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EX-32 - HUIHENG MEDICAL, INC.ex32.htm
EX-31.1 - HUIHENG MEDICAL, INC.ex31-1.htm
EX-31.2 - HUIHENG MEDICAL, INC.ex31-2.htm


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

FORM 10-Q

(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 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  ¨                     No x

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 August 9, 2011, there were 23,730,637 shares of the issuer’s $0.001 par value common stock issued and outstanding.

 
 
 

 

HUIHENG MEDICAL, INC.

FORM 10-Q INDEX


 
Page
   
PART I – FINANCIAL INFORMATION
 
Item 1.  Financial Statements                                                                                                                     
1
Consolidated Balance Sheets at June 30, 2011(Unaudited) and December 31, 2010
2
Consolidated Statements of Income and Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)
3
Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2011 (Unaudited)
5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)
6
Notes to the Consolidated Financial Statements (Unaudited)
7
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
Signature Page                                                                                                                     
41


                          ii                                                            
 
 

 

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.


                              iii                                                            
 
 

 


 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
 
 
 
 
 
 

 
                                                                
 
1

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN US DOLLARS)

ASSETS
     
June 30, 2011
 
December 31,
       
(Unaudited)
 
2010
CURRENT ASSETS:
           
    Cash
     
 $                      118,338
 
 $                    294,542
    Accounts receivable
     
          4,641,448
 
          8,130,681
    Prepaid expenses
     
          2,979,041
 
          2,743,602
    Other receivables, net of allowance for doubtful accounts of nil 
         
        and $757,576 as of June 30, 2011 and December 31, 2010,
         
        respectively
     
             135,718
 
            109,519
    Inventories
     
          3,689,060
 
          2,832,282
        Total Current Assets
     
        11,563,605
 
        14,110,626
             
ACCOUNTS RECEIVABLE, net of allowance for doubtful accounts of
       
    $1,092,752 and $1,451,364 as of June 30, 2011 and December 31, 2010, respectively
 
          9,291,089
 
        11,617,798
PREPAID EXPENSES, net of current portion
     
          1,094,012
 
          1,216,841
INVESTMENT IN AFFILIATE
     
             314,948
 
            137,032
PROPERTY, PLANT AND EQUIPMENT, NET
     
          2,987,547
 
          2,419,348
LAND USE RIGHT, NET
     
             962,036
 
            952,057
INTANGIBLE ASSETS, NET
     
        11,264,408
 
            962,202
        Total Assets
     
 $                 37,477,645
 
 $               31,415,904
             
LIABILITIES AND STOCKHOLDERS' EQUITY
           
             
CURRENT LIABILITIES:
           
    Accounts payable
     
$                    1,153,184
 
$                   1,266,774
    Due to related parties
     
             393,156
 
            385,025
    Income tax payable
     
             651,455
 
            974,328
    Accrued liabilities and other payables
     
          2,356,291
 
          1,740,226
        Total Current Liabilities
     
          4,554,086
 
          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 June 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 June 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
     
          2,280,955
 
          1,676,867
    Retained earnings
     
        19,052,000
 
        14,298,693
    Accumulated other comprehensive income
     
          3,291,532
 
          2,633,236
    Total Huiheng's stockholders' equity
     
        32,136,815
 
        26,121,124
    Non-controlling interests
     
             786,744
 
            928,427
        Total Stockholders' Equity
     
        32,923,559
 
        27,049,551
        Total Liabilities and Stockholders' Equity
     
 $                 37,477,645
 
 $               31,415,904

See accompanying notes to the consolidated financial statements.

                                                                
 
2

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 (IN US DOLLARS)
 
   
For The Three Months Ended
 
For The Six Months Ended
   
June 30,
 
 June 30,
   
2011
 
2010
 
2011
 
2010
 REVENUES
 
 $         1,760,963
 
 $             1,407,342
 
 $          3,424,857
 
 $          2,808,195
 COST OF REVENUES
 
499,690
 
   201,494
 
        777,827
 
    297,926
 GROSS PROFIT
 
  1,261,273
 
1,205,848
 
2,647,030
 
      2,510,269
 OPERATING EXPENSES:
               
      Sales and marketing expenses
 
85,487
 
       60,098
 
       176,710
 
   122,221
      General and administrative expenses
 
             682,795
 
             654,069
 
          1,405,858
 
          1,149,817
      Research and development costs
 
    87,722
 
    21,498
 
    113,114
 
      36,838
         Total Operating Expenses
 
  856,004
 
         735,665
 
      1,695,682
 
    1,308,876
 OPERATING INCOME
 
405,269
 
 470,183
 
  951,348
 
    1,201,393
 OTHER INCOME:
               
     Other income
 
    226,017
 
     29,563
 
  1,379,646
 
   29,563
     Interest income
 
     124
 
         61
 
         212
 
     104
     Gain on business acquisition
 
             -
 
   21,508
 
            -
 
   21,508
     Gain on the acquisition of equipment and operating rights
 
                          -
 
                          -
 
          3,019,137
 
                          -
     Equity in income of affiliate
 
  112,744
 
   55,042
 
   173,356
 
      44,502
         Total Other Income
 
     338,885
 
  106,174
 
 4,572,351
 
    95,677
NET INCOME BEFORE INCOME TAXES
 
             744,154
 
             576,357
 
          5,523,699
 
          1,297,070
INCOME TAXES
 
 156,706
 
   186,355
 
  326,059
 
        313,782
NET INCOME BEFORE
    ATTRIBUTION OF
    NON-CONTROLLING INTERESTS
 
             587,448
 
             390,002
 
          5,197,640
 
             983,288
NET LOSS ATTRIBUTABLE TO
NON-CONTROLLING
   INTERESTS
 
               69,318
 
               91,172
 
             159,755
 
             154,309
NET INCOME ATTRIBUTABLE TO
   HUIHENG’S SHAREHOLDERS
 
 $            656,766
 
 $                481,174
 
 $          5,357,395
 
 $          1,137,597
EARNINGS PER SHARE
               
    - Basic
 
 $                  0.05
 
 $                      0.03
 
 $                   0.38
 
 $                   0.08
                 
    - Diluted
 
 $                  0.04
 
 $                      0.03
 
 $                   0.33
 
 $                   0.07
Weighted Common Shares Outstanding
               
    - Basic
 
14,030,637
 
13,935,290
 
  14,030,637
 
13,935,290
                 
    - Diluted
 
16,251,113
 
  16,251,113
 
16,251,113
 
  16,251,113

See accompanying notes to the consolidated financial statements.

