Pre-Effective Amendment to Registration of Securities by a Small-Business Issuer — Form SB-2 Filing Table of Contents
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SB-2/A — Pre-Effective Amendment to Registration of Securities by a Small-Business Issuer
APPROXIMATE
DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this
Registration Statement becomes effective.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, please
check the following box:
o
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
______________
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
______________
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box.o______________
Calculation
of Registration Fee
Title
of Each Class of
Securities
to be
Registered
Proposed Maximum
Aggregate Offering
Price (2)
Amount
of
Registration
Fee
(3)
Common
Stock, par value $0.001(1)
__________
__________
Underwriter’s
Warrant to purchase shares of common stock
__________
__________
$
34,500,000
$
1,060
(4
)
(1)
Includes
the shares of common stock issuable upon exercise of a warrant to
be sold
to the Company’s underwriter (Chardan Capital Markets, LLC) in connection
with this offering.
(2)
Estimated
solely for the purpose of calculating the registration fee pursuant
to
Rule 457(o) under the Securities
Act.
(3)
Calculated
pursuant to Rule 457(o) based on an estimate of the proposed maximum
aggregate offering price and includes the offering price of shares
that
the underwriters have the option to purchase to cover over-allotments,
if
any.
(4)
Previously
paid.
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall there after become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This preliminary prospectus is not
an offer to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED FEBRUARY ___, 2008
PRELIMINARY
PROSPECTUS
[___________]
SHARES
COMMON
STOCK
HUIHENG
MEDICAL, INC.
This
is a
prospectus for the offer and sale by us of up to [_____] shares of our common
stock.
Our
common stock is quoted on the Over-the-Counter Bulletin Board maintained by
NASD
(“OTCBB”) under the ticker symbol HHGM. We have applied to list our shares on
the Nasdaq Capital Market. On November 27, 2007, the last reported sale price
of
our common stock was $10.00 per share.
Investing
in our common stock involves a high degree of risk. Before buying any
shares, you should read the discussion of material risks in investing in our
common stock. See “Risk Factors” beginning on page 8 of this
prospectus.
Per
Share
Total
Public
offering price
$
$
Underwriting
discounts and commissions
$
$
Proceeds,
before expenses, to us
$
$
The
underwriters may also purchase up to an additional [_______] shares from us
at
the public offering price, less the underwriting discounts and commissions,
within 45 days from the date of this prospectus to cover over-allotments.
If the underwriters exercise this option in full, the total underwriting
discounts and commissions will be $[_____], and our total proceeds, before
expenses, will be $[________]. We will also sell the underwriters a warrant
for
the purchase of up to [____] shares at $[____] per share (115% of the per share
offering price to investors), commencing on _________, 2008 (six months from
the
date of the offering) and expiring on _________, 2013 (five years after the
date
of the offering).
Neither
the Securities and Exchange Commission nor the state securities regulators
have
approved or disapproved these securities or determined if this preliminary
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The
underwriters expect to deliver the shares against payment in [_____, ___]
on[____________], 2008.
CHARDAN
CAPITAL MARKETS, LLC
____________________,
2008
You
should only rely on the information contained in this prospectus. We have
not, and the underwriters have not, authorized anyone to provide you with
additional information or information different from that contained in this
prospectus. We are offering to sell, and seeking offers to buy, shares
only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this
prospectus, regardless of the time of delivery of this prospectus or of any
sale
of shares of our common stock.
TABLE
OF CONTENTS
Prospectus
Summary
4
Risk
Factors
8
Note
Regarding Forward Looking Statements
18
Use
of Proceeds
19
Market
for our Shares
20
Summary
Financial Data
20
Management’s
Discussion and Analysis or Plan of Operation
This
summary highlights selected information appearing elsewhere in this prospectus
and may contain all of the information that is important to you. This
prospectus includes information about the shares of common stock we are offering
as well as information regarding our business and detailed financial data.
You should read this prospectus and the registration statement of which this
prospectus is part in their entirety, especially the risks of investing in
our
common stock which we discuss under “Risk Factors,” and our financial statements
and related notes beginning on page F-1.
Unless
the context requires otherwise, the words “Huiheng,”“Huiheng Medical,”“we,”“us,”“our” and “our company” refer to Huiheng Medical, Inc. and its
subsidiaries.
You
should read the entire prospectus carefully before deciding to invest in shares
of our common stock.
Our
Business
We
design
and sell precision radiotherapy equipment used for the treatment of cancer
and
tumors in The People’s Republic of China (“PRC”). Our patented line of gamma
treatment systems (“GTS”) quickly and accurately deliver a well-defined
conforming dose of radiation to the target tissue while sparing surrounding
normal tissue. We have approximately 17 patents issued in the PRC and
internationally covering our product line.
Our
customers are health care providers and third party hospital equipment
investors, with the hospital as end user. We also offer our customers
comprehensive post-sales services for our products as well as third party
manufactured products. These post sales services include radioactive cobalt
source replacement and disposal, medical expert training, clinical trial
analysis, patient tumor treatment analysis, software upgrades and patient care
consulting.
Our
net
revenues increased from $9.8 million in 2005 to $12.4 million in 2006 and from
$6.5 million for the six-month period ended June 30, 2006 to $8.6 million for
the corresponding period in 2007. Our net income increased from $4 million
2005
to $6.8 million in 2006 and from $3.5 million for the six month period ended
June 30, 2006 to $5.1 million for the corresponding period in 2007. Over the
last 5 years, management of Huiheng believes (based solely upon the high
quality, high performance and low-cost of our products) that we have sold
more GTS units in China than any other company.
We
were
founded in 2001 by Hui Xiaobing, who was a pioneer in the GTS industry in the
PRC. Mr. Hui served as president and Chairman of Shenzhen OUR Technology, Co.,
Ltd., the first PRC company to develop a gamma treatment system. Mr. Hui is
also
the former CEO of Everbright Securities, a major Chinese financial
institution.
Our
Strategies
Our
goal
is to extend our leading position in the GTS market in the PRC by pursuing
the
following strategies:
·
broadening
our product offering, including the launch of four new products estimated
to be released between Q2 2008 and Q4
2009;
·
exploring
opportunities to develop international markets in South America,
Eastern
Europe and Southeast Asia;
·
expanding
our sales and distribution force;
·
pursuing
relationships with foreign medical equipment technology
leaders;
·
continuing
to offer high quality, low cost development services;
and
·
augmenting
our strong commitment to R&D for the development of state-of-the-art
equipment to maintain technological
competitiveness.
Our
Strengths
As
a
leader in the GTS market in the PRC, we consider our core competitive strengths
to be:
·
experienced
and market savvy leadership;
·
strong
customer relationships and network;
·
proprietary
technology;
·
production
model and relationships;
4
·
high
quality product line;
·
strong
gross margins and pricing
flexibility;
·
consistent,
high quality post sale customer service and
support;
·
experienced
research and development team; and
·
strong
R&D partnerships with Beijing University, China Science &
Technology University and Public Healthcare Institute of Jilin
University.
Our
Industry
The
market for medical equipment and supplies in the PRC is segmented into
geographical regions. Hospitals with greater spending power tend to be located
in large towns and cities in the eastern part of the PRC, where rapid economic
growth has taken place during the last two decades and where the population
tends to have higher income. Medical equipment and supplies distribution is
a
very specialized and localized sector in the PRC. Distributors of medical
equipment and supplies operate in the PRC within various relatively small and
geographically dispersed markets, each based in a wealthy eastern city to cover
the surrounding areas, with few distributors willing or able to cover the entire
country. Most distributors focus on the PRC’s eastern cities, where the bulk of
purchasing power is concentrated, while the western part of the PRC has very
limited coverage by distributors. The fact that different areas of the PRC
have
their own medical and insurance practices, purchasing policies and regulatory
issues further increases the complexity of medical equipment and supplies
distribution in the PRC.
The
medical device market in the PRC was estimated to be approximately
$5.0 billion in 2006. This market is expected to grow at a compound
annual growth rate of almost 24 percent till 2010. In particular, the country
is
expected to see an increased demand for digital imaging devices, owing to the
developments of information technology. And as a result of the 2003 SARS crisis
the government has further heightened its awareness of the need to improve
the
country’s healthcare infrastructure, making healthcare a top national priority
for years to come.
The
PRC’s
aging population and the popularization of private hospitals and clinics coupled
with the demand for the high-quality medical devices and efficient healthcare
services are some of the key factors contributing to the growth of the medical
device market in the country. Additionally, initiatives by the government,
such
as reforms in the national medicine system, are also fueling growth in the
industry.
The
PRC
radiotherapy industry has the following characteristics:
·
decreasing
fragmentation of market as small suppliers find it difficult to
compete;
·
high
degree of government regulation with respect to unit
pricing;
·
low
penetration rates of less than one radiotherapy system per
million;
·
large
discrepancy between demand and access to radiation oncology
systems;
·
high
barriers to entry due to both high technology requirement and established
relationship contacts; and
·
cancer continuing
to be the leading cause of death in the PRC in the years 2002, 2003
and 2004.
Our
Market
The
Ministry of Health has identified cancer as the leading cause of death in the
PRC for the years 2004, 2005 and 2006. To the extent that cancer-related illness
and death are caused by environmental factors, the air and water pollution
associated with the PRC’s rapid industrial expansion are expected to increase
the rate of both. As a result, effective treatment of cancer is a high priority
for the PRC healthcare system.
Radiotherapy
is used in approximately 50% of all cancer treatments worldwide. In 2006,
there
were 0.6 radiotherapy units per million people in the PRC. The World Health
Organization recommends 6 radiotherapy units per million people for “developed”
countries. The United States, for example, has 13 units per million
people.
5
·
According
to the World Health Organization between 2000 and 2020 approximately
150 million people will be diagnosed with cancer, of which 100
million
should be treated with radiation therapy. Overall, the Asia Pacific
region has the greatest discrepancy between the estimated need
and supply
wherein only 1,147 radiotherapy systems are available for a current
demand
of 4000 systems.
·
Trends
in the radiotherapy market in the PRC
include:
·
increasing
ability of PRC medical community to detect cancer at treatable
stages;
·
increasing
acceptance of use of western style
medicine;
·
emerging
middle class with increased financial ability to pay for medical
procedures and demand for improved cancer care;
and
·
government
indications to increase permissible spending on medical device
procurement.
Corporate
Structure
We
are a
Nevada holding company and conduct all of our business through our operating
subsidiaries as described in the below chart. We own 100% of the equity interest
of Allied Moral Holdings, Ltd. (“Allied Moral”), a British Virgin Islands
company that, in turn, owns 100% of the equity interest of Tibet Changdu Huiheng
Development Company, Ltd. (“Changdu Huiheng”), a Tibetan holding company that,
in turn, directly owns 100%, 75% and 50%, respectively, of our operating
subsidiaries, Wuhan Kangqiao Medical New Technology Company, Ltd. (“Wuhan
Kangqiao”), a PRC company, Shenzhen Hyper Technology Company, Ltd. (“Shenzhen
Hyper”), a PRC company and Beijing Yuankang Kbeta Nuclear Technology Co., Ltd.
(“Beijing Kbeta”), a PRC company. Wuhan Kangqiao focuses on research and
development and managing production of the Head Gamma System and Body Gamma
System. Shenzhen Hyper focuses on research and development and production
management of the Super Gamma System and linear accelerators. Beijing Kbeta
focuses on installation and replacement of the Cobalt 60 sources. The remaining
equity interests in Shenzhen Hyper and Beijing Kbeta are owned by unrelated
unaffiliated parties.
6
Previous
Operations
Prior
to
the change of control transaction in September 2006, we were engaged in the
business of importing molding and door components and our corporate name was
Pinewood Imports, Ltd. In September 2006, we changed our corporate name to
Mill
Basin Technologies, Ltd. In May 2007, we were subject to another change of
control transaction, in which we acquired Allied Moral.
Corporate
Information
Our
principal executive office is located at Huiheng Building, Gaoxin 7 Street
South, Keyuannan Road, Nanshan District, Shenzhen Guangdong, P.R. China 518057.
Our telephone number at that address is 86-755-25331366. Our website address
is
www.huihengmedical.com. The information on our website is not a part of this
prospectus.
The
Offering
Shares
of common stock offered by us
[________]
Shares
of common stock to be outstanding after this offering
[________]
(1)
Use
of proceeds
Product
development, construction of manufacturing facilities and working
capital.
See “Use of Proceeds.”
Risk
factors
The
purchase of our common stock involves a high degree of risk. See
“Risk
Factors”
Trading
Market
OTCBB:
Ticker symbol HHGM
(1)
The
number of shares of common stock to be outstanding after the closing of the
offering is based on 13,450,000 shares of common stock outstanding as of
December 31, 2007.
Except
as
otherwise indicated, all information in this prospectus assumes no exercise
by
the underwriters of their over-allotment option.
Investment
in our common stock involves risk. You should carefully consider the risks
we
describe below before deciding to invest. Our business, financial condition
or
results of operations could be affected materially and adversely by any of
the
risks discussed below and any others not foreseen. The market price of our
common stock could decline due to any of these risks, in which case you could
lose all or part of your investment. In assessing these risks, you should also
refer to the other information included in this prospectus, including our
consolidated financial statements and the accompanying notes. You should pay
particular attention to the fact that we are a holding company with substantial
operations in China and are subject to legal and regulatory environments that
in
many respects differ from that of the United States. This discussion contains
forward-looking statements.
Risks
Related to our Business
Adverse
trends in the medical equipment industry, such as an overall decline in sales
or
a shift away from the therapies that our products support, may reduce our
revenues and profitability.
Our
business depends on the continued vitality of the radiotherapy equipment
industry, which is subject to technological change, short product life cycles
and margin pressures. It is possible that innovations in other means of
treatment of tumors or improvements in radiotherapy equipment developed by
others will make our products unattractive in relative terms, reducing our
revenues and profits.
We
do not have long-term purchase commitments from customers and have to rely
on
maintaining a steady stream of new orders for our
products.
Our
medical equipment is generally sold one unit at a time to a particular customer,
and most of our customers do not reorder our products. As a result, the
continued growth of our business involves making sales to an increasing number
of new customers each year, rather than being able to rely on continuing orders
from existing customers. The failure to find and sell to a significant number
of
new customers each year would limit our revenues and profits.
We
also
make significant decisions, including determining the levels of business that
we
will seek and accept, production schedules, component procurement commitments,
facility requirements, personnel needs and other resource requirements, based
upon our estimates of future sales. Because many of our costs and operating
expenses are fixed, a reduction in customer demand can reduce our gross margins
and operating results. Additionally, from time to time, we may purchase
quantities of supplies and materials greater than required by customer orders
to
secure more favorable pricing, delivery or credit terms. These purchases can
expose us to losses from cancellation costs, inventory carrying costs or
inventory obsolescence if the expected demand does not materialize , and hence
adversely affect our business and operating results.
Failure
to optimize our sourcing activities and cost structure could materially increase
our overhead, causing a decline in our margins and
profitability.
We
strive
to utilize our suppliers of parts and manufacturing services in an efficient
manner. The efficiency of our operations depend in part on our success in
accurately forecasting demand of our sales and planning component parts
and outsourced manufacturing services for new products that we intend to
produce. Failure to optimize our sourcing activities and cost structure could
materially and adversely affect our business and operating results.
Moreover,
our cost structure is subject to fluctuations from inflationary pressures.
China
is currently experiencing dramatic growth in its economy. This growth may lead
to continued pressure on wages and salaries that may exceed increases in
productivity. In addition, these may not be compensated for and may be
exacerbated by exchange rate movements.
Our
business is subject to intense competition, which may reduce demand for our
products and materially and adversely affect our business, financial condition,
results of operations and prospects.
The
medical device market is highly competitive, and we expect the level of
competition to remain at its current level or intensify. We face direct
competition in China and will do so in other markets should we expand
internationally. This competition is across all product lines and at all price
points. Our competitors also vary significantly according to business segment.
For domestic sales, our competitors include publicly traded and privately held
multinational companies, as well as domestic Chinese companies. For
international sales, which we are planning to commence in the near future,
our
competitors are primarily publicly traded and privately held multinational
companies. We also face competition in international sales from companies that
have local operations in the markets in which we sell our products. Some of
our
larger competitors especially the multinational company, have, among
them:
· greater
financial and other resources;
· A
larger
variety of products;
· more
products that have received regulatory approvals;
· more
extensive research and development and technical capabilities;
· patent
portfolios that may present an obstacle to our conduct of business;
· greater
knowledge of local market conditions where we seek to increase our international
sales;
8
· stronger
brand recognition; and
· larger
sales and distribution networks.
