HUIHENG MEDICAL, INC. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT321 - HUIHENG MEDICAL, INC.	exhibit321.htm
EX-31.1 - EXHIBIT311 - HUIHENG MEDICAL, INC.	exhibit311.htm
EX-31.2 - EXHIBIT312 - HUIHENG MEDICAL, INC.	exhibit312.htm
EXCEL - IDEA: XBRL DOCUMENT - HUIHENG MEDICAL, INC.	Financial_Report.xls

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 September 30, 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 x 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 November 15, 2011, there were 14,030,637 shares of the issuer’s $0.001 par value common stock issued and outstanding.

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HUIHENG MEDICAL, INC.

FORM 10-Q INDEX

		Page

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Balance Sheets at September 30, 2011(Unaudited) and December 31, 2010	1

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)	2

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)	3

	Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2011 (Unaudited)	4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	39

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	40

Item 4.	(Removed and Reserved)	40

Item 5.	Other Information	40

Item 6.	Exhibits	40

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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, 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.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

HUIHENG MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN US DOLLARS)

ASSETS	September 30, 2011			December 31,
	(Unaudited)			2010
CURRENT ASSETS:
Cash	$	243,044		$	294,542
Accounts receivable		4,815,787			8,130,681
Prepaid expenses		2,502,045			2,743,602
Other receivables, net of allowance for doubtful accounts of nil and $757,576 as of September 30, 2011 and December 31, 2010, respectively		149,438			109,519
Inventories		3,882,478			2,832,282
Total Current Assets		11,592,792			14,110,626

ACCOUNTS RECEIVABLE, net of allowance for doubtful accounts of
$1,107,400 and $1,451,364 as of September 30, 2011 and December 31, 2010, respectively		10,838,256			11,617,798
PREPAID EXPENSES, net of current portion		1,033,419			1,216,841
INVESTMENT IN AFFILIATE		278,597			137,032
PROPERTY, PLANT AND EQUIPMENT, NET		3,364,312			2,419,348
LAND USE RIGHT, NET		969,801			952,057
INTANGIBLE ASSETS, NET		9,086,618			962,202
Total Assets	$	37,163,795		$	31,415,904

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	1,078,984		$	1,266,774
Due to related parties		398,428			385,025
Income tax payable		758,379			974,328
Accrued liabilities and other payables		2,722,285			1,740,226
Total Current Liabilities		4,958,076			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 September 30, 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 September 30, 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		2,398,890			1,676,867
Retained earnings		17,814,588			14,298,693
Accumulated other comprehensive income		3,713,600			2,633,236
Total Huiheng's stockholders' equity		31,439,406			26,121,124
Non-controlling interests		766,313			928,427
Total Stockholders' Equity		32,205,719			27,049,551
Total Liabilities and Stockholders' Equity	$	37,163,795		$	31,415,904

See accompanying notes to the consolidated financial statements. (Unaudited)

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

	For The Three Months Ended						For The Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

REVENUES	$	2,513,959		$	1,414,987		$	5,938,816		$	4,223,182
COST OF REVENUES		940,611			207,872			1,718,438			505,798
GROSS PROFIT		1,573,348			1,207,115			4,220,378			3,717,384

OPERATING EXPENSES:
Sales and marketing expenses		100,739			81,375			277,449			203,596
General and administrative expenses		732,110			776,015			2,137,968			1,925,832
Research and development costs		112,477			24,955			225,591			61,793
Total Operating Expenses		945,326			882,345			2,641,008			2,191,221
OPERATING INCOME		628,022			324,770			1,579,370			1,526,163

OTHER INCOME / (EXPENSES):
Other income		404,094			38,891			1,783,740			68,454
Interest income		147			83			359			187
Gain on business acquisition		-			-			-			21,508
Gain on the acquisition of equipment and operating rights		-			-			3,019,137			-
Impairment loss on the acquisition of equipment and operating rights		(1,941,949	)		-			(1,941,949	)		-
Equity in (loss)/income of affiliate		(38,774	)		(40,391	)		134,582			4,111
Total Other Income / (expenses)		(1,576,482	)		(1,417	)		2,995,869			94,260

NET INCOME/(LOSS) BEFORE INCOME TAXES		(948,460	)		323,353			4,575,239			1,620,423
INCOME TAXES		203,237			149,390			529,296			463,172

NET INCOME/(LOSS) BEFORE ATTRIBUTION OF NON-CONTROLLING INTERESTS		(1,151,697	)		173,963			4,045,943			1,157,251

NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS		32,220			92,149			191,975			246,458

NET INCOME/(LOSS) ATTRIBUTABLE TO HUIHENG’S SHAREHOLDERS	$	(1,119,477	)	$	266,112		$	4,237,918		$	1,403,709

EARNINGS/(LOSS) PER SHARE
- Basic	$	(0.08	)	$	0.02		$	0.30		$	0.10

- Diluted	$	(0.08	)	$	0.02		$	0.26		$	0.09

Weighted Common Shares Outstanding
- Basic		14,030,637			13,969,376			14,030,637			13,946,777

- Diluted		14,030,637			16,251,113			16,251,113			16,251,113

See accompanying notes to the consolidated financial statements. (Unaudited)

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(IN US DOLLARS)

	For The Three Months Ended						For The Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Net income/(loss)	$	(1,151,697	)	$	173,963		$	4,045,943		$	1,157,251

Other comprehensive income
Foreign currency translation gain		433,157			353,065			1,109,525			525,272

Comprehensive income/(loss)	$	(718,540	)	$	527,028		$	5,155,468		$	1,682,523

Less: Comprehensive loss attributable to non-controlling interests		(21,131	)		(80,170	)		(162,814	)		(227,862	)

Comprehensive (loss)/income attributable to Huiheng's shareholders	$	(697,409	)	$	607,198		$	5,318,282		$	1,910,385

See accompanying notes to the consolidated financial statements. (Unaudited)

