NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING
The accompanying unaudited condensed consolidated
financial statements have been prepared by management without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted as allowed by such rules and regulations, and management
believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial
statements include all of the adjustments, which, in the opinion of management, are necessary to a fair presentation of financial
position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily
indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the
audited financial statements in the Companys Annual Report on Form 10-K for the fiscal year ended on December 31, 2010 (Form
10-K), filed with the Commission on April 15, 2011.
This summary of significant accounting policies
of the Company is presented to assist in understanding the Companys financial statements. The financial statements and notes
are representations of the Companys management, which is responsible for their integrity and objectivity. These accounting
policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the condensed
consolidated financial statements and the From 10K.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary NTH. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
A substantial amount of the Companys cash is held in bank accounts in the Peoples Republic of China (PRC
or China) and is not protected by Federal Deposit Insurance Corporation (FDIC) insurance or any other similar insurance. Cash held
in China amounted to $65,437 as of June 30, 2011. Given the current economic environment and the financial condition of the banking
industry, there is a risk that the deposits may not be readily available or covered by such insurance. The Company has had no loss
of cash in domestic or foreign banks in past years.
USE OF ESTIMATES
The preparation of these condensed consolidated
financial statements in accordance with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported assets and liabilities, disclosure of contingent assets and liabilities
as of the date of the condensed consolidated financial statements and the reported amounts of net revenues and expenses during
the reporting period. Actual results may differ from those estimates and such differences may be material. The more significant
estimates and assumptions by management include, among others, useful lives and residual values of fixed assets, valuation of inventories,
accounts receivable, and stock based compensation. The current economic environment has increased the degree of uncertainty
inherent in these estimates and assumptions.
The Companys primary country of operations
is China. The financial position and results of operations of the Companys China operation are determined using the local
currency, Renminbi (RMB), as the functional currency. The results of operations denominated in foreign currency are
remeasured at the average rate of exchange during the reporting period. The average rates of exchange from U.S. Dollars to RMB
were 6.53 to 1 and 6.82 to 1 for the three months ended June 30, 2011 and 2010, respectively, or a 4.2% change. As of June 30,
2011, the Company would expect the impact on its financial statements to be approximately a $220 exchange gain or loss
for each 1% change in the exchange rate of U.S. Dollars to RMB. As of June 30, 2011, we do not anticipate significant impact on
our financial statements due to the change of the exchange rate of U.S. Dollars to RMB.
Assets and liabilities denominated in foreign
currencies on the balance sheet date are translated at the exchange rates prevailing on such date. The registered equity capital
denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All
adjustments resulting from the translation of the financial statements into the reporting currency (U.S. Dollars)
are dealt with as a separate component within stockholders equity. Translation adjustments net of tax totaled $2,298 and
$57, for the three months ended June 30, 2011 and 2010, respectively.
The Company's revenue recognition policies
are in compliance with Staff Accounting Bulletin 104 (ASC 605). Service revenue is recognized on the dates services were rendered.
When a formal arrangement exists, the price is fixed or determinable. When the service is completed, no other significant obligations
of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as unearned revenue.
The Company generates revenue from individual
patients as well as third-party payers, including PRC government programs and insurance providers, under which the hospital is
paid based upon several methodologies including established charges, the cost of providing services, predetermined rates per diagnosis,
fixed per diem rates or discounts from established charges. Revenues are recorded at estimated net amounts due from patients, third-party
payers and others for healthcare services provided at the time the service is provided. Revenues for pharmaceutical drug sales
are recognized upon the drug being administered to a patient or at the time a prescription slip executed by a registered physician
is filled for a patient.
Revenues are recorded at estimated net amounts
due from patients and government Medicare funds. The Company's accounting system calculates the expected amounts payable by the
government Medicare funds. The Company bills for services provided to Medicare patients through a medical card (the US equivalent
of an insurance card). There have not been significant differences between the amounts the Company has billed the government Medicare
funds and the amounts collected from the Medicare funds.
Accounts receivable are recorded at the estimated
net realizable amounts from government units, insurance companies and patients. Generally, the third-party payers reimburse the
Company on a 30-day cycle, so collections for the Company have not historically been considered an area that exposes the Company
to additional risk. Hospital staff verifies patient coverage prior to examinations and/or procedures.