As
a
result, we may be unable to offer products similar to, or more desirable than,
those offered by our competitors, market our products as effectively as our
competitors or otherwise respond successfully to competitive pressures. In
addition, our competitors may be able to offer discounts on competing products
as part of a “bundle” of non-competing products, systems and services that they
sell to our customers, and we may not be able to match those discounts while
retaining profitability. Furthermore, our competitors may develop technologies
and products that are more effective than those we currently offer or that
render our products obsolete or uncompetitive. In addition, the timing of the
introduction of competing products into the market could affect the market
acceptance and market share of our products. Our failure to compete successfully
could materially and adversely affect our business, financial condition, results
of operation and prospects.
Moreover,
some of our internationally-based competitors have established or are in the
process of establishing production and research and development facilities
in
China, while others have entered into cooperative business arrangements with
Chinese manufacturers. If we are unable to develop competitive products, obtain
regulatory approval or clearance and supply sufficient quantities to the market
as quickly and effectively as our competitors, market acceptance of our products
may be limited, which could result in decreased sales. In addition, we may
not
be able to maintain our outsourced manufacturing cost advantage.
In
addition, we believe that corrupt practices in the medical device industry
in
China still occur, although it is difficult to know how frequently. To increase
sales, certain manufacturers or distributors of medical devices may pay
kickbacks or provide other benefits to hospital personnel who make procurement
decisions. Our company policy prohibits these practices. As a result, as
competition intensifies in the medical device industry in China, we may lose
sales, customers or contracts to competitors who engage in these practices,
and
there may be no remedy we can pursue to prevent this.
We
may fail to effectively develop and commercialize new products, which would
materially and adversely affect our business, financial condition, results
of
operations and prospects.
The
medical device market is developing rapidly and related technology trends are
constantly evolving. This results in frequent introduction of new products,
relatively short product life cycles and significant price competition.
Consequently, our success depends on our ability to anticipate technology
development trends and identify, develop and commercialize in a timely and
cost-effective manner new and advanced products that our customers demand.
Moreover, it may take an extended period of time for our new products to gain
market acceptance, if at all. Furthermore, as the life cycle for a product
matures, the average selling price generally decreases. Although we have
previously offset the effect of declining average sales prices through increased
sales volumes and reductions in outsourced manufacturing costs, we may be unable
to continue to do so. Lastly, during a product’s life cycle, problems may arise
regarding regulatory, intellectual property, product liability or other issues
which may affect its continued commercial viability.
Whether
we are successful in developing and commercializing new products is determined
by our ability to:
· accurately
assess technology trends and customer needs and meet market
demands;
· optimize
our procurement processes to predict and control costs;
· manufacture
and deliver products in a timely manner;
· increase
customer awareness and acceptance of our products;
· minimize
the time and costs required to obtain required regulatory clearances or
approvals;
· anticipate
and compete effectively with other medical device companies;
· price
our
products competitively; and
· effectively
integrate customer feedback into our research and development
planning.
If
we fail to obtain or maintain applicable regulatory clearances or approvals
for
our products, or if such clearances or approvals are delayed, we will be unable
to commercially distribute and market our products at all or in a timely manner,
which could significantly disrupt our business and materially and adversely
affect our sales and profitability.
The
sale
and marketing of our products are subject to regulation in the PRC and in most
other countries where we intend to conduct business. For a significant portion
of our sales, we need to obtain and renew licenses and registrations with the
PRC State Food and Drug Administration, or SFDA, and its equivalent in other
markets. The processes for obtaining regulatory clearances or approvals can
be
lengthy and expensive, and the results are unpredictable. In addition, the
relevant regulatory authorities may introduce additional requirements or
procedures that have the effect of delaying or prolonging the regulatory
clearance or approval for our existing or new products. For example, the SFDA
introduced a new safety standard to its approval process for new medical devices
which we believe has increased the typical time period required to obtain such
approval by approximately three months. If we are unable to obtain clearances
or
approvals needed to market existing or new products, or obtain such clearances
or approvals in a timely fashion, our business would be significantly disrupted,
and our sales and profitability could be materially and adversely
affected.
9
In
particular, as we enter foreign markets, we lack the experience and familiarity
with both the regulators and the regulatory regimes, which could make the
process more difficult, more costly, more time consuming and less likely to
succeed.
Failure
to manage our growth could strain our management, operational and other
resources, which could materially and adversely affect our business and
prospects.
Our
growth strategy includes building our brand, increasing market penetration
of
our existing products, developing new products, increasing our targeting of
hospitals in the PRC, and expanding internationally. Pursuing these strategies
has resulted in, and will continue to result in, substantial demands on
management resources. In particular, the management of our growth will require,
among other things:
· continued
enhancement of our research and development capabilities;
· information
technology system enhancement;
· stringent
cost controls and sufficient liquidity;
· strengthening
of financial and management controls and information technology
systems;
· increased
marketing, sales and sales support activities; and
· hiring
and training of new personnel.
If
we are
not able to manage our growth successfully, our business and prospects would
be
materially and adversely affected.
We
extend credit to our customers and may not be able to collect all receivables
due to us, and our inability to collect such receivables may have an adverse
effect on our immediate and long-term liquidity.
The
typical terms on which we sell our products provides for the customer to make
a
deposit at the time that the order is placed and to make progress payments
at
various stages of the manufacturing, shipping, installation and testing process.
The final payment is not due until after the testing is complete and the
customer accepts the product as meeting the specifications. We have limited
ability to compel that final payment from the customer. Legal action is
available, but the time it takes and the outcome of any litigation is inherently
uncertain, particularly in the PRC, where the civil justice system continues
to
evolve. Should we be unable to collect on these accounts, it would reduce our
liquidity and profitability.
We
generate a significant portion of our revenues from a small number of products,
and a reduction in demand for any of these products could materially and
adversely affect our financial condition and results of
operations.
We
derive
a substantial percentage of our revenues from a small number of products. As
of
December 31 , 2006, we had just three products in our portfolio. In 2007, we
shipped our first multileaf collimator, increasing our portfolio to four
products. As a result, continued market acceptance and popularity of these
products is critical to our success. A reduction in demand due to, among other
factors, the introduction of competing products, the entry of new competitors,
or end-users’ dissatisfaction with the quality of our products, could materially
and adversely affect our financial condition and results of
operations.
If
we experience a significant number of warranty claims, our costs could
substantially increase and our reputation and brand could
suffer.
We
typically sell our products with warranty terms covering 12 months after
purchase. Our product warranty requires us to repair all mechanical malfunctions
and, if necessary, replace defective components. We accrue liability for
potential warranty claims at the time of sale based on historical experience.
If
we experience an increase in warranty claims or if our repair and replacement
costs associated with warranty claims increase significantly, we may have to
accrue a greater liability for potential warranty claims. Moreover, an increase
in the frequency of warranty claims could substantially increase our costs
and
harm our reputation and brand. Our business, financial condition, results of
operations and prospects may suffer materially if we experience a significant
increase in warranty claims on our products.
We
may need additional capital, and we may be unable to obtain such capital in
a
timely manner or on acceptable terms, or at all.
For
us to
grow, remain competitive, develop new products and expand our distribution
network, we may require additional capital. Our ability to obtain additional
capital is subject to a variety of uncertainties, including:
· our
future financial condition, results of operations and cash flows;
· general
market conditions for capital raising activities by medical device and related
companies; and
· economic,
political and other conditions in China and elsewhere.
We
may be
unable to obtain additional capital in a timely manner or on acceptable terms
or
at all. Furthermore, the terms and amount of any additional capital raised
through issuances of equity securities may result in significant shareholder
dilution.
10
Products
we develop may contain design or manufacturing defects, which could result
in
reduced demand for our services and customer claims, causing us to sustain
additional costs, loss of business reputation and legal
liability.
Our
products are highly complex and may at times contain design or manufacturing
errors or failures. Any defects in the products we develop, whether caused
by a
design, manufacturing or component failure or error, may result in claims,
delayed shipments to customers or reduced or cancelled customer orders. If
these
defects occur, we will incur additional costs, and if in they occur in large
quantity or frequently, we may sustain additional costs, loss of business
reputation and legal liability.
Any
product recall could have a material adverse effect on our business, results
of
operations and financial condition.
Complex
medical devices, such as our radiotherapy systems, can experience performance
problems that require review and possible corrective action by the manufacturer.
From time to time, we receive reports from users of our products relating to
performance problems they have encountered. We expect that we will continue
to
receive customer reports regarding performance problems they encounter through
the use of our products. Furthermore, component failures, manufacturing errors
or design defects that could result in an unsafe condition or injury to the
patient might occur. Any serious failures or defects could cause us to withdraw
or recall products, which could result in significant costs such as repair
and
product replacement costs. We cannot assure you that market withdrawals or
product recalls will not occur in the future, which could have a material
adverse effect on our business, financial condition and results of operations.
We are currently unable to ensure against this type of liability in
China.
We
could become involved in intellectual property disputes,
resulting
in substantial costs and diversion of our management resources. Such disputes
could materially and adversely affect our business by increasing our expenses
and limiting the resources that we can devote to expansion of our business,
even
if we ultimately prevail.
We
currently possess approximately 17 patents issued in the PRC and
internationally. If one of our patents is infringed upon by a third party,
we
may need to devote significant time and financial resources to attempt to halt
the infringement. We may not be successful in defending the patents involved
in
such a dispute. Similarly, while we do not knowingly infringe on patents,
copyrights or other intellectual property rights owned by other parties, we
may
be required to spend a significant amount of time and financial resources to
resolve any infringement claims against us. We may not be successful in
defending our position or negotiating an alternative remedy. Any litigation
could result in substantial costs and diversion of our management resources
and
could reduce our revenues and profits.
We
also
rely on trade secrets, proprietary know-how and other non-patentable technology,
which we seek to protect through non-disclosure agreements with employees.
We
cannot assure you that these non-disclosure agreements will not be breached,
that we will have adequate remedies for any breach, or that our trade secrets,
proprietary know-how and other non-patentable technology will not otherwise
become known to, or be independently developed by, our competitors.
Implementation
and enforcement of PRC intellectual property-related laws has historically
been
deficient and ineffective, and is hampered by corruption and local
protectionism. Accordingly, intellectual property rights and confidentiality
protections in China may not be as effective as in the United States or other
countries. Policing unauthorized use of proprietary technology is difficult
and
expensive, and we might need to resort to litigation to enforce or defend
patents issued to us or to determine the enforceability, scope and validity
of
our proprietary rights or those of others. The experience and capabilities
of
PRC courts in handling intellectual property litigation varies, and outcomes
are
unpredictable. Further, such litigation may require significant expenditure
of
cash and management efforts and could harm our business, financial condition
and
results of operations. An adverse determination in any such litigation will
impair our intellectual property rights and may harm our business, prospects
and
reputation.
We
may develop new products that may not gain market acceptance, and our
significant costs in designing and manufacturing services for new product
solutions may not result in sufficient revenue to offset those costs or to
produce profits.
We
operate in an industry characterized by frequent technological advances, the
introduction of new products and new design and manufacturing technologies.
We
are expecting to introduce four new products during the period 2007 - 2009.
As a
result, we are expending funds and committing resources to research and
development activities, possibly requiring additional engineering and other
technical personnel; purchasing new design, production, and test equipment;
and
continually enhancing design processes and techniques. We may invest in
equipment employing new production techniques for existing products and new
equipment in support of new technologies that fail to generate adequate returns
on the investment due to insufficient productivity, functionality or market
acceptance of the products for which the equipment may be used. We could,
therefore, incur significant sums in design and manufacturing services for
new
products that do not result in sufficient revenue to make those investments
profitable.
Our
limited operating history makes evaluating our business and prospects
difficult.
Shenzhen
Hyper commenced operations in September 2001, and delivered the first unit
of
our Super Gamma System (“SGS”) in that year. Wuhan Kangqiao also commenced
operation in September of 2001, and it delivered the first unit of our Body
Gamma Treatment System (“BGTS”) in 2003 and the first unit of our Head Gamma
Treatment System (“HGTS”) in 2004. As a result, we have a limited operating
history which may not provide a meaningful basis for you to evaluate our
business, financial performance and prospects. We may not have sufficient
experience to address the risks frequently encountered by early-stage companies,
and as a result we may not be able to:
11
· maintain
profitability;
· preserve
our leading position in the market of Gamma Treatment System tumor therapy
devices;
· acquire
and retain customers;
· attract,
train, motivate and retain qualified personnel;
· keep
up
with evolving industry standards and market developments;
· increase
the market awareness of our products;
· respond
to competitive market conditions;
· maintain
adequate control of our expenses;
· manage
our relationships with our suppliers and distributors; or
· protect
our proprietary technologies.
If
we are
unsuccessful in addressing any of these risks, our business may be materially
and adversely affected.
Our
component and materials suppliers may fail to meet our needs, causing us to
experience outsourced manufacturing delays, which may harm our relationships
with current or prospective customers and reduce sales.
We
acquire many of the components of our equipment from third parties. This
generally serves to reduce our commitment risk but does expose us to supply
risk
and to price increases that we may not be able to pass on to our customers.
There may be shortages of some of the materials and components that we
use. If we are unable to obtain sufficient amounts of components or materials
on
a timely basis, we may experience outsourced manufacturing delays, which could
harm our relationships with current or prospective customers and reduce
sales.
We
are subject to product liability exposure and have no product
liability insurance coverage.
As
our
main products are medical devices used for the treatment of patients, we are
exposed to potential product liability claims in the event that the use of
our
products causes or is alleged to have caused personal injuries or other adverse
effects. A successful product liability claim against us could require us to
pay
substantial damages. Product liability claims against us, whether or not
successful, are costly and time-consuming to defend. Also, in the event that
our
products prove to be defective, we may be required to recall or redesign such
products. As the insurance industry in China is still in an early stage of
development, we do not have any product liability insurance. A product liability
claim, with or without merit, could result in significant adverse publicity
against us, and could have a material adverse effect on the marketability of
our
products and our reputation, which in turn, could have a material adverse effect
on our business, financial condition and results of operations. In addition,
we
do not have any business interruption insurance coverage for our operations.
Any
business disruption or natural disaster could result in substantial costs and
diversion of resources.
New
product development in the medical device and supply industry is both costly
and
labor-intensive and has a very low rate of successful
commercialization.
Our
success will depend in part on our ability to enhance our existing products
and
technologies and to develop and acquire new products or technologies. The
development process for medical technology is complex and uncertain, as well
as
time-consuming and costly. Product development requires the accurate assessment
of technological and market trends as well as precise technological execution.
We cannot assure you that:
·
our
product or technology development will be successfully
completed;
·
necessary
regulatory clearances or approvals will be granted by the SFDA or
other
regulatory bodies as required on a timely basis, or at all;
or
·
any
product or technology we develop can be commercialized or will achieve
market acceptance.
Also,
we
may be unable to locate suitable products or technologies to acquire or acquire
such products or technologies on commercially reasonable terms. Failure to
develop or acquire, obtain necessary regulatory clearances or approvals for,
or
successfully commercialize or market potential new products or technologies
could have a material adverse effect on our financial condition and results
of
operations.
The
price and the sales of our products may be adversely affected by reductions
in
treatment fees by the Chinese Government.
Treatment
fees for our radiotherapy systems, like many other medical treatments, are
subject to prices set by provincial governments in China, and these prices
can
be adjusted downward or upward from time to time. If the treatment fees for
our
products are reduced by the government, some hospitals and distributors may
be
discouraged from buying our products, which would reduce our sales. We may
need
to decrease the price of our products to provide hospitals acceptable returns
on
their purchases. Our business or results of operations may be adversely affected
by a reduction in treatment fees for our products in the future.
12
We
may not be able to secure financing needed for future operating needs on
acceptable terms, or on any terms at all.
From
time
to time, we may seek additional equity or debt financing to provide the capital
required to expand our facilities and equipment and/or working capital, if
cash
flow from operations is insufficient to do so. We cannot predict with certainty
the timing or amount of any such capital requirements or the availability of
investment to meet them. If such financing is not available on satisfactory
terms, we may be unable to expand our business or to develop new business at
the
rate desired.
Potential
strategic alliances may not achieve their objectives, which could lead to wasted
effort or involvement in ventures that are not profitable and could harm our
company’s reputation.
We
are
currently exploring strategic alliances designed to enhance or complement our
technology or to work in conjunction with our technology, increase utilization
of our manufacturing capacity, provide additional know-how, components or
supplies, and develop, introduce and distribute products and services utilizing
our technology and know-how. Any strategic alliances entered into may not
achieve their strategic objectives, and parties to our strategic alliances
may
not perform as contemplated. As a result, the alliances themselves may run
at a
loss, which would reduce our profitability, and if the products or customer
service provided by such alliances were of inferior quality, our reputation
in
the marketplace could be harmed, affecting our existing and future customer
relationships.