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 (UNAUDITED)

(IN US DOLLARS)

	Series A Preferred Stock				Common Stock				Treasury Stock
	Number of Shares		Amount		Number of Shares		Amount		Number of Shares			Amount			Additional Paid-in Capital		Statutory Surplus Reserve		Retained Earnings			Accumulated Other Comprehensive Income		Total Huiheng's Stockholders' Equity		Non-controlling Interest			Total Stockholders’ Equity

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)		-		-		-		-		-			-			-		-		4,237,918			-		4,237,918		(191,975	)		4,045,943

Foreign currency translation gain		-		-		-		-		-			-			-		-		-			1,080,364		1,080,364		29,161			1,109,525

Contribution from non-controlling shareholders of subsidiary		-		-		-		-		-			-			-		-		-			-		-		700			700

Appropriation of statutory surplus reserve		-		-		-		-		-			-			-		722,023		(722,023	)		-		-		-			-

Balance, September 30, 2011		211,390	$	211		23,730,637	$	23,731		(9,700,000	)	$	(9,700	)	$	7,498,086	$	2,398,890	$	17,814,588		$	3,713,600	$	31,439,406	$	766,313		$	32,205,719

See accompanying notes to the consolidated financial statements. (Unaudited)

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN US DOLLARS)

	For The Nine Months Ended
	September 30,
	2011			2010
Cash flows from operating activities:
Net income before attribution of non-controlling interests	$	4,045,943		$	1,157,251
Net loss attributable to non-controlling interests		191,975			246,458
Total Huiheng's net income		4,237,918			1,403,709
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation of property, plant and equipment		231,127			184,514
Loss on write off of fixed assets		27,833			-
Amortization of land use right		15,145			14,442
Amortization of intangible assets		832,583			65,276
Recovery of bad debts		(1,143,326	)		-
Equity in income of affiliate		(134,582	)		(4,111	)
Gain on acquisition of subsidiary		-			(21,508	)
Gain on the acquisition of the equipment and operating rights		(3,019,137	)		-
Impairment loss on the acquisition of the equipment and operating rights		1,941,949			-
Non-controlling interests		(191,975	)		(246,458	)
Changes in assets and liabilities:
Accounts receivable		(3,005,691	)		(838,889	)
Prepaid expenses		424,979			(364,706	)
Other receivables		(42,181	)		135,601
Inventories		(1,050,196	)		(962,102	)
Accounts payable		(187,790	)		(136,075	)
Income tax payable		(215,949	)		362,093
Accrued liabilities and other payables		982,059			(122,915	)
Net cash used in operating activities		(297,234	)		(531,129	)

Cash flows from investing activities:
Purchase of property, plant and equipment		(456,891	)		(23,137	)
Advance from related party		-			90,000
Net cash (used in) / provided by investing activities		(456,891	)		66,863

Net decrease in cash		(754,125	)		(464,266	)
Effect on change of exchange rates		702,627			447,710
Cash as of January 1		294,542			84,962
Cash as of September 30	$	243,044		$	68,406

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income tax paid	$	775,120		$	114,576
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	$	8,246,415		$	-

See accompanying notes to the consolidated financial statements. (Unaudited)

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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 the Peoples Republic of China (“PRC”) and a subsidiary in the US (Portola Medical, Inc), which holds the rights to certain patents.

The Company's common stock is quoted 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 the 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.

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 1 - ORGANIZATION AND OPERATIONS (…/Cont’d)

Establishment of new subsidiary

On September 9, 2011, the subsidiary of the Company, Allied Moral Holdings Limited ("Allied Moral "), entered into an agreement with Intact Medical Corporation (“Intact”), a Delaware corporation, and BMG Diamond Holdings Limited (“BMG”), a company incorporated under the laws of British Virgin Islands, to establish a new subsidiary, H & I Medical China Limited ("H & I"), incorporated in the British Virgin Islands for the purpose of developing, manufacturing and selling the Intact Breast Lesion Excision System primarily in China.

The authorized shares of H & I consists of 2,000 shares of Common Stock, 300 non-voting series A preferred shares and 700 non-voting series B preferred shares with a par value $0.001 per share. As of September 30, 2011, 1,000 common stock and 1,000 preferred shares were issued and outstanding. Under the Agreement, Allied Moral invested 650 shares of common stock and 650 shares of series B preferred shares in H & I at $1 per share with the total consideration of $1,300.

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

Reclassifications

Certain reclassifications have been made to the financial statement presentations as of September 30, 2011 and for the year ended to correspond to the current year’s format. Total equity and net income are unchanged due to these reclassifications.

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/A for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on June 30 and August 30, 2011. The results of operation for the nine months ended September 30, 2011, are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

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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

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, realizable values for inventories and provision of impairment on intangible assets. 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, taking into consideration the age of past due accounts and an assessment of the customers' ability to pay. The Company provided an allowance of $1,107,400 and $1,451,364 for doubtful accounts as of September 30, 2011 and December 31, 2010, respectively.

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 and other receivables amounting to $763,557 which in the total amount of $8,246,415 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.

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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)

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

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.

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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)

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.

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 September 30, 2011 and December 31, 2010, the Company determined that there were $1,941,949 and nil impairment loss respectively.

Fair value of financial instruments

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.

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Table of Contents

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 of financial instruments (…/Cont’d)

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.

There was no asset or liability measured at fair value on a non-recurring basis as of September 30, 2011 and December 31, 2010.

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.

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.

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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)

The medical equipment sold by the Company has embedded self-developed software which is an integral part of the medical equipment. The software does not meet the criteria based on ASC 2009-13, multiple deliverable arrangements because the Company does not sell the software as a separate product and no stand-alone value to the customer.

(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.

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 $141,000 (RMB 900,000) will be refundable.

(ii) 31% of business tax payments will be refunded if annual business tax payment in excess of $157,000 (RMB 1.0 million)

(iii) 38.75% of VAT payments will be refunded if annual VAT payment in excess of $235,000 (RMB 1.5 million).