For any Medicare patient who visits the hospital
who is qualified for acceptance, the hospital will only include the portion that the social insurance organization will pay in
the accounts receivable and collects the self-pay portion in cash at the time of service. At times, the pre-determined rate the
hospital will charge may be different than the approved Medicare rate, thus increasing the likelihood of bad debt. Management continues
to estimate the likelihood of bad debt on an ongoing basis.
The Company has established a reserve for uncollectible
debt of approximately $41,000 and $60,000 as of June 30, 2011 and December 31, 2010, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company applies the provisions of FASB
ASC Topic 825, which requires all entities to disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value
of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As
of June 30, 2011 and 2010 the fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses
and other payables approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates
which fluctuate with market rates except for related party debt or receivables for which it is not practicable to estimate fair
FAIR VALUE MEASUREMENTS
Effective January 1, 2009, FASB ASC Topic 825
Financial Instruments, requires disclosure about fair value of financial instruments.
FASB ASC Topic 820, Fair Value Measurements
and Disclosures, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair
value and requires additional disclosures about the use of fair value measurements.
Various inputs are considered when determining
the fair value of the Companys investments, warrant derivative liability, and long-term debt. The inputs or methodologies
used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These
inputs are summarized in the three broad levels listed below.
||Level 1 observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.|
||Level 2 other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).|
||Level 3 significant unobservable inputs (including the Companys own assumptions in determining the fair value of investments).|
The carrying value of financial assets and
liabilities recorded at fair value is measured on a recurring or non-recurring basis. Financial assets and liabilities measured
on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had
no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets
and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.
The Company had no financial assets and liabilities carried at fair value on a recurring basis.
The availability of inputs observable in the
market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument
is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing
inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the
valuation does not require significant management discretion. For other financial instruments, pricing inputs are less
observable in the market and may require management judgment
CONCENTRATIONS, RISKS, AND UNCERTAINTIES
All of the Companys operations are located
in the PRC. There can be no assurance that the Company will be able to successfully continue to operate and failure
to do so would have a material adverse effect on the Companys financial position, results of operations and cash flows.
In addition, the success of the Companys operations are subject to numerous contingencies, some of which are beyond managements
control. These contingencies include general economic conditions, the price of medicine, competition, governmental and political
conditions, and changes in regulations. Because the Company is dependent on the domestic market of the PRC, the Company is subject
to various additional political, economic and other uncertainties. Among other risks, the Companys operations will be subject
to risk of restrictions on the transfer of funds, domestic policy changes, changing taxation policies, foreign exchange restrictions,
and political and governmental regulations.
Inventories consisting of medicine supplies,
both western and traditional Chinese medicine, are valued on the lower of weighted average cost or market basis. Inventory
includes product cost, inbound freight, warehousing costs and vendor allowances not included as a reduction of advertising expense.
Management compares the cost of inventories with the market value and allowance is made for writing down their inventories to market
value, if such value is lower.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following
as of June 30, 2011 and December 31, 2010
||June 30, 2011
||December 31, 2010
|Advance to suppliers
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation
is computed over the estimated useful lives of the related asset type using the straight-line method for financial statement purposes.
Maintenance and repairs are expensed as incurred and the costs of additions and betterments that increase the useful lives of the
assets are capitalized. When property or equipment is disposed, the cost and related accumulated depreciation and amortization
are removed from the accounts and any gain or loss is included in other income or expenses.
A hospital facility currently under development
is accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including land rights cost,
development expenditure, and professional fees capitalized during the course of construction for the purpose of financing
the project. Upon completion of the project and readiness for use, the cost of construction-in-progress is to be transferred to
fixed assets, at which time depreciation will commence. As of June 30, 2011, the Company has incurred and capitalized into construction-in-progress
$7,667,893 of costs. The estimated cost to be incurred in 2011 and 2012 to complete the project is approximately $1,030,000.
The Company expenses the costs associated with
advertising as incurred. Advertising expenses (credits) for the three month periods ended June 30, 2011 and 2010 of $566 and
$(11,458). Advertising expenses for the six month periods ended June 30, 2011 and 2010 of $4,036 and $31,075 respectively
are included in selling and promotional expenses in the statements of operations. Advertising costs include marketing brochures
and a public advertising campaign.