                                                                   
 
3

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(IN US DOLLARS)
 
 
   
For The Three Months Ended
 
For The Six Months Ended
   
June 30,
 
 June 30,
   
2011
 
2010
 
2011
 
2010
                 
Net income
 
 $            587,448
 
 $            390,002
 
 $          5,197,640
 
 $             983,288
                 
Other comprehensive income
               
                 
  Foreign currency translation gain
 
436,173
 
 168,202
 
     676,368
 
172,207
                 
Comprehensive income
 
 $         1,023,621
 
 $            558,204
 
 $          5,874,008
 
 $          1,155,495
                 
Less: Comprehensive loss
 attributable to non-controlling interests
 
             (58,223)
 
             (84,731)
 
           (141,683)
 
           (147,692)
                 
Comprehensive income attributable to Huiheng's shareholders
 
 $         1,081,844
 
 $             642,935
 
 $          6,015,691
 
 $          1,303,187


See accompanying notes to the consolidated financial statements.

                                                                   
 
4

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 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)
 
                            -
 
                   -
 
                        -
 
                 -
 
                        -
 
                 -
 
                       -
 
                       -
 
        5,357,395
 
                        -
 
         5,357,395
 
               (159,755)
 
         5,197,640
                                                         
Foreign currency translation gain
 
                            -
 
                   -
 
                        -
 
                 -
 
                        -
 
                 -
 
                       -
 
                       -
 
                       -
 
            658,296
 
            658,296
 
                   18,072
 
            676,368
                                   
 
                   
Appropriation of statutory surplus reserve
                            -
 
                   -
 
                        -
 
                 -
 
                        -
 
                 -
 
                       -
 
           604,088
 
         (604,088)
 
                        -
 
                        -
 
                            -
 
                        -
Balance, June 30, 2011
 
                211,390
 
 $       211
 
        23,730,637
 
 $   23,731
 
        (9,700,000)
 
 $   (9,700)
 
 $   7,498,086
 
 $   2,280,955
 
 $19,052,000
 
 $   3,291,532
 
 $    32,136,815
 
 $     786,744
 
 $  32,923,559

 


See accompanying notes to the consolidated financial statements.

 
 
5

 

HUIHENG MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN US DOLLARS)
             
For The Six Months Ended
 
             
June 30,
 
             
 2011
 
 2010
 
Cash flows from operating activities:
           
Net income before attribution of non-controlling interests
 
 $                     5,197,640
 
 $                         983,288
 
Net loss attributable to non-controlling interests
 
              159,755
 
           154,309
 
Total Huiheng's net income
     
           5,357,395
 
           1,137,597
 
Adjustments to reconcile net income to net
         
    cash used in operating activities:
           
    Depreciation of property, plant and equipment
 
145,390
 
121,526
 
    Loss on write off of fixed assets
   
                27,833
 
               -
 
    Amortization of land use right
   
                10,030
 
         9,599
 
    Amortization of intangible assets
   
            474,961
 
                41,310
 
    Recovery of bad debts
     
         (1,143,326)
 
                     -
 
    Equity in income of affiliate
   
             (173,356)
 
              (44,502)
 
    Gain on acquisition of subsidiary
   
                     -
 
             (21,508)
 
    Gain on the acquisition of the equipment and operating rights
 
      (3,019,137)
 
                      -
 
    Non-controlling interests
   
             (159,755)
 
             (154,309)
 
Changes in assets and liabilities:
           
    Accounts receivable
     
         (1,284,185)
 
             (677,204)
 
    Prepaid expenses
     
             (112,610)
 
             (288,899)
 
    Other receivables
     
              (29,161)
 
                82,739
 
    Inventories
       
             (856,778)
 
             (540,827)
 
    Accounts payable
     
             (113,590)
 
              (56,093)
 
    Income tax payable
     
             (322,873)
 
              250,200
 
    Accrued liabilities and other payables
   
              616,065
 
             (52,080)
 
Net cash used in operating activities
   
             (583,097)
 
             (192,451)
 
             
 
 
 
 
Cash flows from investing activities:
           
 
Purchase of property, plant and equipment
 
              (33,552)
 
       (3,522)
 
 
Advance from related party
   
                     -
 
           90,000
 
Net cash (used in) / provided by investing activities
 
              (33,552)
 
                86,478
 
                     
Net decrease in cash
     
        (616,649)
 
          (105,973)
 
 
Effect on change of exchange rates
   
              440,445
 
       144,298
 
Cash as of January 1
     
              294,542
 
              84,962
 
Cash as of June 30
     
 $                        118,338
 
 $                         123,287
 
                     
Supplemental disclosures of cash flow information:
         
Cash paid during the period for:
           
Income tax paid
     
 $                        666,241
 
 $                          67,562
 
Non-Cash Investing and Financing Transactions:
Acquisition of medical equipment and certain operating rights from a customer in lieu of outstanding accounts and other receivables of $8,246,416.

See accompanying notes to the consolidated financial statements.

                                                                   
 
6

 

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

NOTE 1 - ORGANIZATION AND OPERATIONS

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

The Company's common stock is 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 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.

                                                                      
 
7

 


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

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

Reclassifications

Certain reclassifications have been made to the financial statement presentations as of June 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, 2011. The results of operation for the six months ended June 30, 2011, are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

Summary of significant accounting policies

Estimates

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

Accounts receivable

Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts, sales returns, trade discounts and value added tax. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company performs ongoing credit evaluations of its customers' financial conditions, taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay. The Company provided an allowance of $1,092,752 and $1,451,364 for doubtful accounts as of June 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.