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

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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)

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 $225,591 and $61,793 for the nine months ended September 30, 2011 and 2010, respectively. For the three months ended September 30, 2011 and 2010, research and development costs were $112,477 and $24,955, 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.

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.

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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)

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.

	September 30, 2011		September 30, 2010		December 31, 2010
As of period ended RMB :USD exchange rate		6.3780		6.6912		6.6000
Average period for the 9 months ended
RMB :USD exchange rate		6.4828		6.7985		-
Average period for the 3 months ended
RMB :USD exchange rate		6.3973		6.7579		-

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.

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 September 30, 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 $0.7029 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 nine months ended September 30, 2011 and 2010 was $3,513 and $3,513 respectively; and for the three months ended September 30, 2011 and 2010 was $1,171 and $1,171, respectively. Such amount had not been recorded as it was considered immaterial.

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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 assumptions used and the weighted average calculated value of options are as follows for the nine months ended September 30, 2011:

Risk-free interest rate		1.88	%
Expected dividend yield		-
Expected volatility		288.67	%
Expected life in years		3.4
Service period in years		3
Weighted average calculated value of options granted	$	1.3189

The following is an analysis of options to purchase shares of the Company’s stock issued and outstanding as of September 30, 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 September 30, 2011		30,000

As of September 30, 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 0.5 year. Compensation cost of approximately $2,342 had not yet been recognized on non-vested awards. The weighted average period over which it is expected to be recognized is 0.5 year.

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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 Comprehensive Income and the Consolidated Statement of Changes in Stockholders' Equity.

Earnings/(Loss) 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/(loss) per common share:

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2011			2010		2011		2010

Net income attributable to
Huiheng’s shareholders	$	(1,119,477	)	$	266,112	$	4,237,918	$	1,403,709

Weighted average outstanding
shares of common stock		14,030,637			13,969,376		14,030,637		13,946,777
Dilutive effect of Convertible
Preferred Stock		-	*		2,281,737		2,220,476		2,304,336
Diluted weighted average
outstanding shares		14,030,637			16,251,113		16,251,113		16,251,113

Earnings per common share:
Basic	$	(0.08	)	$	0.02	$	0.30	$	0.10
Diluted	$	(0.08	)	$	0.02	$	0.26	$	0.09

* Net loss for the period, preferred stock and other dilutive common stock equivalents are anti-dilutive and are excluded from computation.

For the nine months ended September 30, 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.

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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

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.

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.

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.

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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)

Impact of new accounting standards (…/Cont’d)

In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, (“ASU 2011-08”), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. We do not expect that the adoption of ASU 2011-08 will have a material impact on our consolidated 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.

NOTE 3 - ACQUISITION OF MEDICAL ACCELERATOR SYSTEMS AND OPERATING RIGHTS

On March 30, 2011, in order to settle a long outstanding accounts receivable, 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 the 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. The independent appraisal firm utilized the income approach to determine the fair value of the medical accelerator systems and operating rights acquired.

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, in accordance with ASC 845-10-30, 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.

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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 (…/Cont’d)

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

On September 30, 2011, the Company reviewed the carrying value of the acquired medical accelerator systems and operating rights and found that there was an indication of impairment on the operating rights due to the actual profit sharing from January to September was lower than the projected income adopted in valuation report by the third party. As a result, based on the changes of the projected income, and subject to the assessment, review and approval by management, the Company wrote down the operating rights as of September 30, 2011, which would result in an impairment loss of approximately $1.94 million.

NOTE 4 – CASH

Cash represents cash in bank and cash on hand. Cash consists of the following:

	September 30, 2011		December 31, 2010
	(Unaudited)

Bank balances	$	237,569	$	291,787
Cash		5,475		2,755
	$	243,044	$	294,542

Cash is classified by geographical areas is set out as follows:

	September 30, 2011		December 31, 2010
	(Unaudited)

The PRC	$	224,000	$	269,904
Hong Kong		19,044		24,638
	$	243,044	$	294,542

Renminbi is not a freely convertible currency and the remittance of funds out of the PRC is subject to the exchange restrictions imposed by the PRC government.

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 5 – INVENTORIES

Inventories consist of the following:

	September 30, 2011		December 31, 2010
	(Unaudited)

Raw materials	$	328,116	$	578,071
Work-in-progress		3,554,362		2,254,211
	$	3,882,478	$	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 6 – PREPAID EXPENSES

At September 30, 2011 and December 31, 2010, prepaid expenses consisted of the following:

	September 30, 2011		December 31, 2010
	(Unaudited)

Advances made to suppliers and other prepaid expenses	$	2,141,430	$	2,452,693
Prepaid expenses for purchasing "Huiheng" Logo		59,580		-
Construction in progress paid on behalf of landlord (a)
- current portion		301,035		290,909
	$	2,502,045	$	2,743,602

Non-current portion (a)	$	1,033,419	$	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 $25,000 (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 (three months)	$	75,259
2012		301,035
2013		301,035
2014		301,035
2015		301,035
Thereafter		55,055
Total	$	1,334,454

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 7 – OTHER RECEIVABLES

Other receivables, net, consisted of the following:

	September 30, 2011		December 31, 2010
	(Unaudited)
Other receivables
- loan or advance to staff for business travelling	$	75,095	$	38,758
- utilities and rental deposits		1,568		1,515
- prepaid expenses made by director		3,136		3,030
- H&I Share capital consideration by non-controlling shareholders		700		-
- others (net of allowance for doubtful accounts of nil and $757,576)		68,939		66,216
	$	149,438	$	109,519

NOTE 8 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net, consisted of the following:

	September 30, 2011			December 31, 2010
	(Unaudited)

Buildings and building improvements	$	2,654,354		$	2,565,072
Production equipment		1,176,483			702,900
Medical radiotherapy equipment		667,599			-
Furniture, fixture and office equipment		412,495			422,616
Motor vehicles		200,494			193,750
		5,111,425			3,884,338
Less: Accumulated depreciation		(1,747,113	)		(1,464,990	)
	$	3,364,312		$	2,419,348

For the nine months ended September 30, 2011 and 2010, depreciation expenses were $231,127 and $184,514, respectively. For the three months ended September 30, 2011 and 2010, depreciation expenses were $85,737 and $62,988, respectively.

