Huiheng Medical Inc (GREY:HHGM)

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 100% and 100% of our accounts receivable as of December 31, 2011 and 2010

The consolidated financial statements as of and for the years ended December 31, 2010 and 2009, as previously issued, have been restated to derecognize the gross profit received from the sales of equipment under the cost recovery method instead of the accrual method until such receivable is settled.  The deferred profit not yet recognized is offset against the related receivable on the balance sheet.
The following consolidated financial statement line items were affected by the restatement:
Consolidated balance sheet as of December 31, 2010
								As previously
								reported		As restated		Effect of change
Accounts receivable, current portion								$         8,130,681		$         8,130,681		$                          -
Accounts receivable, non-current portion								$       11,617,798		$         5,286,563		$       (6,331,235)
Retained earnings								$       14,298,693		$         7,963,681		$       (6,331,235)
Consolidated statement of income for the year ended December 31, 2010
								As previously
								reported		As restated		Effect of change
Revenue								$        8,636,573		$         8,636,573		$                        0
Cost of revenue								$     (2,176,184)		$      (2,176,184)		$                        0
Gross profit on current year's sales								$        6,460,389		$         6,460,389		$                        0
Less: Deferred profit on current year's sales								-		$         (801,603)		$         (801,603)
Add:  Gross profit realized from prior years' sales								-		$         1,421,317		$         1,421,317
Total gross profit on sales								$        6,460,389		$         7,080,103		$            619,714
Operating income								$        2,715,774		$         3,335,488		$            619,714
Net income before taxes								$        2,756,805		$         3,376,519		$            619,714
Net income attributable to Huiheng’s shareholders								$        3,376,519		$         2,795,880		$         (580,639)
Earnings per share
Basic								$                  0.16		$                  0.20		$                  0.04
Diluted								$                  0.13		$                  0.17		$                  0.04

HUIHENG MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(IN US DOLLARS)

GeoTeam® Note: 2011 vs. 2010 Third quater adjusted EPS was $0.06 vs. $0.02

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

On September 6, 2011, Allied Moral Holdings (“Allied Moral”), a company incorporated under the laws of the British Virgin Islands and a wholly-owned subsidiary of Huiheng Medical, Inc. (“Huiheng”), entered into a Joint Venture Agreement (the “Joint Venture Agreement”) with Intact Medical Corporation, a Delaware corporation (“Intact”), and BMG Diamond Holdings Limited, a company incorporated under the laws of the British Virgin Islands (“BMG”) (collectively, the “Parties”).

Pursuant to the Joint Venture Agreement, the Parties agreed to establish a new company, H & I Medical China Limited (“NewCo”) under the laws of the British Virgin Islands, to develop, manufacture, and sell the Intact Breast Lesion Excision System (the “Product”) primarily in China. Under the Joint Venture Agreement, Allied Moral agreed to contribute $650 for a 65% interest in NewCo, based on the following initial capitalization of NewCo: (i) 2,000 shares of voting Common Stock authorized, 650 of which to be held by the Allied Moral, 300 by Intact, and 50 by BMG; (ii) 300 shares of non-voting Series A Preferred Stock authorized, all of which to be held by Intact; and (iii) 700 shares of non-voting Series B Preferred Stock authorized, 650 of which to be held by the Intact and 50 of which to be held by BMG. In addition, the Parties agreed that all shares of NewCo will be subject to certain transfer restriction requiring each stockholder to offer to sell its shares to the non-selling stockholders first before selling to a third party in accordance to the procedure agreed upon in the Joint Venture Agreement.

On March 14, 2011, a subsidiary of Huiheng Medical Inc., Tibet Changdu Huiheng Development Co., Ltd. (“the Company,” “we,” “us,” “our”), entered into four separate Transfer Agreements in substantially the form as is filed herewith as Exhibit 10.1 with Shenzhen Jiancheng Investment Co., Ltd., an entity organized under the laws of China (“Jiancheng”). Jiancheng is one of the Company’s largest hospital equipment financing companies. 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, the Company purchased for approximately $8.25 million (RMB 54,000,000) (“Purchase Price”) medical equipment, specificially medical accelerator systems located at four different medical centers that it had previously sold to Jiancheng (the “Equipment”) and acquired certain operating rights for which Jiancheng owns in the medical centers which gives the Company the right to share in 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.

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.

Huiheng Medical Inc has withdrawn is intent to offer up to $35.0 million in securities:

"The Company requests withdrawal of the Registration Statement in light of the current market conditions and on the grounds that there is no longer a present need to register securities under the Registration Statement. Specifically, shares being registered on the Registration Statement can now be sold by the selling shareholders under Rule 144, and the selling shareholders with registration rights have terminated such rights."

Investors need to inquire if this new developement will impede the planned acquisition of Portola Medical, Inc, announced on June 2, 2010.  As of its 2010 first quarter HHGM had a cash balance of only $46,570 and negative operating cash flow. Furthermore, its account recievable positon stood at $17.0 million which represents 77.3% of its total current assets.

"To date, we have financed our operations primarily through the issuance of equity and cash flow from operations. We currently do not have any outstanding short-term or long-term bank debt. Our relatively high margins have historically provided us with sufficient cash to purchase various raw materials, meet our component inventory needs and pay our vendors. In addition, there are very few direct costs associated with our service business which further enhances our margins. We have longstanding, positive relationships with our vendors and have maintained 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. We plan to raise additional equity capital to help finance a number of expansion initiatives including new product development."

Account receivable explanation provided by the company:

• First, the majority of our product sales and installations in 2009 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 in the three months ended March 31, 2010 was lower than the cash we collected over the same period of the prior year.
  
• Second, due to our strong, long-standing relationships with our customers, we have extended their payment terms and are confident that we will collect all the money owed by these customers.