                                                                      
 
8

 


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

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

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

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.

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.

                                                                      
 
9

 


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


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

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

Intangible assets

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

Investment in affiliate

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

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

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 June 30, 2011 and December 31, 2010, the Company determined that there was no impairment of value.

Fair value of financial instruments

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

                                                                      
 
10

 


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


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

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

Revenue recognition

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.

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.

                                                                      
 
11

 


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


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

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

Revenue recognition (…/Cont’d)

(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 $139,000 (RMB 900,000) will be refundable.
(ii)  
31% of business tax payments will be refunded if annual business tax payment in excess of $155,000 (RMB 1.0 million)
(iii)  
38.75% of VAT payments will be refunded if annual VAT payment in excess of $232,000 (RMB 1.5 million).

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

Warranty

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


                                                                      
 
12

 


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


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

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

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 $113,114 and $36,838 for the six months ended June 30, 2011 and 2010, respectively. For the three months ended June 30, 2011 and 2010, research and development costs were $87,722 and $21,498, 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.

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.

               
June 30, 2011
 
June 30, 2010
 
December 31, 2010
As of period ended RMB :USD exchange rate
 
6.4635
 
6.7814
 
6.6000
Average period for the 6 months ended
           
    RMB :USD exchange rate
     
6.5256
 
6.8189
 
       -
Average period for the 3 months ended
    RMB: USD exchange rate
 
 
6.4774
 
 
6.8115
 
 
-

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.

                                                                      
 
13

 


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


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

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

Share-based compensation

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 June 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 six months ended June 30, 2011 and 2010 was $2,342 and $2,342 respectively; and for the three months ended June 30, 2011 and 2010 was $1,171 and $1,171, respectively. Such amount had not been recorded as it was considered immaterial.

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

Risk-free interest rate
             
1.88%
Expected dividend yield
             
-
Expected volatility
             
228.57%
Expected life in years
             
3.4
Service period in years
             
3
Weighted average calculated value of options granted
     
 $              0.7029


                                                                      
 
14

 


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


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

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

Share-based compensation (…/Cont’d)

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

As of June 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 0.75 year. Compensation cost of approximately $3,513 had not yet been recognized on non-vested awards. The weighted average period over which it is expected to be recognized is 0.75 year.

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.

                                                                      
 
15

 


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


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

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

Earnings per share

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

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

             
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
             
2011
 
2010
 
2011
 
2010
 
                             
Net income attributable to Huiheng’s shareholders
$      656,766
 
$      481,174
 
 $     5,357,395
 
 $         1,137,597
 
                             
Weighted average outstanding shares of common
stock
14,030,637
 
13,935,290
 
14,030,637
 
          13,935,290
 
Dilutive effect of Convertible Preferred Stock
2,220,476
 
2,315,823
 
        2,220,476
 
        2,315,823
 
Diluted weighted average outstanding shares
16,251,113
 
16,251,113
 
      16,251,113
 
      16,251,113
 
                             
Earnings per common share:
                 
Basic
         
$            0.05
 
$            0.03
 
 $              0.38
 
 $                  0.08
 
Diluted
         
$            0.04
 
$            0.03
 
 $              0.33
 
 $                  0.07
 

For the six months ended June 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.

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.

                                                                      
 
16

 


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


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

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

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.

Fair value measurements

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
               
Level 1 -
 Quoted prices in active markets for identical assets or liabilities.
 
Level 2 -
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 -
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

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

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

                                                                      
 
17

 


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)

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.

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.



                                                                      
 
18

 


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


NOTE 3 - ACQUISITION OF MEDICAL ACCELERATOR SYSTEMS AND OPERATING RIGHTS

On March 30, 2011, 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 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.

Acquisition information which translated at closing rate of March 30, 2011 is presented as follows:

           
Contractual
 
Value of medical
 
Value of operating
   
Name of hospital
   
period
 
accelerator systems
 
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


                                                                      
 
19

 


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


NOTE 4 – CASH

Cash represents cash in bank and cash on hand. Cash as of June 30, 2011 and December 31, 2010 consists of the following:

                 
June 30,
 
December 31,
                 
2011
 
2010
                 
(Unaudited)
 
   
Bank balances
           
 $                                            113,579
 
 $                                            291,787
Cash
             
          4,759
 
               2,755
                 
 $                                            118,338
 
 $                                            294,542

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

                 
June 30,
 
December 31,
                 
2011
 
2010
                 
(Unaudited)
 
   
The PRC
             
$                                         96,252
 
$                                         269,904
Hong Kong
           
22,086
 
24,638
                 
$                                       118,338
 
$                                         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.


                                                                      
 
20

 


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

NOTE 5 – INVENTORIES

At June 30, 2011 and December 31, 2010, inventories consisted of the following:

                 
June 30, 2011
 
December 31, 2010
                 
(Unaudited)
 
   
Raw materials
           
 $                 320,798
 
 $                 578,071
Work-in-progress
         
    3,368,262
 
           2,254,211
                 
 $              3,689,060
 
 $              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 June 30, 2011 and December 31, 2010, prepaid expenses consisted of the following:

                 
June 30, 2011
 
December 31, 2010
                 
(Unaudited)
 
   
Advances made to suppliers and other prepaid expenses
 
 $              2,623,196
 
 $               2,452,693
Prepaid expenses for purchasing "Huiheng" Logo
 
             58,792
 
               -
Construction in progress paid on behalf of landlord (a)
       
  - current portion
         
      297,053
 
         290,909
                 
 $              2,979,041
 
 $               2,743,602
                       
Non-current portion (a)
         
 $              1,094,012
 
 $               1,216,841

(a)  
Under an agreement signed with the landlord, Shenzhen Hyper will make payment for the construction in progress of the building in advance on behalf the landlord. Meanwhile, Shenzhen Hyper signed a rental agreement with the landlord to rent the building for 20 years at about $24,800 (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
                 