During the nine months period ended September 30, 2011, a loss on write off of fixed assets of $27,833 was recorded since the first quarter of 2011. These were the office equipment acquired from Portola Medical Inc. in 2010.

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 9 - 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, the PRC. Land use right is amortized using the straight-line method over the lease term of 50 years. The amortization expense for the nine months ended September 30, 2011 and 2010 were $15,145 and $14,442, respectively. The amortization expense for the three months ended September 30, 2011 and 2010 were $5,115 and $4,843, respectively.

NOTE 10 – INTANGIBLE ASSETS

Intangible net assets consisted of the following:

	Balance at December 31, 2010		Additions		Amortization Expense			Impairment Charge			Foreign Currency Transl Adj		Balance at September 30, 2011 (Unaudited)
Amortized intangible assets:

Patent technology in Shenzhen Hyper (a)	$	718,452	$	-	$	(61,273	)	$	-		$	20,030	$	677,209

Patent technology in Portola Medical, Inc. (b)		243,750		-		(9,375	)		-			-		234,375

Operating rights (c)		-		10,910,827		(761,935	)		(1,973,858	)		-		8,175,034

	$	962,202	$	10,910,827	$	(832,583	)	$	(1,973,858	)	$	20,030	$	9,086,618

(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.

(b)	Patent acquired in Portola Medical, Inc. (“Portola”). 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.

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 10 – INTANGIBLE ASSETS (…/Cont’d)

For the nine months ended September 30, 2011 and 2010, amortization expenses amounted to $832,583 and $65,276, respectively. For the three months ended September 30, 2011 and 2010, amortization expenses amounted to $357,622 and $23,966, respectively. The expected amortization which was based on the closing rate as of September 30, 2011 for the next five years and thereafter is as follows:

	Patent technology in Portola Medical, Inc.		Patent technology in Shenzhen Hyper		Operating rights in Changdu Huiheng		Total
December 31,
2011	$	3,125	$	22,083	$	266,260	$	291,468
2012		12,500		88,332		1,065,037		1,165,869
2013		12,500		88,332		1,065,037		1,165,869
2014		12,500		88,332		1,065,037		1,165,869
2015		12,500		88,332		1,065,037		1,165,869
Thereafter		181,250		301,800		3,648,624		4,131,674
Total	$	234,375	$	677,211	$	8,175,032	$	9,086,618

NOTE 11 – ACCRUED LIABILITIES AND OTHER PAYABLES

At September 30, 2011 and December 31, 2010, accrued liabilities and other payables consisted of the following:

	September 30, 2011		December 31, 2010
	(Unaudited)

Accrued expenses - operating	$	321,695	$	311,342
Accrued payroll and welfare		194,822		181,255
Value added tax, other taxes payable and surcharges		1,193,812		1,170,646
Customer deposits		1,011,956		76,983
	$	2,722,285	$	1,740,226

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 12 – NON-CONTROLLING INTEREST

Non-controlling interest included in the Company’s balance sheets as of September 30, 2011 and December 31, 2010 represents 25% of equity interest in Shenzhen Hyper and 35% of equity interest in H&I Medical China Limited.

The changes in non-controlling interest from January 1, 2011 to September 30, 2011 were as follows:

	September 30, 2011			December 31, 2010
	(Unaudited)

Balance at beginning period/year	$	928,427		$	1,111,027
Effect for the current period/year
- Net loss		(191,975	)		(215,574	)
- Foreign currency translation gain		29,161			32,974
Contribution from non-controlling shareholders of
H & I Medical China Limited		700			-
Balance at end of period/year	$	766,313		$	928,427

NOTE 13 – DUE TO RELATED PARTIES

A summary of related party payables at September 30, 2011 and December 31, 2010 is as follows:

Amounts due to related parties at September 30, 2011 and December 31, 2010 represent the remaining balance due, in an amount of $26,291 and $25,405 respectively, to a former shareholder of 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 September 30, 2011, such director is owed $372,137.

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 14 – 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 September 30, 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 September 30, 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 nine months ended September 30, 2011.

Statutory surplus reserve

In accordance with PRC Company Law, all the companies incorporated in the PRC are required to appropriate at least 10% of the profit to the statutory surplus reserve. Appropriation to the statutory surplus reserve 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 September 30, 2011, the Company established and segregated its retained earnings and the amount for the Statutory Surplus Reserve of $2,398,890.

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 15 – 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 and nine months ended September 30, 2011 and 2010:

	For the Three months ended September 30,				For the Nine months ended September 30,
	2011		2010		2011		2010
Revenues:
Products	$	856,968	$	-	$	856,968	$	-
Services		1,600,753		1,414,987		4,817,036		4,223,182
Operating rights		56,238		-		264,812		-
	$	2,513,959	$	1,414,987	$	5,938,816	$	4,223,182

	For the Three months ended September 30,						For the Nine months ended September 30,
		2011			2010			2011			2010
Operating income:
Products	$	389,775		$	(73,270	)	$	389,775		$	(133,054	)
Services		1,437,401			1,250,018			4,263,441			3,764,786
Operating rights		(288,198	)		-			(531,904	)		-
		1,538,978			1,176,748			4,121,312			3,631,732
Corporate expenses		(910,956	)		(851,978	)		(2,541,942	)		(2,105,569	)
Operating income	$	628,022		$	324,770		$	1,579,370		$	1,526,163

	September 30, 2011		December 31, 2010
Total assets:
Products, Services and Corporate	$	28,369,034	$	31,415,904
Operating rights		8,794,761		-
	$	37,163,795	$	31,415,904

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 16 – OTHER INCOME

The following table presents information about the Company's other income for the nine months ended September 30, 2011 and 2010:

	For the Three months ended September 30,				For the Nine months ended September 30,
	2011		2010		2011		2010

Recovery of bad debts	$	-	$	-	$	1,143,326	$	-
Others		404,094		38,891		640,414		68,454
	$	404,094	$	38,891	$	1,783,740	$	68,454

Provision for bad debts of $382,731 in accounts receivable and $760,595 in other receivables are reversed in March 2011 due to the settlement of agreement signed by Changdu Huiheng and the major customer Jiancheng.

