributable to the reverse of bad debt provision of $382,731 in accounts receivable and $760,595 in other receivables during the period due to the settlement of agreement signed by Changdu Huiheng and Jiancheng and the gain on the acquisition of the equipment and operating rights of $3,019,137.

 
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Other Comprehensive Income

For the three months ended March 31, 2011, the Company’s other comprehensive income, which reflects the change in foreign currency translations on net income, amounted to a gain of $4,850,387, a difference of $4,253,096 compared to a gain of $597,291, for the same period of the prior year. The increase was due to a gain on the acquisition of equipment and operating rights and an increase in net income and foreign currency translation adjustments over the period.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are from cash reserves, current assets such as accounts receivable and from operating activities including the sale of our products and comprehensive post-sales services fees for our products as well as products manufactured by others.

As further discussed in detail below, we have historically been unable to collect our accounts receivable on a timely basis.  However, due to our history with our customers, we keep apprised of such customers’ financial condition and due to our long-standing relationships we are confident that we will collect all the money owed by these customers.  So far, most of our clients can pay their outstanding accounts receivable with some delays.  In addition to regular meetings with our customers, we have oral agreements with certain customers about payment on their outstanding receivables balance, and thus far we have had success in receiving certain payments on a quarterly basis. However, notwithstanding the foregoing, the inability by us to timely collect on our accounts receivable has adversely affected our business by requiring us to reduce expenditures on research and development and expansion of products. As a result of these delays in payments of accounts receivable, our cash position has been hampered. Further, although we believe that we have sufficient working capital to meet our minimum operating requirements for the year 2011, as previously noted we have had to reduce expenditures in other areas which may adversely affect our ability to develop products in the future.

Our relatively high margins have historically provided us with sufficient cash to purchase various raw materials, meet our component inventory needs and pay our vendors.  In addition, there are very few direct costs associated with our service business which further enhances our margins.  We have long-standing, positive relationships with our vendors and have maintained favorable payment terms and believe that we will continue to maintain such favorable payment terms.  Also, we believe that we can defer certain tax payments, if we choose to do so, to provide additional cash.

In order for us to implement our current business growth strategy, we will need additional capital to finance a number of expansion initiatives, including new product development, expansion of our Wuhan facility and possible strategic acquisitions.  No assurance can be given that we will be able to raise such additional capital, or if raised, that it will be on favorable terms.  In the event that we are unable to raise capital, we may not be able to complete some or any of our expansion initiatives.

As of March 31, 2011, we had total assets of $36,537,675.  Our cash was $49,176, current portion of accounts receivable were $5,139,534, current portion of prepaid expense and other receivables were $3,044,670 and inventories were $3,118,046.  Net working capital was approximately $6,713,689.  The current ratio was approximately 2.45.  The quick ratio was approximately 1.78.

Net cash used in operating activities totaled $458,045 for the three months ended March 31, 2011, an increase of $419,119 from $38,926 for the same quarter of the prior year.  This increase resulted primarily from the following changes in the operating assets and liabilities:

 
• 
$910,268 increase in accounts receivables;

 
• 
$285,764 increase in inventories;

 
• 
$130,817 increase in prepaid expense and other receivables;

 
• 
$10,310 decrease in accounts payable;

 
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• 
$177,705 increase in tax payable; and
 
 
• 
$100,949 increase in accrued liabilities and other payables;

The increase in accounts receivable was due to a combination of factors:

First, the majority of our product sales and installations in 2010 occurred during the last quarter of the year.  As a result of the short amount of time between the time of installation and the end of the period, our cash collection this year was lower than our cash collected in the prior year.

Second, due to our strong, long-standing relationships with our customers, we have extended their payment terms.  Our sales contracts for our products provide for the customer to make payments based on milestones, which includes a deposit at the time that the order is placed and payments at various stages of the manufacturing, shipping, installation and testing process, typically with the final 10% payment due 12 months after the customer accepts the product as meeting the specifications.  However, in the PRC we have rarely collected payments under those stated terms and our customers have historically made most of their payments following the installation of our units, which final installation is often delayed due to the length of time it takes to obtain regulatory approval.  Further, although a customer is legally obligated to pay for our products, their ability to pay for the products is dependent on their ability to collect payments from their customers consisting of hospitals and clinics.  For such reasons, we often do not collect outstanding receivables on a timely basis.