 $                 148,526
 
2012
                 
    297,053
 
2013
                 
     297,053
 
2014
                 
     297,053
 
2015
                 
            297,053
 
Thereafter
               
       54,327
Total
                   
 $              1,391,065

                                                                      
 
21

 


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


NOTE 7 – OTHER RECEIVABLES

At June 30, 2011 and December 31, 2010, other receivables, net, consisted of the following:

                   
June 30, 2011
 
December 31, 2010
Other receivables
           
(Unaudited)
 
   
 
- loan or advance to staff for business travelling
   
 $                      65,988
 
 $                       38,758
 
- utilities and rental deposits
       
       1,547
 
                1,515
 
- prepaid expenses made by director
     
             3,094
 
            3,030
 
- others (net of allowance for doubtful accounts of nil and $757,576)
 65,089
 
66,216
                   
 $                    135,718
 
 $                     109,519


NOTE 8 – PROPERTY, PLANT AND EQUIPMENT

At June 30, 2011 and December 31, 2010, property, plant and equipment, net, consisted of the following:

                 
June 30, 2011
 
December 31, 2010
                 
(Unaudited)
 
   
Buildings and building improvements
     
 $                2,619,242
 
 $                   2,565,072
Production equipment
         
         744,330
 
           702,900
Medical radiotherapy equipment
       
           658,768
 
                      -
Furniture, fixture and office equipment
     
      406,333
 
          422,616
Motor vehicles
           
        197,842
 
           193,750
                 
   4,626,515
 
        3,884,338
Less: Accumulated depreciation
       
    (1,638,968)
 
     (1,464,990)
                 
 $                2,987,547
 
 $                   2,419,348

For the six months ended June 30, 2011 and 2010, depreciation expenses were $145,390 and $121,526, respectively. For the three months ended June 30, 2011 and 2010, depreciation expenses were $95,014 and $60,879, respectively.

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


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, People's Republic of China. Land use right is amortized using the straight-line method over the lease term of 50 years. The amortization expense for the six months ended June 30, 2011 and 2010 were $10,030 and $9,599, respectively. The amortization expense for the three months ended June 30, 2011 and 2010 were $5,052 and $4,805, respectively.

                                                                      
 
22

 


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


NOTE 10 – INTANGIBLE ASSETS

At June 30, 2011 and December 31, 2010, intangible net assets consisted of the following:

                   
June 30, 2011
 
December 31, 2010
                   
(Unaudited)
 
   
Patent technology in Shenzhen Hyper (a)
     
 $                 1,547,149
 
 $                  1,515,152
Patent technology in Portola Medical, Inc.(b)
     
         250,000
 
        250,000
Operating rights (c)
           
  10,766,497
 
                      -
Less: Accumulated amortization
       
      (1,299,238)
 
     (802,950)
                   
 $               11,264,408
 
 $                    962,202

(a)  
Patent represents a patent technology for the production of a component of the radiation treatment system. Pursuant to the patent certificate, the patent is valid for 20 years from the application date, May 1999. The amortization expenses for the six months ended June 30, 2011 and 2010 were $43,167 and $41,230, respectively. The amortization expenses for the three months ended June 30, 2011 and 2010 were $21,742 and $20,597, respectively.

(b)  
Patent acquired in Portola Medical, Inc. (“Portola”). The amortization expenses for six months ended June 30, 2011 and 2010 were $6,250 and nil, respectively. The amortization expenses for three months ended June 30, 2011 and 2010 were $3,125 and nil, respectively. Patent technology is utilized in the production of medical equipment and is amortized over its estimated useful life of 20 years.

(c)  
Operating rights represents the contractual rights of receiving net income from four medical centers which utilize the medical accelerator systems owned by Changdu Huiheng, which have been acquired from Jiancheng on March 30, 2011. The operating rights were acquired from its major customer and are amortized over contractual periods ranging from 7 to 10 years. These operating rights are amortized over their contractual periods by straight-line method and the amortization expenses for six months ended June 30, 2011 was $425,544.

For the six months ended June 30, 2011 and 2010, amortization expenses amounted to $474,961 and $41,310, respectively. For the three months ended June 30, 2011 and 2010, amortization expenses amounted to $344,805 and $20,677, respectively. The expected amortization which was based on the closing rate as of June 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
For the year ended
                 
December 31,
                   
 
2011
   
 $                      6,250
 
 $                      42,248
 
 $                    644,449
 
 $                    692,947
 
2012
   
       12,500
 
        84,495
 
  1,288,898
 
          1,385,893
 
2013
   
          12,500
 
        84,495
 
 1,288,898
 
    1,385,893
 
2014
   
             12,500
 
         84,495
 
   1,288,898
 
     1,385,893
 
2015
   
      12,500
 
    84,495
 
  1,288,898
 
         1,385,893
 
Thereafter
 
        181,250
 
     309,816
 
 4,536,823
 
    5,027,889
Total
     
 $                  237,500
 
 $                    690,044
 
 $               10,336,864
 
 $               11,264,408


                                                                      
 
23

 


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


NOTE 11 – ACCRUED LIABILITIES AND OTHER PAYABLES

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

                 
June 30, 2011
 
December 31, 2010
                 
(Unaudited)
 
   
Accrued expenses - operating
       
 $                     308,730
 
 $                        311,342
Accrued payroll and welfare
       
      306,865
 
           181,255
Value added tax, other taxes payable and surcharges
 
 1,079,206
 
        1,170,646
Customer deposits
         
        661,490
 
            76,983
                 
 $                  2,356,291
 
 $                     1,740,226


NOTE 12 – NON-CONTROLLING INTEREST

Non-controlling interest included in the Company’s balance sheets as of June 30, 2011 and December 31, 2010 represents 25% of equity interest in Shenzhen Hyper.