NOTE 17 – 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 PRC concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws.

Income tax expense for nine months ended September 30, 2011 and 2010 amounted to $529,296 and $463,172, respectively. For three months ended September 30, 2011 and 2010 amounted to $203,237 and $149,390, 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% since 2010.

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% since 2010. 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.

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 17 – INCOME TAXES (…/Cont’d)

A reconciliation of the expected income tax expense to the actual income tax expense for nine months ended September 30, 2011 and 2010 are as follows:

	For the Nine months ended September 30,
	2011			2010

Income before income taxes	$	4,575,239		$	1,620,423

Expected PRC income tax expense at statutory tax rate of 25%		1,143,810			405,106
Non-deductible expenses		528,168			268,881
Non-taxable income		(633,134	)		-
Income tax exempted		(509,548	)		(210,815	)
Income tax expense	$	529,296		$	463,172

The Company’s effective income tax rate is 11.6% and 28.6% for the nine months ended on September 30, 2011 and 2010, respectively.

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.

The Company is not aware of any unrecorded tax liability which would impact the Company's financial position or its results of operations as of September 30, 2011.

NOTE 18 – CONCENTRATION OF CREDIT RISK

Customers' concentrations

Customers accounting for 10% or more of the Group's net revenue for the nine months ended September 30, 2011 and 2010 are as follows:

	2011			2010
	%			%
Customer A		53	%		53	%
Customer B		31	%		35	%
Customer C		N/A			11	%

Two customers accounted for 84% and three customers accounted for 99% of revenue for the nine months ended September 30, 2011 and 2010, respectively. These customers also accounted for 93% and 88% of accounts receivable as of September 30, 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 September 30, 2011 and 2010.

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 18 – CONCENTRATION OF CREDIT RISK (…/Cont’d)

Other credit risks

As of September 30, 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 September 30, 2011.

NOTE 19 - OPERATING LEASE COMMITMENTS

As of September 30, 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 September 30, 2011, are as follows:

For the year ended
December 31,
2011 (three months)	$	75,259
2012		301,035
2013		301,035
2014		301,035
2015		301,035
Thereafter		3,562,244
TOTAL	$	4,841,643

NOTE 20 - COMMITMENTS

Pursuant to the Joint Venture Agreement with Intact and BMG, Huiheng will make an unsecured, non-interest bearing loan of $150,000 to Intact, which is to be repaid out of Intact’s distributions from H&I.

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HUIHENG MEDICAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(IN US DOLLARS)

NOTE 21 – 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 September 30, 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.

CONDENSED BALANCE SHEETS
	September 30, 2011			December 31, 2010
	(Unaudited)
ASSETS

Investments in subsidiaries	$	31,545,406		$	26,217,124
Total Assets	$	31,545,406		$	26,217,124

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accrued liabilities and other payables	$	106,000		$	96,000
Total Current Liabilities		106,000			96,000

STOCKHOLDERS' EQUITY:
Total Stockholders' Equity		31,439,406			26,121,124
Total Liabilities and Stockholders' Equity	$	31,545,406		$	26,217,124

CONDENSED STATEMENT OF INCOME	For Nine months ended September 30,
		2011			2010

General and administrative expenses	$	(330,180	)	$	(357,681	)
Equity in income of subsidiaries		4,568,098			1,761,390
Net income	$	4,237,918		$	1,403,709

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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 primarily for our products. 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.

We currently sell our products primarily to a small number of hospital equipment distributors 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 and are sold to our distributors, who, in turn, sell those services to their customers. 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 are 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, the hospital equipment distributor. 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 and install the Gamma Treatment Systems is largely dependent on the customer’s and hospital’s ability to obtain approval by the Ministry of Health and the local provincial government. Our other radiotherapy equipment, such as the LINAC is not required for these special approvals.

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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 patent 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.

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 the changing of market conditions and our 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. (“Changdu Huiheng”), 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 agreement, Jiancheng owed us approximately $17 million (RMB 110,720,000) in account receivables. Under the terms of the transfer agreements, we purchased for an aggregate of approximately $8.25 million (RMB 54,000,000) medical equipment, specifically, medical accelerator systems located at four different medical centers that we had previously sold to Jiancheng 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 for 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. The independent appraisal firm utilized the income approach to determine the fair value of the medical accelerator systems and operating rights acquired.

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. A subsequent measurement of impairment on the intangible asset was $1,941,949.

Acquisition information which translated at closing rate of March 30, 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
	$	11,277,310	$	8,246,416

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On September 6, 2011, our subsidiary Allied Moral Holdings entered into a Joint Venture Agreement with Intact Medical Corporation (“Intact”), and BMG Diamond Holdings Limited (“BMG”) (collectively, the “Parties”).

Pursuant to the Joint Venture Agreement, the Parties agreed to establish a new company, H & I Medical China Limited (“NewCo”) to develop, manufacture, and sell the Intact Breast Lesion Excision System primarily in China. Under the Joint Venture Agreement, Allied Moral agreed to contribute $1,300 for a 65% interest in NewCo, based on the following initial capitalization of NewCo: (i) 1,000 shares of Common Stock of which 650 shares to be held by Allied Moral, 300 shares by Intact, and 50 shares by BMG; and (ii) 300 shares of non-voting Series A Preferred Stock authorized, all of which to be held by Intact; and (iii) 700 shares of non-voting Series B Preferred Stock authorized, 650 of which to be held by Allied Moral and 50 of which to be held by BMG.