IMPAIRMENT OF LONG-LIVED ASSETS
The Companys long-lived assets and other
assets (consisting of property and equipment and purchased intangible assets) are reviewed for impairment in accordance with the
guidance of FASB Topic ASC 360, Property, Plant, and Equipment, and FASB ASC Topic 205 Presentation of Financial
Statements. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be recoverable. Whenever any such impairment exists, an impairment
loss will be recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including
property, plant and equipment and intangible assets, for recoverability at least annually or more frequently upon the occurrence
of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and
evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups
of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment
and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset.
If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount
of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured
by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments. The Company estimates
fair value based on the information available in making whatever estimates, judgments and projections are considered necessary.
There was no impairment of long-lived assets for the period ended June 30, 2011.
BASIC AND DILUTED EARNINGS PER SHARE
Earnings per share (EPS) is calculated in accordance
with the FASB ASC Topic 260, Earnings Per Share. Basic net income (loss) per share is based upon the weighted average
number of common shares outstanding. Diluted net income (loss) per share is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as
if funds obtained thereby were used to purchase common stock at the average market price during the period.
The Company adopts FASB ASC Topic 740, "Income
Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
In July 2006 the FASB issued ASC Topic 740-10,
Accounting for Uncertainty in Income Taxes An Interpretation of FASB ASC Topic 740, which requires income
tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under ASC
Topic 740-10, tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first
subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that
threshold is no longer met.
The application of tax laws and regulations
is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change
as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore,
the actual liability may be materially different from our estimates, which could result in the need to record additional tax liabilities
or potentially reverse previously recorded tax liabilities or deferred tax asset valuation allowance.
As a result of the implementation of FASB
ASC Topic 740-10, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards
established by ASC Topic 740-10. The Company recognized no material adjustments to liabilities or stockholders
equity in lieu of the implementation. The adoption of FIN 48 did not have a material impact on the Companys financial
Beginning January 1, 2008, the new Enterprise
Income Tax (EIT) law will replace the existing laws for Domestic Enterprises (DES) and Foreign Invested Enterprises (FIEs). The
new standard EIT rate of 25% replaced the 33% rate currently applicable to both DES and FIEs.
In addition, companies in the PRC are required
to pay business taxes consisting of 5% of income they derive from providing medical treatment, as well as city construction
taxes and educational taxes which are based on 7% and 3%, respectively, of the business taxes. The Company had accrued
these taxes for 2005. The Company has received notification that they are exempt from these taxes for the years ending 2006 through
2008. The company become a normal taxpayer in 2009 and was required to pay the above taxes. On April 2010, the Company was granted
an exemption from these taxes and the exemption was retroactive to January 1, 2009 until further change.
The Company does not accrue United States income
taxes on unremitted earnings from foreign operations, as it is the Companys intention to invest these earnings in the foreign
COMMITMENTS AND CONTINGENCIES
Certain conditions may exist as of the date
the financial statements are issued. These conditions may result in a future loss to the Company but which will only be resolved
when one or more future events occur or fail to occur. The Companys management and legal counsel assess such contingent
liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal
proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Companys
legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Companys financial statements. If the assessment indicates that a potential material loss
contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies
considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would
FASB ASC Topic 280, "Segment Reporting",
requires use of the management approach model for segment reporting. The management approach model is based on the
way a companys management organizes segments within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in
which management disaggregates a company. FASB ASC Topic 280 has no effect on the companys consolidated financial
statements as the company consists of one reportable business segment. All revenue is from customers in China. All of the companys
assets are located in China.
STATEMENT OF CASH FLOWS
In accordance with FASB ASC Topic 230, "Statement
of Cash Flows," cash flows from the Company's operations are calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.
EMPLOYEE BENEFIT COSTS
In accordance with Chinese regulations on pensions,
the Company contributes to a defined contribution retirement plan organized by the municipal government in the province in which
the Companys subsidiary is registered and all qualified employees are eligible to participate in the plan. Contributions
to the plan are calculated at 30% of the employees salaries above a fixed threshold amount; employees contribute 8% and
the Companys subsidiary contributes the balance of 22%. The Chinese government is responsible for the benefit
liability to retired employees. The Company has no other material obligation for the payment of retirement beyond the
For purposes of determining the variables used
in the calculation of stock compensation expense under the provisions of FASB ASC Topic 505, Equity
and FASB ASC Topic 718, Compensation Stock Compensation, we perform an analysis of current market
data and historical Company data to calculate an estimate of implied volatility, the expected term of the option and the expected
forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables
in the binomial pricing model. Depending upon the number of stock options granted, any fluctuations in these calculations
could have a material effect on the results presented in our condensed consolidated statement of operations and other comprehensive
income. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on
our financial statements.