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

             
                   
June 30, 2011
 
December 31, 2010
                   
(Unaudited)
 
   
Balance at beginning period/year
         
 $                    928,427
 
 $                     1,111,027
Effect for the current period/year
               
 
- Net loss
           
     (159,755)
 
             (215,574)
 
- Foreign currency translation gain
       
             18,072
 
                 32,974
Balance at end of period/year
         
 $                    786,744
 
 $                        928,427


NOTE 13 – DUE TO RELATED PARTIES

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

Amounts due to related parties at June 30, 2011 and December 31, 2010 represent the remaining balance due to a former shareholder of Allied Moral Holdings Limited ("Allied Moral"), a subsidiary of the Company, pursuant to the 2007 share redemption as well as advances related to the acquisition of Changdu Huiheng.

In June 2010, the cash consideration of $260,000 and related expenses amounting to $30,000 for acquiring the new subsidiary, Portola Medical Inc, were paid directly by the director, Hui Xiaobing on behalf of the Company. As of June 30, 2011, such director is owed $367,214.

                                                                      
 
24

 


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 June 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 June 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 six months ended June 30, 2011.

Statutory surplus reserve

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

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

As of June 30, 2011, the Company established and segregated its retained earnings and the amount for the Statutory Surplus Reserve of $2,280,955.



                                                                      
 
25

 


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 six months ended June 30, 2011 and 2010:

         
For the Three months ended June 30
 
For the Six months ended June 30
         
 2011
 
 2010
 
 2011
 
 2010
Revenues:
   
 
           
    Products
   
 $                           -
 
 $                            -
 
 $                            -
 
 $                            -
    Services
   
      1,658,904
 
       1,407,342
 
   3,216,283
 
     2,808,195
    Operating rights
 
           102,059
 
                   -
 
     208,574
 
           -
         
 $            1,760,963
 
 $             1,407,342
 
 $             3,424,857
 
 $             2,808,195
                       
                       
         
For the Three months ended June 30
 
For the Six months ended June 30
   
2011
 
2010
 
2011
 
2010
Operating income:
               
    Products
   
 $                           -
 
 $               (59,784)
 
 $                            -
 
 $                (59,784)
    Services
   
   1,466,500
 
          1,236,965
 
          2,826,040
 
           2,514,768
    Operating rights
 
  (237,980)
 
                  -
 
          (243,706)
 
               -
         
       1,228,520
 
1,177,181
 
2,582,334
 
2,454,984
Corporate expenses
 
    (823,251)
 
          (706,998)
 
         (1,630,986)
 
        (1,253,591)
Operating income
 
 $              405,269
 
 $                470,183
 
 $                951,348
 
 $              1,201,393

                   
June 30,
2011
 
December 31,
2010
Total assets:
                     
    Products, Services and Corporate
           
 $       26,509,006
 
 $       31,415,904
    Operating rights
               
          10,968,639
 
                           -
                   
 $       37,477,645
 
 $       31,415,904

NOTE 16 – OTHER INCOME

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

         
For the Three months ended June 30,
 
For the Six months ended June 30,
         
 2011
 
 2010
 
 2011
 
 2010
                         
Recovery of bad debts
 $                            -
 
 $                            -
 
 $               1,143,326
 
 $                           -
Others
     
      226,017
 
            29,563
 
         236,320
 
        29,563
         
 $                226,017
 
 $                  29,563
 
 $               1,379,646
 
 $                 29,563

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

                                                                      
 
26

 


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


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 People's Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws.

Income tax expense for six months ended June 30, 2011 and 2010 amounted to $326,059 and $313,782, respectively. For three months ended June 30, 2011 and 2010 amounted to $156,706 and $186,355, respectively.

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

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

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

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

                   
 For the Six months ended June 30,
                   
 2011
 
 2010
                         
Income before income taxes
         
 $            5,523,699
 
 $             1,297,070
                         
Expected PRC income tax expense at statutory tax rate of 25%
 
    1,380,925
 
            324,268
Non-deductible expenses
           
      (463,757)
 
     149,030
Income tax exempted
           
         (591,109)
 
   (159,516)
Income tax expense
           
 $               326,059
 
 $                313,782

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 June 30, 2011.

                                                                      
 
27

 


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


NOTE 18 – CONCENTRATION OF CREDIT RISK

Customers' concentrations

Customers accounting for 10% or more of the Group's net revenue for the six months ended June 30, 2011 and 2010 are as follows:
                   
 2011
 
 2010
                   
 %
 
 %
Customer A
             
52%
 
53%
Customer B
             
30%
 
35%
Customer C
             
N/A
 
11%

Two customers accounted for 82% and three customers accounted for 99% of revenue for the six months ended June 30, 2011 and 2010, respectively. These customers also accounted for 92% and 84% of accounts receivable as of June 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 June 30, 2011 and 2010.

Other credit risks

As of June 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 June 30, 2011.


NOTE 19 - OPERATING LEASE COMMITMENTS

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

For the year ended
                 
December 31,
                   
 
2011
                 
 $                 148,526
 
2012
                 
           297,053
 
2013
                 
        297,053
 
2014
                 
         297,053
 
2015
                 
            297,053
 
Thereafter
               
3,515,122
TOTAL
                   
 $              4,851,860


                                                                      
 
28

 


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


NOTE 20 – 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 June 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
       
June 30,
 
December 31,
                   
2011
 
2010
                   
(Unaudited)
 
   
    Investments in subsidiaries
         
 $            32,217,815
 
 $              26,217,124
    Total Assets
             
 $            32,217,815
 
 $              26,217,124
                         
LIABILITIES AND STOCKHOLDERS' EQUITY
           
                         
CURRENT LIABILITIES:
               
    Other payable
           
 $                   81,000
 
 $                     96,000
        Total Current Liabilities
         
            81,000
 
             96,000
                         
STOCKHOLDERS' EQUITY:
               
      Total Stockholders' Equity
       
 32,136,815
 
     26,121,124
      Total Liabilities and Stockholders' Equity
     
$            33,217,815
 
$               26,217,124


                                                                      
 
29

 


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


NOTE 20 – CONDENSED PARENT COMPANY FINANCIAL INFORMATION (…/Cont’d)

CONDENSED STATEMENT OF INCOME
     
For six months ended June 30,
                   
2011
 
2010
                         
General and administrative expenses
       
 $                    (198,721)
 
 $                     (147,488)
Equity in income of subsidiaries
       
         5,556,116
 
           1,285,085
Net income
             
 $                    5,357,395
 
 $                    1,137,597
                         



                                                                      
 
30

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

OVERVIEW

We are a China-based medical equipment company that develops, designs and markets radiation therapy systems used for the treatment of cancer.  We currently have five products: the Super Gamma System (“SGS”), the Body Gamma Treatment System (“BGTS”), OPEN Stereotactic Gamma-ray Radiotherapy System, the Head Gamma Treatment System (“HGTS”) and a multileaf collimator device (“MLC”) used in conjunction with a linear accelerator. In addition to providing radiotherapy equipment, we also offer our customers comprehensive post-sales services for our products as well as products manufactured by others.  These services include radioactive cobalt source replacement and disposal, medical expert training, clinical trial analysis, patient tumour treatment analysis, software upgrades and patient care consulting.