We
may not be able to retain, recruit and train adequate management and production
personnel. We rely heavily on those personnel to help develop and execute our
business plans and strategies, and if we lose such personnel, it would reduce
our ability to operate effectively.
Our
success is dependent, to a large extent, on our ability to retain the services
of our executive management, who have contributed to our growth and expansion
to
date. The executive directors play an important role in our operations and
the
development of our new products. Accordingly, the loss of their services,
without suitable replacements, will have an adverse affect on our business
generally, operating results and future prospects.
In
addition, our continued operations are dependent upon our ability to identify
and recruit adequate management and production personnel in China. We require
trained graduates of varying levels and experience and a flexible work force
of
semi-skilled operators. Many of our current employees come from the more remote
regions of China as they are attracted by the wage differential and prospects
afforded by Shenzhen, Beijing and our operations. With the economic growth
currently being experienced in China, competition for qualified personnel will
be substantial, and there can be no guarantee that a favorable employment
climate will continue and that wage rates we must offer to attract qualified
personnel will enable us to remain competitive. Inability to attract such
personnel or the increased cost of doing so could reduce our competitive
advantage relative to our competitors, reducing or eliminating our growth in
revenues and profits.
Risks
Related to International Operations
We
do not currently conduct a meaningful amount of business internationally.
However, we have plans to expand our operations into international sales, and
the rate and degree of that expansion could be substantial. For that reason,
risks related to international operations may be relevant to your investment
decision.
If
China does not continue its policy of economic reforms, it could, among other
things, result in an increase in tariffs and trade restrictions on products
we
produce or sell following a business combination, making our products less
attractive and potentially reducing our revenues and
profits.
China’s
government has been reforming its economic system since the late 1970s. The
economy of China has historically been a nationalistic, “planned economy,”
meaning it has functioned and produced according to governmental plans and
pre-set targets or quotas.
However,
in recent years, the Chinese government has implemented measures emphasizing
the
utilization of market forces for economic reform and the reduction of state
ownership in business enterprises. Although we believe that the changes adopted
by the government of China have had a positive effect on the economic
development of China, additional changes still need to be made. For example,
a
substantial portion of productive assets in China are still owned by the Chinese
government. Additionally, the government continues to play a significant role
in
regulating industrial development. We cannot predict the timing or extent of
any
future economic reforms that may be proposed, but should they occur, they could
reduce our operating flexibility or require us to divert our efforts to products
or ventures that are less profitable than those we would elect to pursue on
our
own.
A
recent
positive economic change has been China’s entry into the World Trade
Organization, the global international organization dealing with the rules
of
trade between nations. It is believed that China’s entry will ultimately result
in a reduction of tariffs for industrial products, a reduction in trade
restrictions and an increase in trading with the United States and other western
countries. However, China has not fully complied with all of its WTO obligations
to date, including fully opening its markets to American goods and easing the
current trade imbalance between the two countries. If actions are not taken
to
rectify these problems, trade relations between the United States and China
may
be strained, and this may have a negative impact on China’s economy and our
business by leading to the imposition of trade barriers on items that
incorporate our products, which would reduce the revenues and profits we might
otherwise generate from international sales.
13
The
Chinese government could change its policies toward, or even nationalize,
private enterprise, which could leave us unable to use the assets we have
accumulated for the purpose of generating profits for the benefit of our
shareholders.
Over
the
past several years, the Chinese government has pursued economic reform policies,
including the encouragement of private economic activities and decentralization
of economic regulation. The Chinese government may not continue to pursue these
policies or may significantly alter them to our detriment from time to time
without notice. Changes in policies by the Chinese government that result in
a
change of laws, regulations, their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion or imports and
sources of supply could materially reduce the value of our business by making
us
uncompetitive or, for example, by reducing our after-tax profits. The
nationalization or other expropriation of private enterprises by the Chinese
government could result in the total loss of our investment in China, where
a
significant portion of our profits are generated.
The
Chinese legal system may have inherent uncertainties that could materially
and
adversely impact our ability to enforce the agreements governing our
operations.
The
performance of the agreements and the operations of our factories are dependent
on our relationship with the local government. Our operations and prospects
would be materially and adversely affected by the failure of the local
government to honor our agreements or an adverse change in the laws governing
them. In the event of a dispute, enforcement of these agreements could be
difficult in China. China tends to issue legislation , which is followed by
implementing regulations, interpretations and guidelines that can render
immediate compliance difficult. Similarly, on occasion, conflicts arise between
national legislation and implementation by the provinces that take time to
reconcile. These factors can present difficulties in our ability to achieve
compliance. Unlike the United States, China has a civil law system based on
written statutes in which judicial decisions have limited precedential value.
The Chinese government has enacted laws and regulations to deal with economic
matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. However, our experience in implementing,
interpreting and enforcing these laws and regulations is limited, and our
ability to enforce commercial claims or to resolve commercial disputes in China
is therefore unpredictable. These matters may be subject to the exercise of
considerable discretion by agencies of the Chinese government, and forces and
factors unrelated to the legal merits of a particular matter or dispute may
influence their determination.
International
expansion may be costly, time consuming and difficult. If we do not successfully
expand internationally, our profitability and prospects would be materially
and
adversely affected.
Our
success depends to a significant degree upon our ability to expand into
international markets. In expanding our business internationally, we intend
to
enter markets in which we have limited or no experience and in which our brand
may be less recognized. To further promote our brand and generate demand for
our
products so as to attract distributors in international markets, we expect
to
spend significantly more on marketing and promotion than we do in our existing
markets. We may be unable to attract a sufficient number of distributors, and
our selected distributors may not be suitable for selling our products.
Furthermore, in new markets we may fail to anticipate competitive conditions
that are different from those in our existing markets. These competitive
conditions may make it difficult or impossible for us to effectively operate
in
these markets. If our expansion efforts in existing and new markets are
unsuccessful, our profitability and prospects would be materially and adversely
affected.
We
are
exposed to other risks associated with international operations,
including:
· political
instability;
· economic
instability and recessions;
· changes
in tariffs;
· difficulties
of administering foreign operations generally;
· limited
protection for intellectual property rights;
· obligations
to comply with a wide variety of foreign laws and other regulatory
requirements;
· increased
risk of exposure to terrorist activities;
· financial
condition, expertise and performance of our international
distributors;
· export
license requirements;
· unauthorized
re-export of our products;
· potentially
adverse tax consequences; and
· the
inability to effectively enforce contractual or legal rights.
14
If
we begin to do business internationally, we will be subject to significant
worldwide political, economic, legal and other uncertainties that may make
collection of amounts owed to us difficult or costly
Because
we develop all of our products in the PRC, substantially all of the net book
value of our total fixed assets is located there. Should we begin selling our
products to customers worldwide, we will have receivables from and goods in
transit to those locations. Protectionist trade legislation in the United States
or other countries, such as a change in export or import legislation, tariff
or
duty structures, or other trade policies, could adversely affect our ability
to
sell products in these markets, or even to purchase raw materials or equipment
from foreign suppliers.
We
are
also subject to numerous national, state and local governmental regulations,
including environmental, labor, waste management, health and safety matters
and
product specifications and regulatory approvals from healthcare agencies. We
are
subject to laws and regulations governing our relationship with our employees,
including: wage and hour requirements, working and safety conditions,
citizenship requirements, work permits and travel restrictions. These include
local labor laws and regulations, which may require substantial resources for
compliance. We are subject to significant government regulation with regard
to
property ownership and use in connection with our facilities in the PRC, import
restrictions, currency restrictions and restrictions on the volume of domestic
sales and other areas of regulation, all of which can limit our ability to
react
to market pressures in a timely or effective way, thus causing us to lose
business or miss opportunities to expand our business.
Fluctuation
of the Renminbicould
make our pricing less attractive, causing us to lose sales, or could reduce
our
profitability when stated in terms of another currency, such as the US
dollar.
The
value
of the Renminbi, the main currency used in China, fluctuates and is affected
by,
among other things, changes in the PRC’s political and economic conditions. The
conversion of Renminbi into foreign currencies such as the dollar has been
generally based on rates set by the People’s Bank of China, which are set daily
based on the previous day’s interbank foreign exchange market rates and current
exchange rates on the world financial markets. The official exchange rate had
remained stable over the past several years. However, the PRC recently adopted
a
floating rate with respect to the Renminbi. As a result, the exchange rate
of
the Renminbi to the dollar is about 7.7 from what had been about 8.25. This
floating exchange rate, and any appreciation of the Renminbi that may result
from such rate, could have various effects on our international business, which
include making our products more expensive relative to those of our competitors
than has been true in the past, or increasing our profitability when stated
in
dollar terms. It is not possible to predict if the net effects of the
appreciation of the Renminbi, to whatever extent it occurs, would be positive
or
negative for our business.
Changes
in foreign exchange regulations in China may affect our ability to pay dividends
in foreign currency or conduct other business for which we would need access
to
foreign currency exchange.
Renminbi,
or RMB, is not currently a freely convertible currency, and the restrictions
on
currency exchanges may limit our ability to use revenues generated in RMB to
fund business activities outside the PRC or to make dividends or other payments
in United States dollars. The Chinese government strictly regulates conversion
of RMB into foreign currencies. For example, RMB cannot be converted into
foreign currencies for the purpose of expatriating the foreign currency, except
for purposes such as payment of debts lawfully owed to parties outside of the
PRC. Over the years, foreign exchange regulations in the PRC have significantly
reduced the government’s control over routine foreign exchange transactions
under current accounts.
The
State
Administration for Foreign Exchange (“SAFE”) regulates the conversion of the RMB
into foreign currencies. Currently, Foreign Invested Enterprises (“FIE”) are
required to apply for “Foreign Exchange Registration Certificates,” which permit
the conversion of RMB into foreign exchange for the purpose of expatriating
profits earned in the PRC to a foreign country. Our PRC subsidiary, Changdu
Huiheng, is a FIE that has obtained the registration certifications, and with
such registration certifications, which need to be renewed annually, Changdu
Huiheng is allowed to open foreign currency accounts including a “current
account” and “capital account.” Currently, conversion within the scope of the
“current account”, e.g. remittance of foreign currencies for payment of
dividends, etc., can be effected without requiring the approval of SAFE.
However, conversion of currency in the “capital account,” e.g. for capital items
such as direct investments, loans, securities, etc., still requires the approval
of SAFE. In accordance with the existing foreign exchange regulations in the
PRC, Changdu Huiheng is able to pay dividends in foreign currencies, without
prior approval from the SAFE, by complying with certain procedural
requirements.
In
addition, on October 21, 2005, SAFE promulgated Notice 75, Notice on Issues
concerning Foreign Exchange Management in People’s Republic of the PRC
Residents’ Financing and Return investments through Offshore Special Purpose
Vehicle (“OSPV”). Notice 75 provides that Chinese residents shall apply for
Foreign Exchange Investment Registration before establishing or controlling
an
OSPV, which is defined by Notice 75 as a foreign enterprise directly established
or indirectly controlled by Chinese residents for foreign equity capital
financing with their domestic enterprise assets and interests.
Notice
75
further requires that Chinese residents shall process the modification of
foreign investment exchange registration for the interests of net assets held
by
Chinese residents in an OSPV and its alteration condition, if Chinese residents
contributed their domestic assets or shares into the OSPV, or processed foreign
equity capital financing after contributing their domestic assets or shares
into
the OSPV.
Pursuant
to Notice 75, Chinese residents are prohibited, among other things, from
distributing profits or proceeds from a liquidation, paying bonuses, or
transferring shares of the OSPV outside of the PRC if Chinese residents have
not
completed or do not maintain the foreign investment exchange
registration.
15
Hui
Xiaobing, our principal executive officer and director, has filed the requisite
application for foreign investment exchange registration under the relevant
laws
of the PRC and the regulations of Notice 75, and his registration application
has been approved by SAFE. His foreign investment exchange registration is
valid, legal and effective for the purpose of Notice 75.
However,
we cannot provide any assurance that Chinese regulatory authorities will not
impose further restrictions on the convertibility of the RMB. Since our
subsidiary in the PRC currently generates virtually all of our revenue and
these
revenues are denominated mainly in RMB, any future restrictions on currency
exchanges may limit our ability to repatriate such revenues for the distribution
of dividends to our shareholders or for funding our other business activities
outside the PRC.
We
are subject to various tax regimes, whichmay
adversely affect our profitability and tax liabilities in the
future.
Huiheng
is incorporated in the U.S. and it has subsidiaries and/or operations or other
presence in the PRC and the British Virgin Islands, and it will be subject
to
the tax regimes of these countries. Although virtually all of Huiheng’s profits
will be earned outside of the U.S., under U.S. tax laws it is possible that
some
or much of Huiheng’s earnings will be subject to U.S. taxation, because U.S.
companies are generally taxed on their world-wide income. That may be true
even
if Huiheng does not repatriate any of its foreign earnings to the U.S. If that
occurs, Huiheng’s after-tax profits could decrease significantly. The amount of
taxes payable in the U.S. depends on the profitability of our various operations
and the application of available tax credits and tax treaties. Huiheng may
not
be able to avoid having to pay significantly higher taxes than we have paid
historically. In addition, any change in tax laws and regulations or the
interpretation or application thereof, either internally in one of those
jurisdictions or as between those jurisdictions, may adversely affect Huiheng’s
profitability and tax liabilities in the future.
Because
Chinese law will govern almost all of our material agreements, we may not be
able to enforce our legal rights within China or elsewhere, which could result
in a significant loss of business, business opportunities, or
capital.
Chinese
law will govern almost all of our material agreements. We cannot assure you
that
we will be able to enforce any of our material agreements or that remedies
will
be available outside of the PRC. The system of laws and the enforcement of
existing laws in the PRC may not be as certain in implementation and
interpretation as in the United States. The Chinese judiciary is relatively
inexperienced in enforcing corporate and commercial law, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. The
inability to enforce or obtain a remedy under any of our future agreements
could
result in a significant loss of business, business opportunities or
capital.
It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in China.
Substantially
all of our assets will be located outside of the United States and most of
our
officers and directors will reside outside of the United States. As a result,
it
may not be possible for United States investors to enforce their legal rights,
to effect service of process upon our directors or officers or to enforce
judgments of United States courts predicated upon civil liabilities and criminal
penalties of our directors and officers under Federal securities laws. Moreover,
we have been advised that the PRC does not have treaties providing for the
reciprocal recognition and enforcement of judgments of courts with the United
States. Further, it is unclear if extradition treaties now in effect between
the
United States and the PRC would permit effective enforcement of criminal
penalties of the Federal securities laws.
The
PRC
historically has not followed Western style management and financial reporting
concepts and practices, and its access to modern banking, computer and other
control systems has been limited. We may have difficulty in hiring and retaining
a sufficient number of qualified employees to work in the PRC in these areas.
As
a result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards, making it difficult
for management to forecast its needs and to present the results of our
operations accurately at all times.
Imposition
of trade barriers and taxes may reduce our ability to do business
internationally, and the resulting loss of revenue could harm our
profitability.
We
may
experience barriers to conducting business and trade in our targeted emerging
markets in the form of delayed customs clearances, customs duties and tariffs.
In addition, we may be subject to repatriation taxes levied upon the exchange
of
income from local currency into foreign currency, substantial taxes of profits,
revenues, assets and payroll, as well as value-added tax. Further obstacles
still may arise in obtaining the approval for the use of our equipment in the
health care systems of various countries. The markets in which we plan to
operate may impose onerous and unpredictable duties, tariffs and taxes on our
business and products, and there can be no assurance that this will not reduce
the level of sales that we achieve in such markets, which would reduce our
revenues and profits.
16
The
PRC
has agreed that foreign companies will be allowed to import most products into
any part of the PRC. In the sensitive area of intellectual property rights,
the
PRC has agreed to implement the trade-related intellectual property agreement
of
the Uruguay Round. There can be no assurances that the PRC will implement any
or
all of the requirements of its membership in the World Trade Organization in
a
timely manner, if at all. If the PRC does not fulfill its obligations to the
World Trade Organization, we may be subject to retaliatory actions by the
governments of the countries into which we sell our products, which could render
our products less attractive, thus reducing our revenues and
profits.
There
can be no guarantee that our management will continuously meet its obligations
under Chinese law to enable distribution of profits earned in the PRC to
entities outside of the PRC.