The delay in receipt of customer payments places pressure on our working capital requirements.  In particular, our two major customers (“Customer A” and “Customer B”) collectively accounted for 84% and 89% of our revenues for the period ended March 31, 2011 and 2010.  During the period ended March 31, 2011, Customer A paid approximately $0.1 million on its accounts receivable and as of March 31, 2011 had an outstanding balance of approximately $8 million  (with provision for bad debts of approximately $0.2 million).  Of Customer A’s outstanding accounts receivable balance as of March 31, 2011, nil related to the providing of services and 100% related to product sales.  During the period ended March 31, 2011, Customer B paid approximately $0.5 million on its accounts receivable and as of March 31, 2011 had an outstanding balance of $4.3 million, (with provision for bad debts of approximately $0.3 million).  Of Customer B’s outstanding accounts receivable balance, 100% related to the providing of services.  Although we do not yet have an exact payment schedule or a written collection policy, we seek to collect on these outstanding accounts receivables by reviewing our customers’ business operations and financial situation, and having meetings and paying regular visits to our customers and their customers to seek payment on our accounts.  Due to these efforts, and our prior positive history with our customers, we are confident that we will collect our accounts receivable owed by these customers.  In addition, although legal action is available, the duration and outcome of litigation is inherently uncertain, particularly in the PRC, where the civil justice system continues to evolve.

The increase in prepayments and other receivables was attributed primarily to an increase in payments made to our manufacturing suppliers for parts and services needed to manufacture the radiotherapy units that comprise our backlog.

Net cash used in investing activities was $1,642 and $2,791 for the three months ended March 31, 2011 and 2010, respectively.  The cash used in investing activities was primarily used to purchase equipment.

Cash flows from (used in) financing activities amounted to nil for the three months ended March 31, 2011 and 2010.

 
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Off-Balance Sheet Arrangements
 
As of March 31, 2011, we had no off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K promulgated by the Securities and Exchange Commission.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  As reported on Form 10-K for the year ended December 31, 2010, as amended, management has determine our internal controls over financial reporting were not effective as of December 31, 2010. Further, we are late in filing this Form 10-Q and a Form 8-K reporting the repurchase of certain medical accelerator systems and related operating rights. As a result, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this quarterly report.
 
Changes in Internal Controls Over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the period covered by this quarterly report, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

To the best of management’s knowledge, there are no material legal proceedings pending against the Company.

Item 1A.  Risk Factors

Not Applicable.

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

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  [REMOVED AND RESERVED]

Item 5.  Other Information

None.

 
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Item 6.  Exhibits
 
Exhibit
No
 
Description
3.1
 
Articles of Incorporation, as revised, of Huiheng Medical, Inc. (1)
     
3.2
 
Amended and Restated Bylaws of Huiheng Medical, Inc. (2)
     
4.1
 
Amended and Restated Certificate of Designations of Rights and Preferences of the Series A 7% Convertible Preferred Stock (3)
     
4.2
 
Form of Common Stock Purchase Warrant(4)
     
10.1
 
Form of Transfer Agreement with Shenzhen Jiancheng Investment Co., Ltd.(5)
     
10.2
 
Agreement for Debts Settlement with Shenzhen Jiancheng Investment Co., Ltd.(5)
     
31.1
 
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
31.2
 
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
32.1
 
Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 

*
Filed herewith

(1)
Incorporated by reference to the exhibit to the registrant’s annual report on Form 10-KSB filed with the SEC on April 10, 2008.
(2)
Incorporated by reference to the exhibit to the registrant’s annual report on Form 10-KSB filed with the SEC on April 10, 2008.
(3)
Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K filed with the SEC on January 16, 2008.
(4)
Incorporated by reference to the exhibit to the registrant’s registration statement on Form S-1/A filed with the SEC on August 29, 2008.
(5)
Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K filed with the SEC on even date herewith.

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
HUIHENG MEDICAL, INC.
   
Date:     June 23, 2011
By:
/s/ Hui Xiaobing
   
Hui Xiaobing
   
Chief Executive Officer
   
(Principal Executive Officer)
   
Date:     June 23, 2011
By:
/s/ Richard Shen
   
Richard Shen
   
Chief Financial Officer
   
(Principal Accounting and Financial Officer)

 
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