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 is attributed to service contract revenue. In addition, in China, before our radiotherapy equipment may be installed, each hospital or clinic must obtain approval from the Ministry of Health and the local provincial government. The obligation to obtain approval from the Ministry of Health and the local provincial government is the responsibility of our customer, who is usually a third party hospital equipment financing company and who is a distributor of our equipment. As part of the application process, however, we will assist in responding to technical questions raised from time to time. Questions raised during the process can include ensuring that equipment has been approved by the SFDA, that the equipment meets the specifications stated and that the equipment has been properly installed. Because there is no standard application and approval procedure, the processing time for obtaining approval from the local provincial government will vary from province to province. Based on our prior experience the time from application to final installation of our radiotherapy equipment is as follows:
 
 
·
Once the sale contract has been signed, the hospital or clinic will submit an application for approval with the Ministry of Health and local provincial government for the installation of our radiotherapy equipment.  Depending on the priority of and interest of the local provincial government, obtaining the Ministry of Health and local provincial government approval by our customers has taken from as fast as 3 months to as long as 24 months. Unfortunately there is no set time frame in which the local regulatory authorities must respond. As such, the length of the approval process varies dramatically from province to province as each local province has its own approval process and what it deems to be a priority at the local level.
 
 
·
After both regulatory approvals have been obtained from the Ministry of Health and local provincial government, and assuming the hospital or clinic has properly prepared the facility for installation, it typically takes us 1 to 2 months to install and test our products.
 
As a result, our ability to sell, install and recognize revenue for sales of our radiotherapy equipment through our customers is largely dependent on the customer’s and hospital’s ability to obtain approval by the Ministry of Health and the local provincial government.
 
 

 
 
31

 
 
Our expansion plans include broadening our product offering.  Our research and development team is focused on developing and producing technologically advanced radiotherapy and GTS products.  We currently have 42 patents issued in the PRC, three patents in the U.S., one patent in the European Union, one patent in Sweden and additional patents applications pending.  Our SGS, BGTS and GTS products are approved for use in China by the State Food and Drug Administration (“SFDA”), an agency of the Ministry of Healthcare of the PRC.
 
Further, we have sought to expand our product offering.  On June 7, 2010, we completed the acquisition of Portola Medical, Inc. whose primary asset consists of its rights to develop, manufacture and sell an adjustable Multi-Catheter Source Applicator which is intended to provide brachytherapy when a physician chooses to deliver intracavitary radiation to the surgical margins following lumpectomy of breast cancer.  Portola Medical is in its initial stages and we plan to market and sell this product in the United States and in Asia.

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

Our future research and development efforts will focus on developing an advanced magnetic resonance imaging (“MRI”) device and an industrial linear accelerator (“LINAC”) unit used for, among other things, preserving food through irradiation.  Currently we have temporarily suspended the development of these two projects due to 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., we entered into four separate Transfer Agreements with Shenzhen Jiancheng Investment Co., Ltd., an entity organized under the laws of China (“Jiancheng”). Jiancheng is one of our largest customers. Prior to the execution of the Transfer Equipment, Jiancheng owed us approximately $17 million (RMB 110,720,000) in accounts receivable. Under the terms of the Transfer Agreements, we purchased for an aggregate of approximately $8.25 million (RMB 54,000,000) (“Purchase Price”) medical equipment, specifically, medical accelerator systems located at four different medical centers that we had previously sold to Jiancheng (the “Equipment”) and certain operating rights which gives us the right to share with the hospitals in the net income derived from the radiotherapy services provided by each medical center. The Transfer Agreements closed on March 30, 2011.

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

                                                                      
 
32

 

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
 
Total
 
$
11,277,310
   
$
8,246,416
 

RESULTS OF OPERATIONS

Comparison of three months ended June 30, 2011 and 2010

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

 
Three Months Ended June 30
 
2011
 
2010
 
Statements of Operations Data
       
Revenues
$1,760,963
 
$1,407,342
 
Cost of Revenues
499,690
 
201,494
 
Gross Profit
1,261,273
 
1,205,848
 
Operating Expenses
       
Sales and marketing expenses
85,487
 
60,098
 
General and administrative expenses
682,795
 
654,069
 
Research and development costs
87,722
 
21,498
 
Other income
338,885
 
106,174
 
Income from operation before income tax expenses
744,154
 
576,357
 
Income tax expenses
156,706
 
186,355
 
Net income before attribution to non-controlling interests
$587,448
 
$390,002
 

Operating Revenues

For the three months ended June 30, 2011, revenues amounted to $1,760,963, an increase of $353,621, or 25.1%, compared to $1,407,342 for the same period of the prior year.  This increase was mainly due to more revenue from services and the additional revenue from operating rights, which amounted to $102,509 for the three months ended June 30, 2011 compared to none for the three months ended June 30, 2010.  We did not recognize any revenue from product sale.

Revenues from product sales, services and operating rights are broken down below.
 
There was no revenue from product sales for the three months ended June 30, 2011, representing no change from the amount of product sales from the same period of the prior year.  No units were installed in the three months ended June 30, 2011 nor were any units installed in the three months ended June 30, 2010.  This lack of any unit installation was due primarily to the following factors: (i) the first two quarters of the year are typically the lowest season for our business (due partially to the Chinese New Year); and (ii) the unit sales process took longer than expected.