A
circular recently promulgated by SAFE has increased the ability of foreign
holding companies to receive distributions of profits earned by Chinese
operating subsidiaries. We qualify for this treatment, but remaining qualified
for it will require the Chinese principals involved to meet annual filing
obligations. While they have agreed to meet those annual requirements, it is
possible that they will fail to do so, which could limit our ability to gain
access to the profits earned by Allied. The result could be the inability to
pay
dividends to our stockholders or to deploy capital outside of the PRC in a
manner that would be beneficial to our business as a whole.
Risks
Related to our Securities.
The
market price of our shares is subject to significant price and volume
fluctuations.
The
price
of our common shares may be subject to wide fluctuations in response to
variations in operating results, news announcements, trading volume, general
market trends both domestically and internationally, currency movements and
interest rate fluctuations or sales of common shares by our officers, directors
and our principal shareholders, customers, suppliers or other publicly traded
companies. Certain events, such as the issuance of common shares upon the
exercise of our outstanding stock options, could also materially and adversely
affect the prevailing market price of our common shares. Further, the stock
markets in general have recently experienced extreme price and volume
fluctuations that have affected the market prices of equity securities of many
companies and that have been unrelated or disproportionate to the operating
performance of such companies. These fluctuations may materially and adversely
affect the market price of our common shares and the ability to resell shares
at
or above the price paid, or at any price.
One
of our stockholders, which is controlled by our Chief Executive Officer, will
own approximately 67% of our Common Stock following this offering and may act,
or prevent certain types of corporate actions, to the detriment of other
stockholders.
Clear
Honest International Limited, a company controlled by Mr. Hui Xiaobing (our
Chief Executive Officer) owns 11,750,000 shares of our common stock, which
(assuming the sale of 4,000,000 shares in this offering) would represent
approximately 67.3% of our outstanding shares of common stock following this
offering. Mr. Hui will be able to exercise significant influence over all
matters requiring stockholder approval, including the election of a majority
of
the directors and determination of significant corporate actions. This
concentration could increase if the earnout shares are issued. If all 1,600,000
of the earnout shares are issued as additional consideration under the Allied
Moral share exchange (which would occur, if ever, from 2008 through 2011) and
assuming the sale of 4,000,000 shares in this offering and that there are no
other issuances of shares, Clear Honest would own approximately 70% of our
issued and outstanding common stock. This concentration of ownership could
also
have the effect of delaying or preventing a change in control that could
otherwise be beneficial to our stockholders.
Future
Sales Of Our Common Stock May Depress Our Stock Price.
Assuming
the sale of 4,000,000 shares in this offering, we will have 17,450,000 shares
of
common stock outstanding, or 18,050,000 shares if the underwriters
over-allotment option is exercised in full. The 4,000,000 shares sold in this
offering (or 4,650,000 shares if the underwriters over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under federal securities laws unless purchased by our affiliates.
The remaining 13,450,000 shares of common stock outstanding, and an additional
2,810,713 shares of common stock issuable upon conversion of our Series A
Preferred Stock, will be available for sale in the public market as
follows:
Number
of Shares
Date
of Availability for Sale
450,000
On
the date of this prospectus
15,810,713
90
days after the date of this
prospectus
The
above
table assumes the effectiveness of the lock-up agreements under which holders
of
substantially all of our common stock and of our Series A Preferred Stock have
agreed not to sell or otherwise dispose of their shares of common stock. Chardan
Capital Markets may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up
agreements.
17
If
our
stockholders sell substantial amounts of shares in the public market, or if
the
market perceives that these sales may occur, the market price of our common
stock may decline. In addition, as soon as practicable after the completion
of
this offering, we intend to file a registration statement under the Securities
Act covering up to 1,566,666 shares of common stock issuable under our stock
plan. Accordingly, shares registered under that registration statement will
be
available for sale in the open market, subject to the contractual lock-up
agreements described above that prohibit the sale or other disposition of the
shares of common stock underlying the options for a period of 90 days after
the
date of this prospectus.
Our
Articles of Incorporation authorize our board of directors to issue new series
of preferred stock that may have the effect of delaying or preventing a change
of control, which could adversely affect the value of your
shares.
Our
articles of incorporation, provide that our board of directors will be
authorized to issue from time to time, without further stockholder approval,
up
to 700,000 additional shares of preferred stock in one or more series and to
fix
or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each series, including the dividend
rights, dividend rates, conversion rights, voting rights, rights of redemption,
including sinking fund provisions, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations
of
any series. Such shares of preferred stock could have preferences over our
common stock with respect to dividends and liquidation rights. We may issue
additional preferred stock in ways which may delay, defer or prevent a change
of
control of our company without further action by our stockholders. Such shares
of preferred stock may be issued with voting rights that may adversely affect
the voting power of the holders of our common stock by increasing the number
of
outstanding shares having voting rights, and by the creation of class or series
voting rights.
There
may not be an active, liquid trading market for our common
stock
.
Our
common stock is currently traded on the Over the Counter Bulletin Board, and
we
have filed an application for listing on The Nasdaq Capital Market. We believe
we meet all of the listing criteria except for the number of round lot holders.
Although we intend on meeting all of the necessary requirements, our application
may not be accepted. If we do not succeed in securing a listing on the Nasdaq
Capital Market, it could limit the ability to trade our common stock and result
in a reduction of the price that can be obtained for shares being
sold.
Compliance
with the applicable provisions of the Sarbanes-Oxley Act may be a further
condition of continued listing or trading. If we are granted a listing on the
Nasdaq Capital Market, we may not always be able to meet the listing
requirements. Failure to continually meet the Nasdaq Capital Market listing
requirements could result in the delisting of our common stock, which may
adversely affect the liquidity of our shares, the price that can be obtained
for
them or both.
We
may not pay dividends.
We
may
not pay dividends in the future. Instead, we expect to apply earnings toward
the
further expansion and development of our business. The likelihood of our paying
dividends is further reduced by the fact that, in order to pay dividends, we
would need to repatriate profits earned outside of the U.S., and in doing so
those profits would become subject to U.S. taxation. Thus, the liquidity of
your
investment is dependent upon your ability to sell stock at an acceptable price,
rather than receiving an income stream from it. The price of our stock can
go
down as well as up, and fluctuations in market price may limit your ability
to
realize any value from your investment, including recovering the initial
purchase price.
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains certain forward-looking statements. When used in this
prospectus, statements which are not historical in nature, including the words
“anticipate,”“estimate,”“should,”“expect,”“believe,”“intend”“may,”“project,”“plan” or “continue,” and similar expressions are intended to
identify forward-looking statements. They also include statements containing
anticipated business developments, a projection of revenues, earnings or losses,
capital expenditures, dividends, capital structure or other financial
terms.
The
forward-looking statements in this prospectus are based upon our 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.
18
USE
OF PROCEEDS
The
net
proceeds to the Company from the sale of the shares offered hereby are estimated
to be approximately $25 million. We expect to use approximately $13 million
to
develop new products and new manufacturing plant construction, approximately
$5
million for research and development and the remainder for working
capital.
Development
of New Products and Construction of Manufacturing Facilities - $13
Million
Over
the
next few years, Huiheng expects to make a significant volume of its
linear accelerator (LINAC) sales in both domestic and foreign markets. To meet
the requirements from the SFDA for LINAC manufacturing, Huiheng plans to
construct an advanced manufacturing and assembly and testing facility. Huiheng
has obtained the approval to acquire rights to a piece of property for
industrial purposes in Wuhan City, Hubei Province, China. Huiheng will establish
an assembly and testing line for its MRI products, the estimated cost of which
is $13 million, which includes the purchase price of the property and the
construction of facilities.
Research
& Development - $5 Million
Huiheng
plans to invest $5 million for research and development activities. The new
products under such activities include an integrated medical LINAC and a
multi-leaf collimeter, the SGS-III, a new HGM and advanced MRI (0.3-0.5,
1.0-1.5) equipment.
Working
Capital - $7 Million
Huiheng
plans to utilize approximately $7 million as working capital. This will include
sales and marketing expenses for both new and existing products and the cost
for
clinical trials and FDA and SFDA filings. Huiheng is also actively seeking
strategic acquisition opportunities in both China and abroad that offer new
technologies and/or synergies that help Huiheng grow to become a market
leader.
19
MARKET
FOR OUR SHARES
Our
common stock is currently listed for trading in the over-the-counter market
on
the NASD “Electronic Bulletin Board” (Symbol: “HHGM”). After we initially
registered shares for public trading in 2006, our common stock did not have
any
trading volume or bid prices listed. Our common stock has only had bid prices
entered since the second quarter of 2007, following the share exchange we
consummated with Allied Moral Holdings Limited.
The
following table shows the high and low bid information for our stock since
May,
2007 (these amounts reflect inter-dealer prices, without retail mark-ups,
mark-downs, or commissions and do not necessarily represent actual
transactions):
Fiscal
2007
High
Low
Second
Quarter
$
9.00
$
9.00
Third
Quarter
$
8.00
$
7.50
Fourth
Quarter
$
13.00
$
8.00
There
are
no outstanding options or warrants that can be converted into our common equity.
As provided in the Allied Moral Holdings share exchange agreement, if Huiheng
achieves certain profit targets for 2008 through 2011, we may distribute some
or
all of 1,600,000 shares of common stock to those persons who were the holders
of
Allied Moral’s common stock at the time of the share exchange.
We
have
approximately 40 record holders of our common stock. This number excludes any
estimate by us of the number of beneficial owners of shares held in street
name,
the accuracy of which cannot be guaranteed.
Dividends
In
January 2007, we paid a dividend of approximately $9.16 million to the holder
of
our common stock, Mr. Hui Xiaobing, our Chief Executive Officer. This dividend
was paid upon the completion of a restructuring transaction in which Mr. Hui
became the sole shareholder of our common stock. The dividend was intended
to
distribute the retained earnings that had accumulated before the restructuring.
The Company has no plans to distribute additional dividends for at least the
immediate future, as it plans to retain any profit to support its growth
plans.
All
of
our business is conducted through our subsidiaries based in China. As stated
above in the Risk Factors section, Renminbi, or RMB, is not a freely convertible
currency currently, and the restrictions on currency exchanges may limit our
ability to make dividends or other payments in United States dollars. However,
in accordance with the existing foreign exchange regulations in China, Allied
Moral is able to pay dividends in foreign currencies, without prior approval
from the SAFE, by complying with certain procedural requirements. There can
be
no assurance that the current foreign exchange measures will not be changed
in a
way that will make payment of dividends and other distributions outside of
China
more difficult or unlawful. As a result, if we intend to distribute profits
outside of China, there can be no assurance that we will be able to obtain
sufficient foreign exchange to do so. Additionally, we cannot provide any
assurance that China regulatory authorities will not impose further restrictions
on the convertibility of the RMB. Since our subsidiaries in China, both direct
and indirect, generate virtually all of our revenue, and these revenues are
currently denominated in RMB, any future restrictions on currency exchanges
may
limit our ability to repatriate such revenues for the distribution of dividends
to our shareholders.
SAFE
regulations have required extensive documentation and reporting, some of which
was burdensome and slowed payments. If there is a return to burdensome payment
restrictions and reporting, the ability of a company with its principal
operations in China to attract investors will be reduced. Also, current
investors may not be able to obtain the profits of the business in which they
own for other reasons. Relevant Chinese law and regulation permit payment of
dividends only from retained earnings, if any, determined in accordance with
Chinese accounting standards and regulations. It is possible that Chinese tax
authorities may require changes in our reported income that would limit our
ability to pay dividends and other distributions. Chinese law requires companies
to set aside a portion of net income to fund certain reserves, which amounts
are
to distributable as dividends. These rules and possible changes could restrict
a
company in China from repatriating funds to us and our shareholders as
dividends.
Securities
authorized for issuance under equity compensation plans
At
present, Huiheng Medical has 1,566,666 shares authorized for issuance under
its
equity compensation plan. However, no options for such shares have been granted
as yet.
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The
following summary of selected historical consolidated financial data should
be
read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements
and the notes thereto that are included elsewhere in this report. Historical
results are not necessarily indicative of the results that may be expected
for
any future period.
The
following table sets forth certain information concerning exchange rates between
Renminbi and U.S. dollars for the periods indicated:
Period
Period End
Average
High
Low
2005
8.0702
8.1826
8.2765
8.0702
2006
7.8041
7.9579
8.0702
7.8041
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
You
should read the following discussion and analysis of our financial condition
and
results of operations in conjunction with our consolidated financial statements
and the related notes included elsewhere in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results and the timing of selected events could differ materially from
those anticipated in these forward-looking statements, including as a result
of
those matters set forth under “Risk factors” and elsewhere in this
prospectus.
OVERVIEW
We
are a
China-based medical device company that develops, designs and markets radiation
therapy systems used for the treatment of cancer. We currently have four
products; the Super Gamma System (“SGS”), the Body Gamma Treatment System
(“BGTS”), the Head Gamma Treatment System (“HGTS”) and a multileaf collimator
device (“MLC”) used in conjunction with a linear accelerator.
In
2006,
we established Allied Moral Holdings, Ltd. in the British Virgin Islands as
a
holding company and transferred 100% of the ownership interests of Changdu
Huiheng to Allied Moral as part of an ownership restructuring to facilitate
investments by foreign investors. As discussed below in the “Business -
Huiheng’s Background” section, the shareholders of Allied Moral engaged in a
share exchange transaction with Huiheng in May 2007.
In
2005,
the ownership interests of Shenzhen Hyper, Wuhan Kangqiao and Beijing Kbeta
were
reorganized under Changdu Huiheng. Upon the completion of the reorganization,
Changdu Huiheng owned 75% of the equity interest in Shenzhen Hyper, 100% of
the
equity interest of Wuhan Kangqiao and 50% of the equity interest of Beijing
Kbeta.
Our
company is led by Hui Xiaobing, the former CEO of Everbright Securities, a
major Chinese financial institution. Through his experience and relationships,
Mr. Hui maintains access to China’s hospitals and the Company’s principal
customers. As a result of his leadership, we have successfully developed a
strong sales and marketing force, that covers the entire country and maintains
relationships with China’s top medical institutions.
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 17 patents issued
in
the PRC and internationally and additional patent applications pending. Our
SGS
and BGTS products are approved for use in China by the State Food and Drug
Administration, an agency of the Ministry of Healthcare of the PRC.
21
Currently,
the focus of the research and development efforts has been on four main projects
that are expected to lead to four product launches between Q3 2007 and Q4 2009.
The first project is the development of the next generation SGS unit that will
incorporate what the Company believes are the world’s most advanced functional
radiotherapy technologies through the addition of an Image Guided System
(“IGS”), which improves the targeting of the radiation beam through use of
computer-generated images, and Respiration Tracking System (“RTS”), which
automatically adjusts the targeting of the radiation to compensate for the
patient’s breathing. This project is at the prototype stage which we expect to
be completed by the end of 2007. The other major projects include the
development of an integrated linear accelerator (“LINAC”) plus multileaf
collimator unit, another type of radiotherapy device that is used in less
demanding applications, an advanced magnetic resonance imaging (“MRI”) device
and an industrial LINAC unit that is used for, among other things, preserving
food through irradiation. These projects are in various stages of development,
and we expect the prototypes for the LINAC to be completed by the end of 2007.
We
sell
our products directly to hospitals and to third party investors in China that
install our systems in hospitals. We also offer comprehensive post-sales
services for our medical equipment to our customers. The service contracts
are
negotiated and signed independently and separately from the sales of medical
equipment. Our post sales services include radioactive cobalt source replacement
and disposal, training, product maintenance, software upgrades, and
consulting.
Many
of
the key research and development personnel who developed our products are
currently employed by our company.
We
have
also begun pursuing relationships with foreign medical capital equipment
technology leaders to offer the management of high
quality, low cost manufacturing services and
China-based distribution for their products.
Shenzhen
Hyper.
Shenzhen Hyper was established in September of 2001 as a domestic Chinese
company based in Shenzhen China. From inception, it has been engaged in
designing, developing and servicing radiotherapy medical equipment used for
the
treatment of tumors for customers throughout China. Shenzhen Hyper developed
the
Super Gamma System (“SGS”), our most advanced and versatile technology, in 2001.
The SGS is a radiotherapy device that uses gamma radiation to non-invasively
treat tumors located in the head and the body and to treat certain functional
disorders of the head and neck areas. It utilizes stereotactic, or
three-dimensional imaging, principles to enhance the accuracy of the targeting
of the radiation beams. Our first SGS device was installed in 2001 and our
SGS
device was approved by the SFDA in 2004. As of the end of 2006, we have a total
installed base of 19 SGS units, all of which are located in China. We estimate
that over 14,000 patients have been treated with our SGS product. Shenzhen
Hyper
has also developed a multileaf collimator (“MLC”) device that is used in
conjunction with a linear accelerator (“LINAC”) to provide conformal shaping of
radiotherapy treatment beams, which increases the precision of the beam and
reduces the damage caused to surrounding tissues. Our first MLC was installed
in
March of 2007 in China for a clinical trial. We are currently developing our
own
LINAC with which we will integrate our MLC. Shenzhen Hyper is currently working
on the development of additional radiotherapy and diagnostic equipment that
will
be sold in China and abroad.