Stock-based compensation costs that have been
included in operating expenses amounted to $1,280 and $0, for the three months ended June 30, 2011 and 2010, respectively.
Stock-based compensation costs that have been included in operating expenses amounted to $1,675 and $0 for the six months ended
June 30, 2011 and 2010, respectively.
The Company reports comprehensive income in
accordance with FASB ASC Topic 220 Comprehensive Income," which established standards for reporting and displaying
comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial
Total comprehensive income is defined as all
changes in stockholders' equity during a period, other than those resulting from investments by and distributions to stockholders
(i.e., issuance of equity securities and dividends). Generally, for the Company, total comprehensive income (loss) equals net income
(loss) plus or minus adjustments for currency translation. Total comprehensive income (loss) represents the activity
for a period net of related tax and was a loss of $81,930 and $170,215 for the three months periods ended June 30, 2011 and 2010,
respectively. Total comprehensive income (loss) represents the activity for a period net of related tax and was a loss of $19,126
and $292,195 for the six months periods ended June 30, 2011 and 2010, respectively.
While total comprehensive income is the activity
in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (AOCI)
represents the cumulative balance of other comprehensive income as of the balance sheet date. For the Company, AOCI
is primarily the cumulative balance related to the currency adjustments and increased overall equity by $86,837 and $83,077 as
of June 30, 2010 and December 31, 2010, respectively.
In June 2011, the FASB issued ASC Topic
220 Comprehensive Income that amends the presentation of comprehensive income in the financial statements by requiring
an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update
also eliminates the option to present the components of other comprehensive income as part of the statement of equity. The guidance
is effective for interim and annual reporting periods beginning on or after December 15, 2011, with early adoption permitted.
The adoption of this guidance will not have a material effect on the Companys financial condition, results of operations
or cash flows.
In December 2010, the FASB issued ASC Topic
720 "Other Expenses": Fees Paid to the Federal Government by Pharmaceutical Manufacturers (SEC Update). The purpose of
this Update is to address questions concerning how pharmaceutical manufacturers should recognize and classify in their income statements
fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act.
The amendments in this Update are effective for calendar years beginning after December 31, 2010, when the fee initially becomes
effective. The adoption of ASC Topic 720 did not have a material effect on the financial position, results of operations, or cash
flows of the Company.
In August 2010, Accounting Standards Update
(ASU) 2010-24 was issued. This update amends ASC Topic 954-450 to require that anticipated insurance settlements
from malpractice claims not be offset against the accrual for the malpractice claim. The amendments in this Update are
effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. This pronouncement did not
have a material effect on the Company's financial statements.
In August 2010, ASU 2010-23 was issued. This
amends ASC Topic 954 to require the disclosure of charity care be disclosed at cost. The amendments in this Update are
effective for fiscal years beginning after December 15, 2010. This pronouncement did not have a material effect on the
Company's financial statements.
In April 2010, the FASB issued ASC Topic 740
"Income Taxes" : Accounting for Certain Tax Effects of the Health Care Reform Acts (SEC Update). The purpose of this
Update is to address questions concerning how pharmaceutical manufacturers should recognize and classify in their income statements
fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act.
The adoption of ASC Topic 740 did not have a material effect on the financial position, results of operations, or cash flows of
The accompanying consolidated financial statements
have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the company as
a going concern. However, the Company has negative cash flows of 144,149, negative working capital of $8,088,118, and an
accumulated deficit of $344,664 as of June 30, 2011. In view of the accumulated losses, recoverability of a major
portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations
of the Company, which in turn is dependent upon the Companys ability to raise additional capital, obtain financing and succeed
in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to
continue as a going concern.
Management has taken certain restructuring
steps to provide the necessary capital to continue its operations. These steps included: 1) plan to convert existed related parties
loans into equity 2) to continue actively seeking additional funding, such as making the major shareholders contribute additional
capital 3) plan to increase sales revenue with better service and advertising control 4) better control of operating
expenses, to increase profitability.