Revenues from services were $1.66 million for the three months ended June 30, 2011, representing an increase of $0.25 million, or 17.7%, 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 $102,059 for the three months ended June 30, 2011. No revenues from operating rights were received during the same period of the prior year.

 
 
 
33

 
 
Cost of Revenues
 
For the three months ended June 30, 2011, the total cost of revenues amounted to $499,690, an increase of $298,196, or 148%, compared to $201,494 for the same period of the prior year. This increase was mainly due to 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 71.62% for the three months ended June 30, 2011 as compared with 85.68% for the same period in the prior year.  This decrease was due to service revenues having a higher gross margin than operating rights revenue.  There are certain costs associated with the operating rights including depreciation of the equipment and amortization of the operating rights.  Depreciation for the equipment for the three months period ended June 30, 2011 amounted to $20,201 and the amortization was $321,533. Operating rights income received for the three months period ended June 30, 2011 was only $102,059 which was not enough to cover the depreciation and amortization expenses, thus lowering the overall gross profit margin.  Revenues for the three months ended June 30, 2011 contains 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 $85,487 for the three months ended June 30, 2011, an increase of $25,389, or 42.2%, compared with $60,098 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 $682,795 for the three months ended June 30, 2011, representing an increase of $28,726, or 4.4%, compared to $654,069 for the same period of the prior year.  The increase in general and administrative expenses primarily resulted from an increase in personnel expense.

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 $87,722 for the three months ended June 30, 2011, an increase of $66,224, or 308%, compared to $21,498 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 during the three months ended June 30, 2011, as we expect to launch our new products at the end of this year or early next year.

Other Income

Other income consists principally of government financial subsidies to Changdu Huiheng and equity in income of affiliate for the three months ended June 30, 2011, and totalled $338,885, representing an increase of $232,711, or 219%, compared to $106,174 for the same period of the prior year.  The Company received the tax refunds and subsidies, amounted to $226,017 for the three months ended June 30, 2011, compared to $29,563 for the same period of the prior year.


                                                                      
 
34

 

Income Tax Provision

For the three months ended June 30, 2011, the Company’s income tax provision was $156,706, compared to $186,355 for the same period of the prior year, representing a decrease of $29,649, or 15.9%.  The decrease in income tax was due to more income tax was exempted in the three months ended June 30, 2011 according to the local tax regulations, compared to the same period of the prior year.

Net Income Before Attribution to Non-controlling Interests

For the three months ended June 30, 2011, the Company’s net income before attribution to non-controlling interests amounted to $587,448, an increase of $197,446, or 50.6%, compared to $390,002 for the same period of the prior year.  This increase was attributable to (i) the increase of revenues from service and additional operating rights for the three months ended June 30, 2011 and (ii) the Company received the tax refunds for the three months ended June 30, 2011.

Comparison of six months ended June 30, 2011 and 2010

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

 
Six Months Ended June 30
 
2011
 
2010
 
Statements of Operations Data
       
Revenues
$3,424,857
 
$2,808,195
 
Cost of Revenues
777,827
 
297,926
 
Gross Profit
2,647,030
 
2,510,269
 
Operating Expenses
       
Sales and marketing expenses
176,710
 
122,221
 
General and administrative expenses
1,405,858
 
1,149,817
 
    Research and development costs
113,114
 
36,838
 
Other income
4,572,351
 
95,677
 
Income from operation before income tax expenses
5,523,699
 
1,297,070
 
Income tax expenses
326,059
 
313,782
 
Net income before attribution to non-controlling interests
$5,197,640
 
$983,288
 

Operating Revenues

For the six months ended June 30, 2011, revenues amounted to $3,424,857, an increase of $616,662, or 22%, compared to $2,808,195 for the same period of the prior year.  This increase was primarily due to more revenue from services and the additional revenue from operating rights for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.  We did not recognize any revenue from product sales.

Revenues from product sales, services and operating rights are broken down below.
 
 
There was no revenue from product sales for the six months ended June 30, 2011, representing no change from the amount of product sales from the same period of the prior year.  No units were installed in the six months ended June 30, 2011 nor were any units installed in the six months ended June 30, 2010.  This lack of any unit installation was due primarily to the following factors: (i) the first two quarters of the year is typically the lowest season for our business (due partially to the Chinese New Year); and (ii) the unit sales process took longer than expected.

Revenues from services were $3,216,283 for the six months ended June 30, 2011, representing an increase of $408,088, or 14.5% compared to $2,808,195 in revenues 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 six months 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 $208,574 for the six months ended June 30, 2011. No revenues from operating rights were received during the same period of the prior year.

 
 
35

 
 
 
Other Income

Other income consists principally of government financial subsidies to Changdu Huiheng, reverse of bad debt provision and equity in income of affiliate for the six months ended June 30, 2011, and totalled $4,572,351, representing an increase of $4,476,674, compared to $95,677 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 six months ended June 30, 2010 amounted to $236,320; 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)the company received a gain of $3,019,137 on the acquisition of the equipment and operating rights. The Company did not receive a similar payment for the six months ended June 30, 2010.

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 June 30, 2011 amounted to $9.13 million, representing a decrease of 2.69 million or 23%, compared to $11.82 million as of June 30, 2010.  The backlog has decreased but remained in place in large part due to the newly installation in the last quarter of 2010 and regulatory approval delays concerning clients’ facility preparation as necessary to install our products, which caused some of the units to stay in our backlog longer than we expected.  Subject to any further delays in obtaining regulatory approval, we anticipate that the installation of the first SGS-I in Peru will be completed by the end of 2011.

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 2011.