The
first
project is the development of a next generation SGS unit, capable of treating
tumors in the head and body by advanced radioenergy and radiotherapy functions.
In addition, this next generation unit will have a respiratory tracking system,
which automatically adjusts the targeting of radiation to compensate for a
patient’s breathing.
Wuhan
Kangqiao.
Wuhan
Kangqiao was established in September of 2001 as a domestic Chinese company
based in Wuhan China. From inception, it has been engaged in designing,
developing and servicing radiotherapy medical equipment for customers throughout
China. Wuhan Kangqiao developed BGTS in 2003 and the HGTS in 2004 and currently
designs, markets and services these products.
The
BGTS
is a stereotactic radiotherapy device that uses gamma sourced radiation to
non-invasively treat tumors located in the body. Our first BGTS device was
installed in 2003 and in 2004 it was approved by the SFDA. As of the end of
2006, we have a total installed base of 7 BGTS units.
The
HGTS
is a stereotactic radiotherapy device that uses gamma sourced radiation to
non-invasively treat tumors in the head and to treat other functional disorders
of the head and neck area. Our first HGTS device was installed in 2004 and
is
expected to achieve SFDA approval in 2008. As of the end of 2006, we had a
total
installed base of 4 HGTS units.
Beijing
Kbeta.
Beijing
Kbeta was established in December 2004 and supplies the Cobalt-60 radioactive
material used as the radioactive source in the SGS, BGTS and HGTS.
PRICING
Treatment
fees for radiotherapy are set by provincial governments in China, a factor
we
consider when pricing our systems. To gain market penetration, we price our
radiotherapy treatment systems at levels that we believe offer attractive
economic returns to distributors and hospitals, taking into account the prices
of competing products in the market. We market and sell our products to
distributors at a price that is lower than the price that hospitals pay for
our
products. We believe that our products are competitively priced compared to
other radiotherapy devices available in China.
22
The
provincial governments in China set the treatment fee rates for radiotherapy,
and they may adjust the fee rates from time to time. If they reduce the fee
rates, some hospitals and third party investors may be discouraged from
purchasing our products, which would reduce our sales. In that event, we may
need to decrease the price of our systems to provide our customers acceptable
returns on their purchases. We cannot assure you that our business, financial
condition and results of operations will not be adversely affected by any
reduction in treatment fees for radiotherapy in the future.
REVENUES
We
derive
our revenues from selling our products to hospitals and third party investors
and from selling service contracts to the buyers of our products.
Our
net
revenues are net of Value Added Tax (“VAT”), but include VAT refunds on the
sales of self-developed software embedded in our medical equipment products.
In
addition, our revenues include regional VAT and Business tax
subsidies.
The
sales
price of our devices includes basic training and installation services. These
services are ancillary to the purchase of medical equipment by our customers
and
are normally considered by the customers to be an integral part of the acquired
equipment. As the delivered items (training and installation services) do not
have determinable fair values, revenues for the entire arrangement is recognized
upon customer acceptance, which occurs after delivery and
installation.
Our
revenue recognition policies, as disclosed in our financial statements, state
that revenue is recognized when products are delivered, collection is probable,
persuasive evidence of an arrangement exists and the sales price is fixed or
determinable. Typically we require our customers to pay 90% of the sales price
in installments based upon placement of the order; delivery of the product,
installation, testing and acceptance by the customer. The 90% is recognized
as a
liability until such time as the products are delivered and the customer takes
ownership and risk of loss. The remaining 10% of the arrangement is typically
paid within one year of acceptance by the customer.
The
use
of the installment method with regards to collection impacts our revenue
recognition policies in that we must determine if collection is probable prior
to recognizing revenue for each arrangement. We have not experienced any
material bad debts, and accordingly generally recognize revenue from our
arrangements in full when the devices have been installed, tested and accepted
by our customers.
We
typically require our customers to pay 30% of the sales price as a down-payment
when a purchase order is placed, another 30% of the sale price when the product
is shipped, and another 30% of the sale price after the device has been
installed, tested and is accepted by the customer. The remaining 10% balance
is
typically paid by the customer within one year of acceptance.
Our
revenues, growth and results of operations depend on several factors, including
the level of acceptance of our products among doctors, hospitals and patients
and our ability to maintain prices for our products at levels that provide
favorable margins. The level of acceptance among doctors, hospitals and patients
is influenced by the performance and pricing of our products, our ability to
educate distributors and the medical community about our products, our
relationships with hospitals and major distributors, government reimbursement
levels as well as other factors.
Our
sales
have historically been achieved on a unit-by-unit basis. We expect that in
any
given period a relatively small, and changing, number of third party investors
will continue to account for a significant portion of our revenues. For the
fiscal year ended December 31, 2005 and December 31, 2006, sales to our top
four
customers accounted for 85% and 89%, respectively, of our revenues.
COSTS
Cost
of revenues
Our
cost
of revenues primarily consists of material and component costs. It also includes
amortization of intangible assets and direct costs incurred in the assembly,
installation and service of our products, such as salaries and related personnel
expenses and depreciation costs of plant and equipment used for production
purposes. Depreciation of property, plant and equipment attributable to
manufacturing activities is capitalized and expensed as cost of revenues when
product is sold. Depreciation for the years ended December 31, 2005 and 2006
amounted to RMB 0.96 million (US $0.117 million) and RMB 1.2 million (US $0.152
million), respectively. We outsource the production of components and assembly
to our independent preferred vendors.
As
we
source a significant portion of our components and raw materials in China,
we
currently have a relatively low cost base compared to medical technology
companies in more developed countries. We expect the costs of components and
raw
materials in China will increase in the future as a result of further economic
development in China. In addition, our focus on new generations and applications
of our products may require higher cost components and raw materials. We plan
to
offset increases in our cost of raw materials and components through more
efficient product designs and product assembly enhancements as well as through
savings due to economies of scale.
23
Operating
expenses
Our
operating expenses primarily consist of research and development expenses,
sales
and marketing expenses and general and administrative expenses.
Research
and development. Research
and development expenses primarily consist of costs associated with the design,
development, testing and enhancement of both our existing products and our
new
product development. These costs consist of expenditures for purchases of
supplies, clinical trials, salaries and related personnel expenses, and other
relevant costs. Going forward, we expect to increase our research and
development expenses, both on an absolute basis and as a percentage of revenue,
to develop new products and applications and to improve the product designs
of
our existing products.
Sales
and marketing. Sales and marketing expenses consist
primarily of salaries and related expenses for personnel engaged in sales,
marketing and customer support functions and costs associated with advertising
and other marketing activities. Similar to most China-based medical device
companies, our sales are made primarily to third party investors. As a result,
our sales and marketing expenses as a percentage of revenues are significantly
lower than medical device companies that operate their own marketing and
distribution networks and sell directly to hospitals. Going forward, we expect
to increase our expenditures on sales and marketing, both on an absolute
basis
and as a percentage of revenue, to promote our products in China. Furthermore,
we anticipate aggressively pursuing new markets outside the PRC and expect
to
increase our expenditures on sales and marketing for this purpose as
well.
General
and administrative. General
and administrative expenses consist primarily of salaries and benefits and
related costs for our administrative personnel and management, fees and expenses
of our outside advisers, including legal, audit and valuation expenses, expenses
associated with our administrative offices and the depreciation of equipment
used for administrative purposes. We expect that our general and administrative
expenses will increase, both on an absolute basis and as a percentage of
revenue, as we hire additional personnel and incur costs related to the
anticipated growth of our business and our becoming a publicly listed company
in
the U.S.
TAXES
AND INCENTIVES
Allied
Moral Holdings
Under
the
current laws of the British Virgin Islands, we are not subject to tax on our
income or capital gains. In addition, no British Virgin Islands withholding
tax
will be imposed on payments of dividends by us to our shareholders.
Changdu
Huiheng
Under
the
current PRC laws, Changdu Huiheng is subject to the Enterprise Income Tax
(“EIT”) and the VAT. Changdu Huiheng is established in the western region of the
PRC and, as such, it is currently subject to an EIT rate of 15%, compared to
a
statutory rate of 33% for most companies in China. However, pursuant to an
agreement with the Tibet Finance Bureau, Changdu Huiheng will be refunded any
amounts of its annual EIT payment that exceed RMB 900,000 (USD 121,579). In
addition, the Tibet Finance Bureau will refund Changdu Huiheng’s annual 31%
business tax payment and its 38.75% VAT payment under the condition that the
total annual business tax and VAT owed exceeds RMB 1 million (USD 135,088)
and
RMB 1.5 million (USD 202,632), respectively. This tax incentive policy will
be
valid for 5 years from the commencement of the tax refund, which began in fiscal
2006.
Shenzhen
Hyper
Shenzhen
Hyper is classified as a high technology company and currently operates in
an
approved economic-technological development area. As such, it is currently
subject to an EIT rate of 15%, compared to a statutory rate of 33% for most
companies in China. Furthermore, this classification, according to local tax
regulations, entitles Shenzhen Hyper to a tax-free period for two years,
commencing on it first profitable year, and a 50% reduction in EIT for the
following six years. As of December 31, 2006, Shenzhen Hyper had not yet
achieved retained profits after deducting accumulated losses.
VAT
is
charged based on the selling price of products at a general rate of 17% and
revenues are recorded net of this VAT. Shenzhen Hyper, however, is entitled
to a
14% refund of VAT on the sales of self-developed software embedded in device
systems. This is a result of a PRC government program to promote the development
of the high technology sector of China’s economy. The program phases out for
companies after five years of profitable operations.
The
VAT
refund is recorded as part of net revenues under U.S. GAAP. For the fiscal
year
ended December 31, 2006, VAT refunds amounted to RMB 1.35 million (USD 182,368),
which accounted for approximately 1.2% of our revenues for the period. There
were no VAT refunds for fiscal year ending December 31, 2006.
Wuhan
Kangqiao
Wuhan
Kangqiao is classified as a high technology company and currently operates
in an
approved economic-technological development area. As such, it is currently
subject to an EIT rate of 15%, compared to a statutory rate of 33% for most
companies in China. Furthermore, this classification, according to local tax
regulations, entitles Wuhan Kangqiao to a tax-free period for two years,
commencing the first year the company is established. Wuhan Kangqiao’s EIT rate
for the years ending December 31, 2004, 2005 and 2006 were 0%, 15% and 15%,
respectively.
24
The
PRC
tax system is subject to uncertainties and has been subject to recently enacted
changes, the interpretation and enforcement of which are also uncertain. There
can be no assurance that changes in PRC tax laws or their interpretation or
their application will not subject us to tax increases in the
future.
SIGNIFICANT
ACCOUNTING POLICIES
Significant
Accounting Policies and Estimates
The
discussion and analysis of our financial condition presented in this section
are
based upon our financial statements, which have been prepared in accordance
with
the generally accepted accounting principles in the United States. During the
preparation of our financial statements we are required to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue
and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates and judgments, including those related
to sales, returns, pricing concessions, bad debts, inventories, investments,
fixed assets, intangible assets, income taxes and other contingencies. We base
our estimates on historical experience and on various other assumptions that
we
believe are reasonable under current conditions. Actual results may differ
from
these estimates under different assumptions or conditions.
In
response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding
Disclosure About Critical Accounting Policy,” we identified the most critical
accounting principles upon which our financial status depends. We determined
that those critical accounting principles are related to the use of estimates,
inventory valuation, revenue recognition, income tax and impairment of
intangibles and other long-lived assets. We present these accounting policies
in
the relevant sections in this management’s discussion and analysis, including
the Recently Issued Accounting Pronouncements discussed below.
(a)
Principles
of Consolidation
The
consolidated financial statements include the Company and its three
operating subsidiaries. All significant intercompany balances and
transactions have been eliminated in
consolidation.
(b)
Cash
Cash
consist of cash on hand and in
bank.
(c)
Trade
Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount after deduction
of
trade discounts, value added taxes and allowance, if any, and do
not bear
interest. The allowance for doubtful accounts is management’s best
estimate of the amount of probable credit losses in the existing
accounts
receivable. Management determines the allowance based on historical
write-off experience, customer specific facts and economic condition.
No
allowance has been provided for doubtful accounts as of December31, 2005
and 2006 (Note 5).
(d)
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using
the
weighted average cost method. Cost of work in progress and finished
goods
comprise direct material, direct production and an allocated proportion
of
production overheads.
(e)
Property,
Plant, and Equipment
Property,
plant, and equipment are stated at cost less accumulated depreciation
or
amortization. Depreciation expense is recognized using the straight-line
method to the asset’s estimated residual value over the estimated useful
lives of the assets as follows:
Years
Leasehold
improvement
3-5
Buildings
20
Production
equipment
3-5
Furniture,
fixtures and office equipment
3-5
Motor
vehicles
5-10
25
Leasehold
improvements are amortized straight line over the shorter of the
lease
term or estimated useful life of the asset. Depreciation of property,
plant, and equipment attributable to development activities is capitalized
as part of inventory, and expensed to cost of revenues as inventory
is
sold.
(f)
Intangible
Assets
Intangible
assets were contributed to us and are stated at cost, representing
the
fair value at the time of contribution by minority owner of a subsidiary.
Fair value was supported by cash contributed contemporaneously by
another
investor. Cost is net of accumulated amortization and impairment
losses.
Amortization expense is recognized on the straight-line basis over
the
estimated respective useful lives of these intangible assets as
follows:
Years
Patented
technology
20
Software
5
Management
reviews the carrying values of its intangible assets if the facts
and
circumstances suggest that these assets may be impaired. To the extent
that the review indicates that the carrying values of these assets
may not
be recoverable, as determined based on their estimated future undiscounted
cash flows over the remaining amortization period, the carrying values
of
these assets will be reduced to their estimated fair
values.
(g)
Investment
in Affiliated Company
Beijing
Kbeta was established in December 15, 2004 at which time Changdu
Huiheng
acquired a 20% equity interest. During fiscal year 2005, Changdu
Huiheng
acquired an additional 30% equity interest in Beijing Kbeta for RMB
300,000 (USD 36,663). The cost for each acquisition approximated
fair
value of the proportion of the net assets acquired and accordingly,
no
investor level goodwill was
recognized.
The
Company’s equity interest in Beijing Kbeta is accounted for used the
equity method of accounting because 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 our investment
in
Beijing Kbeta may not be recoverable, we 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.
Long-lived
assets, including property, plant, and equipment 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 assets to be held and used is measured by a comparison
of the carrying amount of an 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 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 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. The assets and liabilities of
a
disposed group classified as held for sale are presented separately
in the
appropriate asset and liability sections of the balance
sheet.
No
Impairment was recognized in 2005 and
2006.
(i)
Revenue
Recognition
We
generate revenue primarily from sales of medical equipment and provision
of maintenance and support services. Revenue is recognized as
follows:
We
recognize 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 and installation services. 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 the delivered items (training and installation
services) do not have determinable fair values, we recognize revenue
for
the entire arrangement upon customer acceptance, which occurs after
delivery and installation.
26
In
the PRC, VAT of 17% on invoice amount is collected in respect of
the sales
of goods on behalf of tax authorities. The VAT collected is not our
revenue; 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 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 our products, we recognize the VAT refund at the time the product
is
sold. The amount is included in the line item “Revenues, net” in the
consolidated statements of income and is recorded on an accrual basis.
VAT
refunds included in revenue for the year ended December 31, 2006
was RMB
1,346,154 (USD 169,159). There were no VAT refunds for the year ended
December 31, 2005.
Pursuant
to the document dated December 16, 2004 with No. 173 issued by Tibet
Finance Bureau, the profits tax payment of Changdu Huiheng in excess
of
RMB 900,000 (USD 121,579) for a year will be refundable by Tibet
Finance
Bureau. The 31% and 38.75% of business tax payment and value added
tax
payment respectively for a year will be refundable by Tibet Finance
Bureau
provided that the business tax payment and value added tax payment
should
be arrived at RMB 1 million (USD 135,088) and RMB 1.5 million (USD
202,632) for a year respectively. Such tax incentive policy will
be valid
for 5 years from the year of commencement of tax refund. The tax
subsidy
income from Tibet Finance Bureau was included in our revenue for
2006.
The
medical equipment we sell has embedded self-developed software. In
all
cases, the medical equipment is marketed and sold based on its performance
and functionality as a whole. The self-developed software is not
sold on a
standalone basis.