Under the Joint Venture Agreement, the Parties also agreed that the Series A Preferred Stock and Series B Preferred Stock of NewCo will have certain preferential distribution rights. Beginning in the second year following the approval of the Intact Breast Lesion Excision System by the China State Food and Drug Administration (the “SFDA”), the Series A Stockholders will be entitled to annual preference distributions for three years in the amounts of $1,100,000, $2,250,000; and $3,250,000. Over that same period, and after the Series A Stockholders have received their preference distributions, Series B Stockholders will be entitled to annual preference distributions of $2,566,667, $5,250,000, and $7,583,333. All of the preference distributions to both the Series A and Series B Stockholders will be less any proportional taxes accrued.

Furthermore, the Parties agreed that: (1) NewCo will have three directors, of which two (2) are to be appointed by Huiheng and one (1) by Intact , (2) an approval vote of more than seventy-five percent (75%) will be required on certain matters relating to NewCo; and (3) Huiheng will make an unsecured, non-interest bearing loan of $150,000 to Intact, which is to be repaid out of Intact’s distributions from NewCo.

In connection with the Joint Venture Agreement, it is anticipated that Intact and NewCo will enter into a License, Supply, Marketing, and Distribution Agreement pursuant to which Intact will grant NewCo an exclusive license allowing NewCo to develop, manufacture, and sell the Product in China.

Intact is engaged in the design, production and sale of the Intact Breast Lesion Excision System. Because we are engaged in the design, manufacture and sale of large-scale radiotherapy equipment and are in the process of manufacturing and distributing a breast brachytherapy system throughout Asia, we and Intact wish to expand the sales of the Intact Breast Lesion Excision System in China and possibly other markets through the Joint Venture. Further, we and Intact believe that it will be useful to establish a manufacturing and development facility in China in order to gain a competitive advantage with regard to costs of developing, manufacturing, delivering and servicing the Breast Lesion Excision System.

RESULTS OF OPERATIONS

Comparison of three months ended September 30, 2011 and 2010

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

	Three Months Ended September 30
	2011			2010
Statements of Operations Data
Revenues	$	2,513,959		$	1,414,987
Cost of Revenues		(940,611	)		(207,872	)
Gross Profit		1,573,348			1,207,115
Operating Expenses
Sales and marketing expenses		(100,739	)		(81,375	)
General and administrative expenses		(732,110	)		(776,015	)
Research and development costs		(112,477	)		(24,955	)
Other income/(expense)		(1,576,482	)		(1,417	)
Net income/(loss) from operation before income tax expenses		(948,460	)		323,353
Income tax expenses		(203,237	)		(149,390	)
Net income/(loss) before attribution to non-controlling interests	$	(1,151,697	)	$	173,963

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Operating Revenues

For the three months ended September 30, 2011, revenues amounted to $2,513,959, an increase of $1,098,972, or 77.7%, compared to $1,414,987 for the same period of the prior year. This increase was mainly contributed by revenue generated from more product sales and additional two service contracts and additional revenue from operating rights than we did in the same period of the prior year.

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

$856,968 revenue generated from product sales for the three months ended September 30, 2011, and no revenue from the amount of product sales from the same period of the prior year. One unit of medical accelerator system was installed in the three months ended September 30, 2011 while no units installed in the three months ended September 30, 2010. Low unit installation rate was due primarily to the unit sales process took longer than expected.

Revenues from services were $1.6 million for the three months ended September 30, 2011, representing an increase of $0.19 million, or 13.5%, compared to $1.41 million in revenue from services from the same period of the prior year. This increase was mainly due to that we had two more service contracts during the first quarter of 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 $56,238 for the three months ended September 30, 2011. No revenues from operating rights were received during the same period of the prior year.

Cost of Revenues

For the three months ended September 30, 2011, the total cost of revenues amounted to $940,611, an increase of $732,739, or 352%, compared to $207,872 for the same period of the prior year. This increase was mainly due to recognition of cost of product sales and increased additional cost of revenue from service revenues and operating rights.

Gross Margin

As a percentage of total revenues, the overall gross margin decreased to 62.58% for the three months ended September 30, 2011 as compared with 85.30% for the same period in the prior year. This decrease was due to the fact that profit ratio of sales of product eroded the high profit ratio from service revenues. Revenues for the three months ended September 30, 2011 contains sales of product, service and operating rights while they only contained service fee for the same period of the prior year.

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 $100,739 for the three months ended September 30, 2011, an increase of $19,364, or 23.8%, compared with $81,375 for the same period of the prior year. This increase in sales and marketing expenses resulted from more marketing activities in this period, compared with the same period of the prior year.

General and administrative expenses

General and administrative expenses amounted to $732,110 for the three months ended September 30, 2011, representing an decrease of $43,905, or 5.66%, compared to $776,015 for the same period of the prior year. The decrease in general and administrative expenses primarily resulted from more strength expenses control of administrative.

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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 basic research for advanced technologies. Research and development expenses were $112,477 for the three months ended September 30, 2011, an increase of $87,522, or 351%, compared to $24,955 in the same period of the prior year. This significant increase was mainly due to the fact that the Company incurred more expenses related to research and development for new products during the three months ended September 30, 2011, as we expect to launch our new products in the next year.

Other Income/(Expense)

Other Income/expense consists principally of government financial subsidies to Changdu Huiheng and equity in loss from an affiliated company for the three months ended September 30, 2011, and totalled $1,576,482 loss, representing an increase of $1,575,065, compared to $1,417 loss for the same period of the prior year. The Company received the tax refunds and subsidies, amounted to $401,633 for the three months ended September 30, 2011, compared to zero for the same period of the prior year. An impairment of intangible asset of amount $1,941,949 was recognized comparing to zero for the same period of the prior year.