Below is a summary of our revenue backlog broken down by product, unit price, quantity and total amount owed as of June 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
     
2,784,868.88
 
SGS-I
   
14,000,000
     
1
     
14,000,000
     
2,166,009.13
 
SGS-I
   
14,000,000
     
1
     
14,000,000
     
2,166,009.13
 
LINAC
   
6,500,000
     
2
     
13,000,000
     
2,011,294.19
 
Total
           
6
     
59,000,000
     
9,128,181.33
 

Cost of Revenues
 
For the six months ended June 30, 2011, the total cost of revenues amounted to $777,827, an increase of $479,901, or 161%, compared to $297,926 for the same period of the prior year.  This increase was due to 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 77% for the six months ended June 30, 2011 as compared with 89% for the same period in the prior year.  This decrease was due to service revenues having a higher gross margin than operating rights revenue.  There are certain costs associated with the operating rights including depreciation of the equipment and amortization of the operating rights.  Depreciation for the equipment for the six months period ended June 30, 2011 amounted to $26,736 and the amortization was $425,544.  Operating rights income received for the six months period ended June 30, 2011 was only $208,574 which was not enough to cover the depreciation and amortization expenses, thus lowering the overall gross profit margin.  Revenues for the six months ended June 30, 2011 contains service and operating rights while they only contained service fee for the same period of the prior year.
 
 
 
 
36

 
 
 
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 $176,710 for the six months ended June 30, 2011, an increase of $54,489, or 44.6%, compared with $122,221 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 $1,405,858 for the six months ended June 30, 2011, representing an increase of $256,041, or 22.3%, compared to $1,149,817 for the same period of the prior year.  The increase in general and administrative expenses resulted from an increase in personnel expense and intangible asset amortization and 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 $113,114 for the six months ended June 30, 2011, an increase of $76,276, or 207%, compared to $36,838 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 six months ended June 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 six months ended June 30, 2011, the Company’s income tax provision was $326,059, compared to $313,782 for the same period of the prior year, representing an increase of $12,277, or 3.9%.  The increase in income tax was due to the increase of income in the six months ended June 30, 2011, compared to the same period of the prior year.

Net Income Before Attribution to Non-controlling Interests

For the six months ended June 30, 2011, the Company’s net income before attribution to non-controlling interests amounted to $5,197,640, an increase of $4,214,352, or 429%, compared to $983,288 for the same period of the prior year. This increase was attributable to (i) the increase of revenues from service and operating rights in the six months ended June 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) the company recognized a gain of $3,019,137 on the acquisition of the equipment and operating rights.

Comprehensive Income

For the six months ended June 30, 2011, the Company’s other comprehensive income, which reflects the change in foreign currency translations on net income, amounted to a gain of $5,874,008, a difference of $4,718,513 compared to a gain of $1,155,495, 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.


                                                                      
 
37

 

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

In order for us to implement our current business growth strategy, we will need additional capital to finance a number of expansion initiatives, including new product development, expansion of our Wuhan facility and possible strategic acquisitions.  No assurance can be given that we will be able to raise such additional capital, or if raised, that it will be on favorable terms.  In the event that we are unable to raise capital, we may not be able to complete some or any of our expansion initiatives.
 
 
As of June 30, 2011, the company had total assets of $37,477,645.  Our cash was $118,338, accounts receivable were $13,932,537, prepayment and other receivables were $4,208,771 and inventories were $3,689,060.  Working capital was approximately $7,009,519.  The current ratio was approximately 2.54. The quick ratio was approximately 1.73.
 
 
Net cash used in operating activities totalled $583,097 for the six months ended June 30, 2011, an increase of $390,646 from $192,451 for the prior year.  This increase resulted primarily from the following changes in the operating assets and liabilities:

           •           $1,284,185 increase in accounts receivables;
 
           •           $856,778 increase in inventories;
 
           •           $141,771 increase in prepayments and other receivables;

           •           $113,590 decrease in accounts payable;
 
           •           $322,873 decrease in tax payable; and
 
           •           $616,065 increase in accrued expenses and other current liabilities;
 
The increase in accounts receivable was due to a combination of factors:
 
 
 
 
38

 

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

Second, due to our strong, long-standing relationships with our customers, we have extended their payment terms.  However, in the PRC we have rarely collected payments under those stated terms and our customers have historically made most of their payments following the installation of our units, which final installation is often delayed due to the length of time it takes to obtain regulatory approval.  Further, although a customer is legally obligated to pay for our products, their ability to pay for the products is dependent on their ability to collect payments from their customers consisting of hospitals and clinics.  For such reasons, we often do not collect outstanding receivables on a timely basis.

The delay in receipt of customer payments places pressure on our working capital requirements.  In particular, our two major customers (“Customer A” and “Customer B”) collectively accounted for 82% and 88% of our revenues for the period ended June 30, 2011 and 2010.  During the period ended June 30, 2011, Customer A paid approximately $0.2 million on its accounts receivable and as of June 30, 2011 had an outstanding balance of approximately $9 million  (with provision for bad debts of approximately $0.2 million).  Of Customer A’s outstanding accounts receivable balance as of June 30, 2011, 8% related to the providing of services and 92% related to product sales.  During the period ended June 30, 2011, Customer B paid approximately $1.6 million on its accounts receivable and as of June 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 an increase in payments made to our manufacturing suppliers for parts and services needed to manufacture the radiotherapy units that comprise our backlog.

Net cash (used in)/provided by investing activities was $33,552 and $86,478 for the six months ended June 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 six months ended June 30, 2011 and 2010.
 
Off-Balance Sheet Arrangements
 
As of June 30, 2011, we had no off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K promulgated by the Securities and Exchange Commission.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  As reported on Form 10-K for the year ended December 31, 2010, as amended, management has determine our internal controls over financial reporting were not effective as of December 31, 2010. Further, we 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.
 
 
 
 
39

 

 
Changes in Internal Controls Over Financial Reporting

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

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

To the best of management’s knowledge, 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
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
* to be filed by amendment.


                                                                      
 
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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:           August 23, 2011
By:
/s/ Hui Xiaobing
   
Hui Xiaobing
   
Chief Executive Officer
   
(Principal Executive Officer)
   
Date:           August 23, 2011
By:
/s/ Richard Shen
   
Richard Shen
   
Chief Financial Officer
   
(Principal Accounting and Financial Officer)
   






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