Changdu
Huiheng 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 equipments. According to the agreements, Changdu Huiheng
provides
comprehensive services including exchange of cobalt, training to
users of
the medical equipment, maintenance of medical equipment, upgraded
software
and consulting. Fees for the services are recognized under the
straight-line method over the life of the
contract.
(j)
Research
and Development Costs
Research
and development costs are expensed as
incurred.
(k)
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred
tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases
and operating loss and tax credit carry forwards. 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 income in the
period
that includes the enactment date. A valuation allowance is provided
to
reduce the amount of deferred tax assets if it is considered more
likely
than not that some portion, or all, of the deferred tax assets will
not be
realized.
Contributions
to retirement schemes (which are defined contribution plans) are
charged
to consolidated statements of operations as and when the related
employee
service is provided.
(m)
Warranty
Costs for Medical
Equipment
We
provide a product warranty to its customers to repair any product
defects
that occur generally within twelve months of the date of sales. Based
on
the limited number of actual warranty claims and the historically
low cost
of such repairs, we have not recognized a liability for warranty
claims,
but rather recognize such cost when product repairs are
made.
(n)
Use
of Estimates
The
preparation of the consolidated financial statements requires our
management 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 consolidated
financial statements and the reported amounts of revenues and expenses
during the period. Significant items subject to such estimates and
assumptions include the recoverability of the carrying amount and
the
estimated useful lives of long-lived assets; valuation allowances
for
receivables, realizable values for inventories and deferred income
tax
assets. Actual results could differ from those
estimates.
27
(o)
Contingencies
In
the normal course of business, we are subject to contingencies, including
legal proceedings and claims arising out of the businesses that relate
to
a wide range of matters, including among others, product liability.
We
record accruals for such contingencies based upon the assessment
of the
probability of occurrence and, where determinable, an estimate of
the
liability. Management may consider many factors in making these
assessments including past history, scientific evidence and the specifics
of each matter. As management has not become aware of any product
liability claim arising from any medical incident over the last three
years, we have not recognized a liability for product liability
claims.
(p)
Recently
Issued Accounting
Standards
In
December 2004, the Financial Accounting Standard Board (“FASB”) issued
FASB Statement No. 123R (revised 2004),
Share-Based Payments
,
which addresses the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, with a primary
focus on transactions in which an entity obtains employee services,
in
share-based payment transactions. This Statement is a revision to
Statement 123 and supersedes Accounting Principles Board (“APB”) Opinion
No. 25,
Accounting for Stock Issued to Employees
,
and its related implementation guidance. For nonpublic companies,
this
Statement requires measurement of the cost of employee services received
in exchange for stock compensation based on the grant-date fair value
of
the employee stock options. We have not been engaged in any share-based
payment transactions.
In
December 2004, the FASB issued FASB Statement No. 151,
Inventory Costs
,
which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling cost, and wasted material (spoilage).
Under
this Statement, such items will be recognized as current-period charges.
In addition, the Statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity
of
the production facilities. This Statement will be effective for us
for
inventory costs incurred on or after January 1, 2007. Management
anticipates that this new Statement will not have a material impact
on
us.
In
December 2004, the FASB issued FASB Statement No. 153,
Exchanges of Nonmonetary Assets
,
which eliminates an exception in APB 29 for recognizing nonmonetary
exchanges of similar productive assets at fair value and replaces
it with
an exception for recognizing exchanges of nonmonetary assets at fair
value
that do not have commercial substance. This Statement will be effective
for us for nonmonetary asset exchanges occurring on or after January,
1,
2007. Management currently does not contemplate entering into any
transactions within the scope of FASB Statement No. 153. Consequently,
management does not believe the adoption of the statement will have
material impact on its consolidated financial
statements.
In
September 2005, the Emerging Issues Task Force (“EITF”) issued EITF issue
No. 04-13
Accounting for Purchases and Sales of Inventory with the Same
Counterparty
,
EITF 04-13 provides guidance as to when purchases and sales of inventory
with the same counterparty should be accounted for as a single exchange
transaction. EITF 04-13 also provides guidance as to when a nonmonetary
exchange of inventory should be accounted for at fair value. EITF
04-13
will be applied to new arrangements entered into, and modifications
or
renewals of existing arrangements occurring after January 1, 2007.
We do
not have such transactions within the scope of EITF 04-13. Consequently,
management doesn’t believe the adoption of the statement will have
material impact on its consolidated financial
statements.
In
July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes”. FIN 48 establishes the
threshold for recognizing the benefits of tax-return positions in
the
consolidated financial statements as “more-likely-than-not” to be
sustained by the taxing authority, and prescribes a measurement
methodology for those positions meeting the recognition threshold.
FIN 48
is effective the fiscal year beginning after December 15, 2006. Management
is currently evaluating the effect that the adoption of FIN 48 will
have
on its consolidated financial position and results of
operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(SFAS No. 157). The purpose of SFAS No.157 is to define fair value,
establish a framework for measuring fair value, and enhance disclosures
about fair value measurements. The measurement and disclosure requirements
are effective for us beginning in the first quarter of fiscal year
2008.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159
permits companies to choose to measure certain financial instruments
and
certain other items at fair value. The standard requires that unrealized
gains and losses on items for which the fair value option has been
elected
be reported in earnings. SFAS No. 159 is effective for us beginning
in the
first quarter of fiscal year 2008, although earlier adoption is
permitted.
28
Management
does not believe that any recently issued, but not yet effective,
accounting standards, if currently adopted, would have a material
effect
on the accompany financial
statements.
We
have no operating segments, as that term is defined in FASB Statement
No.
131,
Disclosure About Segments of an Enterprise and Related
Information.
All of our operations and customers are in the PRC. Accordingly,
no
geographic information is
presented.
(r)
Recapitalization
The
post-acquisition entity is accounted for as a recapitalization of
Allied
Moral using accounting principles applicable to reverse acquisitions
with
Allied Moral being treated as the accounting parent (acquirer) and
Huiheng
Medical, Inc., the legal parent, being treated as the accounting
subsidiary (acquiree). Mill Basin is regarded as the predecessor
entity.
In accordance with the provisions governing the accounting for reverse
acquisitions, all historical figures presented are those of Allied
Moral.
Incentive
Share and After-Tax Profit Targets
As
an
additional purchase price under the Allied Moral Holdings share exchange, the
previous shareholders of common stock of Allied Moral Holdings will be issued,
on an all or none basis per year, an aggregate of 1,600,000 shares of common
stock of Huiheng (400,000 shares each year for four years), if on a consolidated
basis, Huiheng has after-tax profits in the following amounts for the indicated
12-month periods ending December 31:
Total
revenues from product sales and services were $11.29 million for 2006, an
increase by $1.39 million, compared to $9.90 million for the same period of
the
prior year, representing a 14.0% increase. This increase was due to a
significant increase in service revenues in 2006 compared with 2005. Service
revenues totaled approximately 1.03 million in 2005 compared to approximately
4.7 million in 2006. Service revenues increased in 2006 compared with 2005
for two reasons. First, we managed more service contracts in 2006, 26 contracts,
compared with 23 contracts in 2005. Secondly, as a result of our reorganization,
we commenced managing all 23 of our 2005 service contracts on October 1, 2005.
As a result, we only generated service revenues in the last three months of
2005, whereas in 2006, we generated service revenues for all 12
months.
Product
sales decreased from approximately $9.1 million in 2005 to approximately $6.6
million in 2006, representing a decrease of 37.9%. This decrease was due
to a temporary marketwide slowdown in medical capital equipment purchases over
that period resulting from the implementation of new government regulatory
reforms.
In
2006,
we sold 8 units and in 2005 we sold a total of 12 units. This decrease in unit
sales and revenues from unit sales in 2006 compared to 2005, was due to a larger
than normal number of installations of our BGTS device in 2005. Our success
with
the BGTS unit in 2005 was due to its approval by the SFDA in 2004.
Of
the
$12.35 million of net revenues, approximately $1.38 million related to tax
refunds and subsidies, an increase of approximately $1.38 million over the
$0 in
tax refunds and subsidies for the same period of the prior year, a 100%
increase. Tax refunds and subsidies accumulate each current year and are paid
to
us, and recognized as revenue, the following year. Based on the regional tax
refund and subsidy policies, the we did not pay taxes in 2004 and therefore
had
no refunds in 2005. We did pay taxes in 2005, and as a result, received a refund
in 2006.
29
Revenue
Backlog
An
important measure of the stability and growth of the Company’s business is the
number of purchase orders placed by customers for products that the company
has
not yet installed or backlog, which represents the total amount of unrecognized
revenue associated with existing purchase orders. Any deferral of revenue
recognition is reflected in an increase in backlog as of the end of current
period. The backlog as of December 31, 2006 amounted to $5.41 million,
representing an increase of 9.6%, compared to $4.93 million as of December31,2005. This increase was due to an increase in purchase orders in 2006 compared
with 2005. These purchase orders are not cancellable and we expect that all
of
them will be filled in the next year.
Cost
of revenues
The
total
cost of revenues amounted to $2.65 million, a decrease by $1.5 million compared
to $4.15 million for the same period of the prior year, representing a 36.1%
decrease. The decrease was due to an increase in service contract revenues
as a
percentage of total revenues over the prior year which has a higher margin
and a
lower associated cost of revenues than sales of devices.
Gross
margin
As
a
percentage of total revenues, the overall gross margin increased significantly
to 78.5% for the year ended December 31, 2006 from 57.6% for the same period
in
the prior year, primarily because higher margin service revenues represented
a
higher percentage of total revenues.
Operating
expenses
Sales
and marketing expenses.
Sales
and marketing expenses consist primarily 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 approximately $123,308 for the year ended December
31st
2006, an increase of 101%, or roughly $61,863, compared to approximately $61.445
for the same period of the prior year. The increase was mainly due to the
reorganization in October 2005, which resulted in sales and marketing expenses
concentrated in Chengdu Huiheng, whereas before the reorganization some of
these
selling expenses were logged in the operating center subsidiary. As a result,
for October, November and December of 2005, all sales and marketing expenses
were realized in Chengdu Huiheng and for all 12 months of 2006, all sales and
marketing expenses were realized in Chengdu Huiheng.
This
relatively low overall expenditure toward sales and marketing is due to our
direct marketing strategy which primarily includes expenses for salaries,
commissions and travel fees for our marketing staff. We have established
guidelines to monitor and evaluate sales performance for its products to
customers in different industries and regions to control selling expenses.
We
expect that our selling expenses will remain at or increase above the 2006
levels as we increase our efforts to expand sales, particularly internationally,
where our brand is not as well known and the resources devoted to establish
a
presence in new markets will be greater.
General
and administrative expenses.
General
and administrative expenses consist primarily of salaries and benefits and
related costs for our administrative personnel and management, fees and expenses
of our outside advisers, including legal, audit and valuation expenses, expenses
associated with our administrative offices. General and administrative expenses
amounted to approximately $1.28 million for the year ended December 31, 2006,
an
increase of roughly $145,458 compared to approximately $1.13 million for the
same period of the prior year, representing an increase of 12.86%. The increase
in general and administrative expenses was due primarily to increased expenses
associated with human resources, increased administrative expenses resulting
from our growth over that period and from preparing to become a publicly listed
company in the U.S.
Research
and development expenses.
Research and development expenses comprise mostly 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 $124,283 for the year
ended
December 31, 2006, compared to $72,267 in the same period of the prior year.
This was due to new product development including our MLC, linear accelerator
and next generation SGS device.
Subsidy
and tax refund income
The
PRC
government provides financial subsidies out of the value added tax they collect
in order to encourage the research and development efforts of certain
enterprises, such as those involved with software development. Shenzhen Hyper
qualifies for such subsidies. In addition, the Tibet government provide
financial subsidies out of the value added tax they collect in order to
encourage business development in the region. Chengdu Huiheng qualifies for
such
subsidies.
30
All
subsidies were accounted for based on evidence that the operations of those
companies were entitled to receive these subsidies or that cash had been
received. Subsidy income received for the year ended December 31, 2006 amounted
to $1.38 million, compared to $0 for the year ended December 31, 2005. Based
on
the regional tax refund and subsidy policies, we did not pay taxes in 2004
and
therefore had no refunds in 2005. We did pay taxes in 2005, and as a result,
received a refund in 2006.
Income
tax provision
Our
effective tax rate was 17.07% for the year ended December 31, 2006, compared
to
8.02% for the year ended December 31, 2005. The income tax expense for the
year
ended December 31, 2006 was approximately $1.39 million, an increase of
$1.04 million, or nearly 300%, compared to $352,000 for the prior year. The
increase in income tax provision was attributed in large part to the increase
in
taxable income, which nearly doubled year-over-year.
Net
income
For
the
year ended December 31, 2006, the Company’s net income amounted to $6.82
million, an increase of $2.82 million compared to $3.99 million for the prior
year, or 70.66%. This increase was attributable primarily to the increase in
total revenues and operating income.
For
the
nine months ended September 30, 2007, net revenues amounted to $10.99 million,
an increase by $1.95 million, compared to $9.05 million for the same period
of
the prior year, representing a 22% increase. This increase was primarily due
to
more unit installations during the first nine months of 2007 compared to the
first nine months of 2006.
Revenues
from product sales and services totaled $9.50 million for the nine months ended
September 30, 2007, representing an increase by $1.17 million, or 14%, compared
with $8.35 million in revenues generated from product sales and services for
the
same period of the prior year.
Revenues
from product sales totaled $5.96 million for the nine months ended September30,2007, representing an increase by $886,500, or 17.5%, compared with $5.08
million in revenues generated from product sales for the same period of the
prior year. This increase was due to more unit installations during the first
nine months of 2007 compared to the first nine months of 2006.
Revenues
from services totaled $3.56 million for the nine months ended September 30,2007, representing an increase by $285,300, or 8.7%, compared with $3.28 million
in revenues generated from services for the same period of the prior year.
This
increase was due to new service contracts in 2007 and to the appreciation of
the
RMB versus the dollar over that period which resulted in an increase in dollars
generated from existing service contracts.
For
the
nine months ended September 30, 2007, net revenues from tax refunds and
subsidies totaled approximately $1.47 million, representing an increase by
approximately $774,500 or 111.6% compared with $693,900 in revenues generated
from tax refunds and subsidies over the same period of the prior year. This
increase in tax refunds and subsidies was from our having a higher taxable
income in 2006 compared to 2005, which resulted in our paying more tax in
2006 and receiving larger refunds and subsidies in 2007.
Cost
of revenues
For
the
nine months ended September 30, 2007 the total cost of revenues amounted to
$2.56 million, an increase by $427,000 or 20% compared to $2.14 million for
the
same period of the prior year. This increase in costs was due to increases
in
orders and installations.
Gross
margin
As
a
percentage of net revenues, the overall gross margin increased to 77%, for
the
nine months ended September 30, 2007, from 76% for the same period in the prior
year. This slight increase was due the increase of tax refunds and subsidies
for
the first nine months of 2007 compared with the first nine months of
2006.
Operating
expenses
Sales
and marketing expenses.
Sales
and marketing expenses consist primarily of salaries and related expenses for
personnel engaged in sales, marketing and customer support functions along
with the costs of advertising and other marketing
activities.
31
Sales
and
marketing expenses were approximately $61,000 for the nine months ended
September 30, 2007, an increase of roughly $400 compared to approximately
$60,600 for the same period of the prior year.
General
and administrative expenses.
General
and administrative expenses amounted to approximately $1.08 million for the
nine
months ended September 30,
2007,
representing an increase of roughly $343,000, or 46%, compared to approximately
$738,500 for the same period of the prior year. The increase in general and
administrative expenses resulted from the expenses incurred over that period
related to the acquisition of Allied Moral Holdings, the BVI parent of our
Chinese operating companies.
Research
and development expenses.
Research and development expenses consist mostly 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 presented on the statement
of income as $336,700 for the nine months ended September 30, 2007, an increase
of $233,000 or 224%, compared to $104,000 in the same period of the prior year.
This increase was due to our adding additional research and development staff
in
2007 and the increased expenses associated with the development of new
products including our next generation SGS unit, the SGS III, and our linear
accelerator (LINAC) unit.
Income
Tax Provision
For
the
nine months ended September 30, 2007, the Company’s income tax provision was
$730,300 whereas the income tax provision was $919,400 for the same period
of
the prior year. The lower income tax provision for the first nine months of
2007, compared to the first nine months of 2006, occurred as a result of one
of
our subsidiaries deducting accumulated losses from the prior year from our
taxable income, thereby reducing our income tax provision.
Net
income
For
the
nine months ended September 30, 2007, the Company’s net income amounted to $6.21
million, an increase by $1.13 million, or 22%, compared to $5.08 million for
the
same period in the prior year. This increase was attributable to an increase
in
both the sales of equipment and service income.