Income Tax Provision

For the three months ended September 30, 2011, the Company’s income tax provision was $203,237, compared to $149,390 for the same period of the prior year, representing a increase of $53,847, or 36%. The increase in income tax was due to increase profit from sales of product in the three months ended September 30, 2011, compared to the same period of the prior year.

Net Income/(loss) before attribution of non-controlling interests

For the three months ended September 30, 2011, the Company’s net income/(loss) amounted to ($1,151,697), an decrease of $1,325,660, or 762%, compared to $173,963 for the same period of the prior year. Although the company has achieved increase in: (i) sales of product profit as compared to no such income from the same period of the prior year, (ii) revenues from service and additional operating rights for the three months ended September 30, 2011 and (iii) the Company received the tax refunds for the three months ended September 30, 2011; the Company had a loss of ($1,151,697). This is because the Company reviewed the carrying value of the acquired medical accelerator systems and operating rights and found that there was a potential impairment on the operating rights due to the actual profit sharing from January to September was lower than the projected income adopted in valuation report by the third party. As a result, based on the changes of the projected income, and subject to the assessment, review and approval by management, the Company was going to write down the operating rights as of September 30, 2011, which would result in an impairment loss of approximately $1.94 million.

Comparison of nine months ended September 30, 2011 and 2010

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

	Nine Months Ended September 30
	2011			2010
Statements of Operations Data
Revenues	$	5,938,816		$	4,223,182
Cost of Revenues		(1,718,438	)		(505,798	)
Gross Profit		4,220,378			3,717,384
Operating Expenses
Sales and marketing expenses		(277,449	)		(203,596	)
General and administrative expenses		(2,137,968	)		(1,925,832	)
Research and development costs		(225,591	)		(61,793	)
Other income		2,995,869			94,260
Net income from operation before income tax expenses		4,575,239			1,620,423
Income tax expenses		(529,296	)		(463,172	)
Net income before attribution of non-controlling interests	$	4,045,943		$	1,157,251

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Operating Revenues

For the nine months ended September 30, 2011, revenues amounted to $5,938,816, an increase of $1,715,634, or 40.6%, compared to $4,223,182 for the same period of the prior year. This increase was primarily due to revenue generated from product sales and more revenue from services and the additional revenue from operating rights for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. We have recognized revenue from product sales.

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

$856,968 revenue generated from product sales for the nine months ended September 30, 2011, and no revenue from the amount of product sales from the same period of the prior year. One unit of medical accelerator system was installed in the nine months ended September 30, 2011 while no units installed in the nine months ended September 30, 2010. Low unit installation rate was due primarily to the following factors: (i) 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; and (ii) the unit sales process took longer than expected.

Revenues from services were $4,817,036 for the nine months ended September 30, 2011, representing an increase of $593,854, or 14.1% compared to $4,223,182 in revenues from services from the same period of the prior year. This increase was mainly due to two major reasons: (1) on March 30, 2011, through our subsidiary Changdu Huiheng we acquired certain operating rights of four medical centres which operate with these medical accelerator systems in different hospitals providing radiotherapy treatment services. With this acquisition, we had four more customers requiring services than what we did in the same period of the prior year; (2) Jiancheng has signed two more service contracts with its costumers, which would need our company to supply services to these customers.

Pursuant to the operating rights acquired, Changdu Huiheng will receive a percentage of net income derived from the radiotherapy services provided by each medical centre. Revenues from operating rights were $264,812 for the nine months ended September 30, 2011. No revenues from operating rights were received during the same period of the prior year.

Other Income

Other revenue consists principally of government financial subsidies to Changdu Huiheng, reverse of bad debt provision and equity in income of affiliate for the nine months ended September 30, 2011, and totalled $2,995,869, representing an increase of $2,901,609, compared to $94,260 for the same period of the prior year. This significant increase was due to the following factors: 1) the Company received tax refunds or subsidies for the nine months ended September 30, 2011 amounted to 634,213; 2) 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; and 3) in March 2011, the company received a gain of $3,019,137 on the acquisition of the equipment and operating rights. On September 30, 2011, the Company reviewed the carrying value of the acquired medical accelerator systems and operating rights and found that there was an impairment on the operating rights due to the actual profit sharing from January to September was lower than the projected income adopted in valuation report by the third party. As a result, based on the changes of the projected income, and subject to the assessment, review and approval by management, the Company wrote down the operating rights as of September 30, 2011, which would result in an impairment loss of approximately $1.94 million.

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 September 30, 2011 amounted to $9.13 million, representing a decrease of 2.69 million or 23%, compared to $11.82 million as of September 30, 2010. The backlog has decreased but remained in place in large part due to the newly installation in the last quarter of 2010.

The purchase orders are not cancellable and are subject to certain conditions, including but not limited to, customers obtaining regulatory approval from their local government for our products. Notwithstanding, we expect the purchase orders comprising the revenue backlog to be installed during the last quarter of 2011 and 2012.

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Below is a summary of our revenue backlog broken down by product, unit price, quantity and total amount owed as of September 30, 2011, based on an exchange rate of 6.4635 RMB per dollar:

Products	Unit Price (RMB)		Quantity		Total Amount (RMB)		Value of Backlog (USD)
SGS-I		9,000,000		2		18,000,000		2,784,869
SGS-I		14,000,000		1		14,000,000		2,166,009
SGS-I		14,000,000		1		14,000,000		2,166,009
LINAC		6,500,000		2		13,000,000		2,011,294
Total				6		59,000,000		9,128,181

Cost of Revenues

For the nine months ended September 30, 2011, the total cost of revenues amounted to $1,718,438, an increase of $1,212,640, or 240%, compared to $505,798 for the same period of the prior year. This increase was due to increased additional cost of revenue from service revenues and operating rights and the cost of the product sold.

Gross Margin

As a percentage of total revenues, the overall gross margin decreased to 71.1% for the nine months ended September 30, 2011 as compared with 88% for the same period in the prior year. This decrease was due to the fact that profit ratio of sales of product eroded the high profit ratio from service revenues. Revenues for the nine months ended September 30, 2011 contains sales of product, service and operating rights while they only contained service fee for the same period of the prior year.

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 $277,449 for the nine months ended September 30, 2011, an increase of $73,853, or 36.3%, compared with $203,596 for the same period of the prior year. This increase in sales and marketing expenses resulted from more marketing activities in this period due to the new business, compared with the same period of the prior year.

General and administrative expenses

General and administrative expenses amounted to $2,137,968 for the nine months ended September 30, 2011, representing an increase of $212,136, or 11%, compared to $1,925,832 for the same period of the prior year. The increase in general and administrative expenses resulted from an increase in personnel and intangible asset amortization and in fees paid to our legal counsel and auditors.

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 basic research on advanced technologies. Research and development expenses were $225,591 for the nine months ended September 30, 2011, an increase of $163,798, or 265%, compared to $61,793 in the same period of the prior year. This increase was mainly due to the fact that the Company incurred more expenses related to research and development during the nine months ended September 30, 2011, as we expect to launch our new products at the end of this year or early next year.

Income Tax Provision

For the nine months ended September 30, 2011, the Company’s income tax provision was $529,296, compared to $463,172 for the same period of the prior year, representing an increase of $66,124, or 14.3%. The increase in income tax was due to the increase of income in the nine months ended September 30, 2011, compared to the same period of the prior year.

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Net Income

For the nine months ended September 30, 2011, the Company’s net income amounted to $4,045,943, an increase of $2,888,692, or 250%, compared to $1,157,251 for the same period of the prior year. This increase was attributable to (i) the increase of revenues from sales of product, service and additional operating rights in the nine months ended September 30, 2011; (ii) the Company’s reversal of $1,143,326 allowance provided for doubtful accounts for the period of the prior year and (iii) in March 2011, the company recognized a gain of $3,019,137 on the acquisition of the equipment and operating rights. On September 30, 2011, the Company reviewed the carrying value of the acquired medical accelerator systems and operating rights and found that there was a potential impairment on the operating rights due to the actual profit sharing from January to September was lower than the projected income adopted in valuation report by the third party. As a result, based on the changes of the projected income, and subject to the assessment, review and approval by management, the Company was going to write down the operating rights as of September 30, 2011, which would result in an impairment loss of approximately $1.94 million.

Comprehensive Income

For the nine months ended September 30, 2011, the Company’s other comprehensive income, which reflects the change in foreign currency translations on net income, amounted to a gain of $5,155,468, a difference of $3,472,945 compared to a gain of $1,682,523, 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

To date, we have financed our operations primarily through the issuance of equity and cash flows from operations. We currently do not have any outstanding bank debt. 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 longstanding, positive relationships with our vendors and have maintained favourable payment terms and believe that we will continue to maintain such favourable payment terms. Also, we believe that we can defer certain tax payments, if we choose to do so. We plan to raise additional equity capital that would help to finance a number of expansion initiatives including new product development.

As of September 30, 2011, the company had total assets of $37,163,795. Our cash was $243,044, accounts receivable were $15,654,043, prepayment and other receivables were $2,651,483 and inventories were $3,882,478. Working capital was approximately $6,634,716. The current ratio was approximately 2.34. The quick ratio was approximately 1.56.

Net cash used in operating activities totalled $297,234 for the nine months ended September 30, 2011, an increase of $233,895 from $531,129 for the prior year. This increase resulted primarily from the following changes in the operating assets and liabilities:

• $3,005,691 decrease in accounts receivables;

• $1,050,196 increase in inventories;

• $382,798 increase in prepayments and other receivables;

• $187,790 decrease in accounts payable;

• $215,949 decrease in tax payable; and

• $982,059 increase in accrued expenses and other current liabilities.

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.

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Second, due to our strong, long-standing relationships with our customers, we have extended their payment terms. 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 99% of our revenues for the period ended September 30, 2011 and 2010. During the period ended September 30, 2011, Customer A paid approximately $0.5 million on its accounts receivable and as of September 30, 2011 had an outstanding balance of approximately $10.9 million (with provision for bad debts of approximately $0.2 million). Of Customer A’s outstanding accounts receivable balance as of September 30, 2011, 13% related to the providing of services and 87% related to product sales. During the period ended September 30, 2011, Customer B paid approximately $2.2 million on its accounts receivable and as of September 30, 2011 had an outstanding balance of $3.7 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 a decrease 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)/ provided by investing activities was ($456,891) and $66,863 or the nine months ended September 30, 2011 and 2010, respectively. The cash used in investing activities was primarily used to purchase equipment.

Cash flows from financing activities both amounted to nil for the nine months ended September 30, 2011 and 2010.

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 were late in filing our Form 10-Q for the quarter ended March 31, 2011 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.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

To the best of management’s knowledge, the Company has not been involved in any legal proceedings.

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.

Item 6. Exhibits

Exhibit No.		Description
10.1		Joint Venture Agreement dated September 6, 2011 (Incorporated by reference to Exhibit 10.1 of Form 8-K filed with the Commission on September 9, 2011).

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

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		XBRL Taxonomy Extension Definition Linkbase

101.LAB*		XBRL Taxonomy Extension Label Linkbase

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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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: November 18, 2011	By:	/s/ Hui Xiaobing
		Hui Xiaobing
		Chief Executive Officer
		(Principal Executive Officer)

Date: November 18, 2011	By:	/s/ Richard Shen
		Richard Shen
		Chief Financial Officer
		(Principal Accounting and Financial Officer)

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HUIHENG MEDICAL, INC. - FORM 10-Q - November 21, 2011

Attached files

HUIHENG MEDICAL, INC. Reports