Comprehensive
income
For
the
nine months ended September 30, 2007, the Company’s comprehensive income, which
reflects the change in currency translations on the net income, amounted to
$6.49 million, an increase by $1.4 million, or 28%, compared to $5.09 million
for the prior year.
For
the
three months ended September 30, 2007, net revenues amounted to $2.43 million,
a
decrease of $121,000 compared to $2.55 million for the same period of the prior
year. This decrease resulted from delayed installation dates of units sold.
We
anticipate those units will be installed during the next quarter at which time
we will recognize the revenue to be generated.
Revenues
from product sales and services totaled $1.98 million for the three months
ended
September 30, 2007, representing a decrease of $182,100, or 8%, over the $2.16
million in revenues from product sales and services for the same period of
the
prior year.
Revenues
from product sales totaled approximately $726,000 for the three months ended
September 30, 2007, representing a decrease of $235,900, or 24.5%, compared
with
the $962,000 in revenues from product sales for the same period of the prior
year. This decrease resulted from delayed installation dates of units sold.
We anticipate those units will be installed during the next quarter at which
time we will recognize the revenue to be generated.
Revenues
from services totaled $1.25 million for the three months ended September 30,2007, representing an increase of $53,900, or 4.5%, over the $1.20 million
in
revenues from services for the same period of the prior year. This increase
was due to the appreciation of the RMB versus the dollar since September 30,2006, which resulted in an increase in dollars generated from existing service
contracts.
For
the
three months ended September 30, 2007, net revenues from tax refunds and
subsidies totaled approximately $451,200, representing an increase of
approximately $61,000, or 16%, over the $390,200 in tax refunds and subsidies
for the same period of the prior year. This increase in tax refunds and
subsidies was from our having a higher taxable income in 2006 compared to 2005,
which resulted in us paying more tax in 2006 and receiving larger refunds and
subsidies in 2007.
32
Cost
of revenues
For
the
three months ended September 30, 2007 the total cost of revenues amounted to
$442,600, an increase by $35,300, or 8%, compared to $407,300 for the same
period of the prior year. This increase was due to a sale of a LINAC and
multi-leaf collimeter (MLC) unit over that period, a device that has a
relatively high cost of revenues.
Gross
margin
As
a
percentage of net revenues, the overall gross margin decreased to 82% for the
three months ended September 30, 2007 from 84% for the same period in the prior
year. This decrease was due to the cost structure of the units installed over
that period. Because we are in the process of developing our LINAC unit, we
presently integrate our MLC with a LINAC unit purchased from one of our
preferred vendors. Once we finish the development of our LINAC unit, we
anticipate sales of our integrated LINAC and MLC to achieve a higher gross
profit margin.
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 approximately $18,800 for the three months ended
September 30, 2007, a decrease of 21% or roughly $5,000, compared to
approximately $23,800 for the same period of the prior year.
General
and administrative expenses.
General
and administrative expenses amounted to approximately $331,600 for the three
months ended September 30, 2007, representing an increase of roughly $105,000,
or 46%, compared to approximately $226,600 for the same period of the prior
year. The increase in general and administrative expenses resulted from
increasing our expenditures on human resources over that period.
Research
and development expenses.
Research and development expenses are comprised mostly 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 presented on the statement
of income as $293,000 for the three months ended September 30, 2007, an increase
of $228,700 or 356% compared to $64,300 in the same period of the prior
year.
The
increase is attributable to expenses associated with the development of new
products including our next generation SGS unit, the SGS III, and our LINAC
unit.
Income
Tax Provision
For
the
three months ended September 30, 2007, the Company’s income tax provision was
$207,000, whereas the income tax provision was $300,700 for the same period
of
the prior year. The lower income tax provision for the three months ended
September 30, 2007, compared to the three months ended September 30, 2006,
occurred as a result of one of our subsidiaries deducting accumulated losses
from the prior year from our taxable income, thereby reducing our income tax
provision.
Net
income
For
the
three months ended September 30, 2007, the Company’s net income amounted to
$1.25 million, a decrease by $296,700 compared to $1.55 million for the prior
year, or 20%. This decrease was attributable primarily to higher operating
expenses over that period compared with the prior period, principally in the
areas of research and development and general and administrative
expenses.
Comprehensive
income
For
the
three months ended September 30, 2007, the Company’s comprehensive income, which
reflects the change in currency translations on the net income, amounted to
$1.37 million, a decrease by $184,000 compared to $1.56 million for the prior
year, or 12%. A significant portion of this increase resulted from the
appreciation of the RMB versus the US dollar during the periods reported
on.
LIQUIDITY
AND CAPITAL RESOURCES
To
date,
the Company has financed its operations primarily through cash flows from
operations. We currently do not have any outstanding short term or long term
debt. We generate sufficient capital from our operating revenues and shareholder
investments to cover our operating cash flow needs. We require that our
customers pay us 30% of the sale price at the time the order is placed and
the
purchase order is signed. In addition, our customers pay us an additional 30%
once the unit has been built and tested. The final 40% is paid in two
installments, 30% on the date of installation and acceptance by the customer
and
the final 10% on 1 year following the installation date. As we operate with
relatively high margins, this scenario provides 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 cash position. We have longstanding,
positive relationships with our vendors and are given favorable payment terms.
Also, we believe that we can defer certain tax payments, if we choose to do
so.
We plan to raise additional capital that will help finance a number of expansion
initiatives including new product development.
33
As
of
September 30, 2007, the Company had total assets of $17.25 million, of which
cash amounted to $539,000, accounts receivable amounted to $7.61 million,
prepayment and other current assets amounted to $3.15 million and inventories
amounted to $918,000. Working capital was approximately $7.9 million. The quick
ratio was approximately 2.43:1.
Net
cash
from operating activities totaled approximately $3.49 million for the nine
months ended September 30, 2007, a decrease by $3.19 million compared to $6.7
million for the same period in the prior year. This decrease resulted primarily
from the following changes in the operating assets and liabilities:
·
$4.96
million increase in accounts receivables;
·
$706,200
decrease in inventories;
·
$364,500
increase in prepayments and other
receivables;
·
$55,000
increase in accounts payable;
·
$693,000
decrease in tax payable;
·
$2.4
million increase in accrued expenses and other current
liabilities;
Cash
collected from accounts receivable for the nine months ended September 30,2007
was significantly lower than cash collected from accounts receivables for the
nine months ended September 30 2006. This was due to an abnormal, large accounts
receivable payment made by one of the company’s major customers during the nine
months ended September 30, 2006.
Net
cash
from investing activities was ($3.14) million and ($21,500) for the nine months
ended September 30, 2007 and 2006, respectively. The cash used by investing
activities was primarily used to equip our new office facility into which we
moved to support our growing operations.
Cash
flows provided by financing activities amounted to ($456,000) and ($6.5) million
for the nine months ended September 30, 2007 and 2006, respectively. For the
nine months ended September 30, 2007, cash flows generated by financing
activities consisted of $9.3 million of contributed capital, ($6.2 million)
as a
repayment of advances to related parties and ($3.58) million as a payment for
redemption of common shares.
Net
cash
used in operating activities totaled $10.55 million for year ended December31,2006, an increase by $9.78 million compared to $764,854 for the prior year,
representing a 1280.0% increase. This increase resulted primarily from the
increase in net income of $2.82 million; and the following changes in the
operating assets and liabilities:
·
$4.98
million decrease in accounts receivable;
·
$135,437
increase in inventory;
·
$16,437
increase in prepayments and other receivables;
·
$114,838
decrease in accounts payable;
·
$547.612
increase in tax payable;
·
$1.78
million decrease in accrued liabilities;
·
$1,024
increase in amounts due to related
parties.
The
decrease in accounts receivable was due to the Company’s enhanced ability of
receivable collections. The decrease in accounts payable was due to fewer device
sales over the period that required prepayments to manufacturing vendors. The
decrease in accrued liabilities was also due to fewer device sales over that
period that required prepayments to manufacturing vendors. The increase in
tax
payable was due to the increase in revenue and net income over that
period.
Net
cash
used by investing activities was -$260,107 and -$283,603 for the years ended
December 31, 2005 and 2006, respectively. The cash used by investing activities
consisted mainly of capital expenditures, advances to third parties and advances
to related parties.
34
Cash
flows provided by financing activities amounted to -$477,064 and -$10.06 million
for the year ending December 31, 2005 and 2006, respectively. Cash flows
generated by financing activities consist of dividends paid and repayments
of
advances to third parties. There was a dividend payment of approximately $9.16
million compared to $0 in the prior year. This dividend was declared prior
to
the private financing in which Allied Moral engaged in January 2007 and paid
upon the closing of that financing. As a result of these changes, the financing
activities for year ended December 31, 2006 created a decrease of $9.58 million
compared to the financing activities for the same period of the prior
year.
Working
Capital
The
Company’s working capital has decreased by $512,000 over the period between
December 31, 2005 and December 31, 2006. Total current assets at December 31,2006 amounted to $8.11 million, a decrease by approximately $4.01 million
compared to $12.12 million at December 31, 2005. The decrease was attributable
mainly to a significant decrease in accounts receivable.
Current
liabilities amounted to $9.44 million at December 31, 2006, in comparison to
$11.30 million at December 31, 2005. The decrease is attributable mainly to
following factors: First, a decrease of $1.67 million in accrued liabilities
and
other payables; and second, a decrease of $655,000 in liabilities due to a
related party.
The
current ratio increased from 1.07 at December 31, 2005 to 0.86 at December31,2006. The changes in current ratio were due mainly to a larger percent reduction
of current liabilities than current assets, year-over-year.
OPERATING
LEASE COMMITMENTS
Rental
expenses for obligations under operating leases were RMB 667,268 (USD 81,547)
and RMB 356,088 (USD 44,746) for the years ended December 31, 2005 and 2006,
respectively. As of December 31, 2006, the total future minimum lease payments
under non-cancellable operating leases in respect of premises are RMB 74,906
(USD 9,598). While our new facilities have a lower cost per square meter, they
are larger than the office space we previously occupied. As a result, our total
rental expense will increase from RMB 31,880 (USD 4,085) per month to RMB
160,000 (USD 21,934) per month.
Quantitative
information about market risk and qualitative information about market
risk
Transaction
Risk and Currency Risk Management
Our
operations do not employ financial instruments or derivatives which are market
sensitive, and therefore we are not subject to the financial market risks
associated with such instruments and derivatives.
Exchange
Rate Sensitivity
We
do not
currently sell our products internationally, so we are not subject to
substantial risk from changes in exchange rates. There is a limited impact
from
exchange rate fluctuations as a result of the fact that we purchase some
components and materials internationally. However, after a fairly stable period
when the RMB was pegged to the US Dollar, the trend over the past few years
has
been appreciation of the RMB. This has the result of reducing our costs when
stated in RMB terms, as it requires fewer RMB to acquire the same dollar value
of goods compared to periods when the RMB was weaker.
Our
production base is in China, which results in a substantial portion of our
operating expenses being denominated in Renminbi, although the majority of
our
international purchases are made in U.S. dollars.
We
currently do not engage in hedging or other activities to control the risk
of
our foreign currency exposure.
Exchange
Controls
Chinese
law allows enterprises owned by foreign investors to remit their profits,
dividends and bonuses earned in China to other countries, and the remittance
does not require prior approval by the State Administration on Foreign Exchange.
SAFE regulations formerly required extensive documentation and reporting, some
of which was burdensome and slowed payments. If there is a return to payment
restrictions and reporting, the ability of a Chinese company to attract
investors will be reduced. Also, current investors may not be able to obtain
the
profits of the business which they own as a result of other restrictions that
the Chinese government may impose. Relevant Chinese laws and regulations permit
payment of dividends only from retained earnings, if any, determined in
accordance with Chinese accounting standards and regulations. It is possible
that the Chinese tax authorities may require changes in our reported income
that
would limit our ability to pay dividends and other distributions. Chinese law
requires companies to set aside a portion of net income to fund certain reserves
which amounts are to distributable as dividends. These rules and possible
changes could restrict a company in China from repatriating funds to us and
our
shareholders as dividends.
Interest
Rate Risk
We
are
equity financed and have only limited debt that is subject to interest rate
change risk.
35
BUSINESS
Overview
We
design
and sell precision radiotherapy equipment used for the treatment of cancer
and
tumors in the PRC. Our patented line of gamma treatment systems (“GTS”) quickly
and accurately deliver a well-defined conforming dose of radiation to the target
tissue while sparing surrounding normal tissue. We have 17 patents issued in
the
PRC and internationally and additional patent applications which cover our
product line.
Our
entire GTS product line is capable of treating tumors with sophisticated
radiation therapy techniques, such as stereotactic radiosurgery,
intensity-modulated radiotherapy and 3D conformal radiotherapy. Management
of
Huiheng believes, based solely upon the high quality, high performance and
low-cost of our products, that we have sold more GTS devices in the PRC over
the
last five years than any other company. Our R&D operations have developed
additional products that we will introduce through 2009. We also plan to expand
our sales and distribution beyond the PRC.
Our
business is focused on the development and design of devices used in the
treatment of cancer. The Ministry of Health has identified cancer as the leading
cause of death in the PRC for the years 2002, 2003 and 2004. To the extent
that
cancer-related illness and death are caused by environmental factors, the air
and water pollution associated with China’s rapid industrial expansion are
expected to increase the rate of both. As a result, effective treatment of
cancer is a high priority for China’s healthcare system.
Our
customers are health care providers and third party hospital equipment
investors, with the end user being the hospital. We also offer our customers
comprehensive post-sales services for our products as well as third party
manufactured products. These post sales services include radioactive cobalt
source replacement and disposal, medical expert training, clinical trial
analysis, patient tumor treatment analysis, software upgrades, and patient
care
consulting.
Our
net
revenues increased from $9.8 million in 2005 to $12.4 million in 2006 and from
$9.0 million for the nine month period ended September 30, 2006 to $11.0 million
for the corresponding period in 2007. Our net income increased from $4 million
2005 to $6.8 million in 2006 and from $5.1 million for the nine month period
ended September 30, 2006 to $6.2 million for the corresponding period in 2007.
From 2003 through June 2007, we sold what we believe, based solely on
management’s knowledge of the industry, are 70% (36 of 50) of the total number
of radiotherapy devices sold in the PRC.
We
conduct our business principally through the three operating subsidiaries of
Changdu Huiheng: Shenzhen Hyper, which is engaged in our principal research
and
development activities along with the production and servicing of the SGS
system; Wuhan Kangqiao, which also conducts research and development and focuses
on the production and servicing of our HGTS and BGTS products; and Beijing
Kbeta, a collaboration between Chengdu Huiheng, the Beijing Shuangyuan Isotope
Technology Co., Ltd. and Beijing Taihai Tonghui Culture Technology Co., Ltd.
that is engaged in research on radiotherapy techniques.
Industry
Background
The
conventional and most commonly used treatment methods for cancer in China and
elsewhere are surgery, radiotherapy and chemotherapy. High intensity focused
ultrasound, radio frequency ablation, microwave thermo-coagulation and
cryosurgery are some of the major new cancer treatment methods developed and
commercialized in recent years. Biotherapy and gene therapy are currently still
in experimental stages and are not currently available to patients generally.
The selection of a particular treatment method for a patient depends on various
factors, including the tumor’s receptivity to the treatment method, the location
of the tumor, the stage of the tumor and the patient’s state of health. Cancer
patients are usually treated by a combination of various treatment
methods.
There
are
two primary types of radiation therapy. The first type, which represents the
majority of radiation treatments, is external beam radiation therapy. In this
type of radiation therapy, a beam of energy originating outside the patient’s
body is focused on the tumor. The second type of radiation therapy is internal
radiation therapy, commonly referred to as brachytherapy, which involves
implanting radioactive materials in the patient’s body at the site of the tumor.
Huiheng’s GTS products are external beam radiation therapy devices.
External
radiation therapy can be divided into two main categories, common radiotherapy
and precision radiotherapy. Common radiotherapy involves the use of a linear
accelerator to deliver high energy X-rays to a tumor target. This X-ray beam
is
relatively wide. This type of common radiotherapy may be employed to treat
relatively large, localized tumors, but it affects surrounding tissues, making
it inappropriate for tumors in sensitive areas.
Precision
radiotherapy devices deliver either high energy gamma or x-ray energy to tumor
targets in a precise manner, limiting radiation exposure to surrounding tissue.
Precision radiotherapy devices include the various gamma treatment systems,
such
as Huiheng’s GTS product line and various other devices capable of Stereotactic
Radiosurgery, Conformal Radiotherapy Treatments (“CRT”) and Intensity-Modulated
Radiation Therapy (“IMRT”).
In
general, gamma treatment systems are precision stereotactic radiotherapy devices
that deliver low dose beams of high energy gamma ray energy to tumor targets
for
the purposes of destroying tumor cells. In the case of Huiheng’s GTS products,
numerous gamma ray beams, arranged across an arc frame, are irradiated and
collimated from a source of Cobalt-60, to the treatment target. The gamma ray
beams intersect, precisely, at the tumor target and generate a high dosage
gradient between the target and the surrounding tissue, minimizing radiation
exposure outside the target.
36
The
PRC Market
In
order
to improve the country’s healthcare situation, the PRC government intends to
make large investments over the next decade.
Market
Size
The
medical device market of the PRC has grown during the past few years. According
to National Development and Reform Commission, the total revenue of Chinese
medical devices industry was about $4.16 billion in 2005, which increased at
a
compound annual growth rate of 20.9% from 2000 to 2005. The market touched
$5.16
billion in 2006.
Note:
(E)–Estimated; Source: Kalorama Information Market Intelligence Report: “Asian
Medical Devices,” Publication Date: May 2007 (“Kalorama Information
Report”)
Market
Projections
According
to National Development and Reform Commission (NDRC), the Chinese medical
devices industry is expected to grow at a compound annual growth rate of 24%
to
about $12.19 billion until 2010.
1
1
Source:
Kalorama Information Report
37
Note:
(E)–Estimated; Source: Kalorama Information Report
Trends
The
Chinese medical device market is expected to grow substantially in the near
future. With an increase in the standard of living of the people, better medical
care is expected in the country.
The
number of doctors per 1,000 people increased from 1.47 in 2002 to 1.52 in 2005.
This trend is expected to have a positive impact on the medical device market
in
the future.
2
Source:
Kalorama Information Report
38
Factors
Affecting the Market
Growth
Drivers
Owing
to
unprecedented economic growth and rise in per capita income, the demand for
high-quality medical care is increasing in the PRC. Recent threats such as
Severe Acute Respiratory Syndrome (SARS) and avian flu have prompted the
government to make significant investments in the healthcare
sector.
Increasing
Expenditure on Healthcare
In
2005,
the healthcare expenditure of the PRC (with a population of 1.3 billion persons)
accounted for 5.7% of the GDP ($2.3 trillion) as compared to 15.9% of the GDP
($12 trillion) in the US (with a population of 300 million). We believe that
this indicates that expenditure on healthcare is likely to increase in the
future.
3
Demand
for High quality Medical Devices and Efficient Healthcare Services
Three
types of public healthcare insurance schemes are available in the urban areas
of
the PRC. The first type, known as the Government Insurance System, provides
free
healthcare and medical benefits to approximately 34 million public sector
employees. The second type, known as the labor safety healthcare scheme,
provides compulsory coverage for approximately 148 million employees of
state-owned enterprises and some collectively owned enterprises with coverage
including a 50% contribution towards medical expenses incurred by dependent
relatives of the employee, according to Medistat. As the PRC’s economy has
grown, more private sector companies have emerged whose workers are covered
by
the third type, the compulsory healthcare insurance scheme. Under this scheme,
a
worker normally pays 2% of his or her wages into an insurance fund, while the
employer contributes an additional 6% of the worker’s wages.
2 Source:
Kalorama Information Report
3 Source:
Kalorama Information Report
Please
note that any URL included on this page is an inactive textual reference only
and is not a part of this prospectus.
One
of
the major benefits of the economic boom in the PRC is the increase in the per
capita income of people in the country. The annual per capita income in the
PRC
reached $1,740 by the end of 2005
4
, a
significant increase from $960 in 2004 5
. This
number is expected to continue to grow as the GDP continues to rise. Therefore,
the population at large, demands better and more efficient health services
resulting in a higher demand for high, medium and low-tech medical devices.
Moreover, the endeavor of the government to provide better health services
to
its citizens is resulting in large investments in big hospitals. These
investments are directly related to the investments in medical devices as
well.
Reform
in
National Medicine System Fuels Growth of Medical Devices
In
the
recent years, the government has replaced the self-procurement system of
hospitals with a centralized public bidding system. As a result, hospitals
are
now required to provide better services and upgrade their hardware, to increase
their revenue. Hence, the demand for mid or high-end medical devices will be
one
of the main growth drivers for this market in the PRC. The recent medical system
reforms in the PRC have increased the demand for medical devices in hospitals.
According to an official market survey, about 15% of all medical devices were
manufactured in the 1970s, and 60% in the 1980s, which means that there is
a
potential market for product replacements.
Healthcare
Insurance - Catalyst for High quality Healthcare Services
The
PRC
has opened its market to foreign insurance companies, thereby providing
affordable healthcare insurance options to the middle-class in the country.
This
prompts the healthcare service providers to purchase better quality machines
to
cater to the increasing demand. Since the PRC’s entry into WTO in December 2001,
insurance companies have been offering improved services and risk coverage
to
meet international standards as well as the intensifying competition. By the
end
of 2004, there were 65 foreign operated insurance companies in the
PRC.
6
Private
Hospitals and Clinics Becoming More Popular
The
key
strategy of private hospitals and clinics is to use advanced technologies or
devices to attract customers. Private chospitals and clinics therefore, through
the use of high quality healthcare devices, have more market share as compared
to state-owned hospitals.
Aging
Population
As
a
result of the “one-child policy”, the country has entered an “aging” phase since
2001. According to the PRC Research Center on Aging, it is estimated that there
will be 5.96 million senior citizens (above 60 years of age) added every year
from 2001 to 2020. This means that by 2020 the number of senior citizens is
estimated to reach 248 million.
7
39
Other
Threats and Epidemics
Threats
such as SARS and avian flu have led the government to increase awareness on
healthcare services among people and equip them to deal with emergencies. The
Chinese government has made significant investments in the country’s healthcare
infrastructure. While it is impossible to determine how much money was injected
into the healthcare sector as a direct result of the SARS epidemic, many
government policies were changed in the wake of the epidemic. For example,
the
government re-established subsidies for a cooperative medical scheme in the
poorer provinces after an absence of almost 20 years. Beijing also created
a
medical assistance fund for persons with debilitating diseases.
8
Our
Products
Huiheng
is involved principally in radiotherapy, which uses an external radiation source
to destroy or inhibit the growth of tumor tissues. Radiotherapy is often used
as
a complement to surgery. Although radiotherapy is used to treat a wide range
of
cancer types, different types of tumor tissues have different sensitivities
to
radiation, and different patients have different levels of tolerance for
radiation, both of which play a role in determining if radiotherapy is an
appropriate treatment. Radiation therapy is the primary treatment option for
localized cancerous tumors.
Please
note that any URL included on this page is an inactive textual reference only
and is not a part of this prospectus.
40
Huiheng’s
line of gamma treatment systems include the Head Gamma Treatment System
(“HGTS”), the Body Gamma Treatment System (“BGTS”) and the Super Gamma System
(“SGS”). They were developed based on the principles of the Leksell system. They
each deliver gamma radiation to tumor targets in an optimally precise and
effective manner. The BGTS is used to treat a variety of tumors located
throughout the body and is not used for intracranial tumors. Similarly, the
HGTS
treats only tumors of the head and other functional disorders of the head,
especially those that cannot be treated with conventional surgery. The SGS,
on
the other hand, can effectively treat tumors of both the head and body with
accuracy and precision, and this wide range of applicability is what sets it
apart from other GTS products on the market. In addition, Huiheng’s GTS products
are capable of performing a wide range of treatment options, including
stereotactic radiosurgery, stereotactic radiotherapy, intensity-modulated
radiotherapy (“IMRT”) and 3D-conformal radiotherapy (“CRT”).
Prior
to
October 2005, our business had been organized differently. While we had the
production operations described above, a significant part of our business
involved the operation of treatment centers within Chinese hospitals. These
treatment centers would either purchase or lease our products on favorable
terms
and we would participate in the revenue stream generated from the treatments
delivered in the center, an arrangement that facilitated the hospital’s purchase
of these capital items. However, following our reorganization in 2005, we
shifted our business model to one in which our revenues and profits are derived
from the sale of our medical devices and from servicing those devices after
sale.
Since
the
inception of Shenzhen Hyper in 2001, our revenues have grown steadily, with
the
shift in the business model leading to substantially greater revenues and
profits compared with prior years. This was due to both the continued expansion
of our business and the change in accounting treatment accorded to sales of
equipment, with revenue recognized upon acceptance of the equipment by the
customer, versus the revenues associated with the income stream produced over
a
period of years by the treatment centers.
Our
relatively strong competitive position is reflected in our gross margins, which
were in excess of 50% for both 2005 and 2006. We believe that these large
margins will allow us to meet pricing pressure without a loss of sales volumes
or to decrease pricing in order to increase volumes as our production capacity
increases. This pricing flexibility will also provide us with significant
assistance in entering foreign markets where our products are not as well known
and our pricing power is not as great.
Practices
in our industry that have an effect on working capital requirements relate
to
the method of payment by customers for our products. Normally we obtain a
deposit or down payment from the customer with the order and before we begin
production of the device. Progress payments are made until the device is
delivered, installed and tested for conformity with specifications. When the
device passes testing and the customer accepts it, the final payment is due.
Generally speaking, the progress payments made by customers during the
development of the device are adequate to cover the costs of making it, reducing
or eliminating altogether the need for working capital to support development
operations. We will need working capital to expand capacity or to enter
international markets, as well as for research and development. These working
capital needs have historically been met through a combination of cash flow
and
equity financing.
Research
and Development
R&D
is a major priority for Huiheng. Our R&D is primarily focused on the next
generation developments of existing products and new product launches. As
China’s economy and social structure continues its development and evolution,
Huiheng understands it must evolve as well if it wants to maintain its position
as a leader in China’s radiotherapy industry.
Huiheng
is currently working to complete the development of the third generation SGS,
as
well as an integrated linear accelerator and MLC, an advanced MRI and an
industrial linear accelerator. The addition of these products will bolster
the
overall product line and keep the company at the forefront of the China’s
radiotherapy and medical capital equipment industry.
We
have
spent $72,267 and $124,283 during 2005 and 2006, respectively, on research
and
development efforts to improve existing products and processes and to develop
new products. These amounts may appear low by developed country standards,
but
they have been adequate to support the development of significant improvements
in our products and the development of new products.
Regulation
Our
GTS
products are medical devices and are subject to regulatory controls governing
medical devices. Our SGS and BGTS products are authorized by the State Food
and
Drug Administration (SFDA), which is the regulatory institution for medical
devices in the PRC. As a developer of medical equipment we are subject to
regulation and oversight by different levels of the SFDA. We are also subject
to
other government laws and regulations which are applicable to developer in
general. SFDA requirements include obtaining production permits, compliance
with
clinical testing standards, development practices, quality standards, applicable
industry and adverse reporting, and advertising and packing standards.
On
April1, 2000, SFDA formulated a set of regulations for the medical device market
-
“Regulations for the Supervision and Administration of Medical Devices” - which
included general provisions, administration of medical devices, administration
of production, distribution and use of medical devices, supervision of medical
devices, penalties, and supplementary provisions. Recent regulatory changes
in
the PRC include improvements in the supervision and efficiency of medical
devices testing, introduction of a new pricing policy for medical devices,
and
introduction of a new regulation - “Provisions on Daily Supervision and
Administration of Medical Devices Manufacturing Enterprises,” by SFDA in
2006.
41
Classification
of medical devices
In
China,
medical devices are classified into three different categories, Class I, Class
II and Class III, depending on the degree of risk associated with each medical
device and the extent of control needed to ensure safety and effectiveness.
Classification of a medical device is important because the class to which
a
medical device is assigned determines, among other things, whether a developer
needs to obtain a production permit and the level of regulatory authority
involved in obtaining such permit. Classification of a device also determines
the types of registration required and the level of regulatory authority
involved in effecting the registration.
Class
I
devices are those with low risk to the human body and are subject to “general
controls.” Class I devices are regulated by the city level food and drug
administration where the manufacturer is located. Class II devices are those
with medium risk to the human body and are subject to “special controls.” Class
II devices require product certification, usually through a quality system
assessment, and are regulated by the provincial level food and drug
administration where the manufacturer is located. Class III devices are those
with high risk to the human body, such as life-sustaining, life-supporting
or
implantable devices, and are regulated by the SFDA under the strictest
regulatory control.
Our
GTS
product is classified as a Class III device, and it therefore is subject to
all
regulatory controls governing Class III medical devices.
Production
permit for medical devices
A
developermust
obtain a production permit from the provincial level food and drug
administration before commencing the development of Class II or Class III
medical devices. A production permit, once obtained, is valid for four years
and
is renewable upon expiration. To renew a production permit, a
developerneeds
to
submit to the provincial level food and drug administration an application
to
renew the permit, along with required information six months before the
expiration date of the permit. Our
production permit expired in December 2007 and we have applied for a renewal
in
September 2007
Registration
requirements of medical devices
In
accordance with the "Administration Measures Regarding Medical Device
Registration" implemented on August 9, 2004, before a medical device can be
developed for commercial distribution, a developer must obtain medical device
registration by establishing, to the satisfaction of respective levels of the
food and drug administration, the safety and effectiveness of the medical
device. In addition, in order to conduct a clinical trial on a Class II or
Class
III medical device, the SFDA requires developers to apply and to obtain in
advance a favorable inspection result for the device from a third party
inspection center approved by the SFDA. The application to the inspection center
must be supported by required data, such as animal and laboratory testing
results, as well as certain pre-clinical and clinical trial data. If approved,
the medical device registration is valid for four years.
According
to the "Provisions Regarding Medical Device Clinical Trials" implemented on
April 1, 2004, clinical trials for our GTS products are also subject to SFDA
regulation governing GTS medical devices. Under these regulations, the minimum
clinical trial period for a medical device is one year, with a minimum of 100
subjects participating and using at least two units of the GTS. Compliance
with
these SFDA regulations also require satisfactory clinical reports from at least
2 institutions that have participated in the clinical trial. Other areas subject
to these regulations include proper labelling of the medical device, obtaining
informed consent from each subject, and the proper record-keeping.
The
SFDA
occasionally changes its policies, adopts additional regulations, revises
existing regulations or tightens enforcement, each of which could block or
delay
the approval process for a medical device.
We
have
received SFDA approval for our SGS and BGTS products. Our products
under development have not been approved by the SFDA, and we will need to
conduct clinical trials (none of which have commenced) in order to obtain any
such approval.
Continuing
SFDA regulations
We
are
subject to continuing regulation by the SFDA. In the event of significant
modification to an approved medical device, its labelling or its manufacturing
process, a new pre-market approval or pre-market approval supplement may be
required. Our GTS products are subject to, among others, the following
regulations:
•
SFDA’s
quality system regulations, which require developers to create, implement
and follow certain design, testing, control, documentation and other
quality assurance procedures;
•
medical
device reporting regulations, which require that developers report
to the
SFDA certain types of adverse reactions and other events involving
their
products; and
42
•
SFDA’s
general prohibition against promoting products for unapproved uses.
Class
II
and III devices may also be subject to special controls applicable to them,
such
as supply purchase information, performance standards, quality inspection
procedures and product testing, which may not be required for Class I devices.
We believe we are in compliance with the applicable SFDA guidelines, but we
could be required to change our compliance activities or be subject to other
special controls if the SFDA changes or modifies its existing regulations or
adopts new requirements.
We
are
also subject to inspection and market surveillance by the SFDA to determine
compliance with regulatory requirements. If the SFDA decides to enforce its
regulations and rules, the agency can institute a wide variety of enforcement
actions, such as:
•
fines,
injunctions and civil penalties;
•
recall
or seizure of our products;
•
the
imposition of operating restrictions, partial suspension or complete
shutdown of production; and
•
criminal
prosecution.
Regulatory
requirements for developing international markets
We
believe that the regulatory requirements of some international markets will
be
satisfied at least substantially by the regulatory approvals granted by the
SFDA. We believe that compliance with regulatory requirements in international
markets that we have been making efforts to develop will ultimately be the
responsibility of the local distributor, especially in markets where regulators
will rely on the SFDA approval process. We have not fully evaluated the
regulatory requirements of these markets and our ability to comply with the
requirements of a jurisdiction will be a factor in our expansion
plans.
Customers
Our
customer base consists of hospitals and clinics that diagnose and treat various
type of tumors, although, as noted above, our equipment is currently purchased
by distributors that place the device in the hospital or clinic, through a
financing arrangement that facilitates the hospital’s acquisition of the
equipment. While we have a limited number of distributors (with two distributors
accounting for 89% of revenues for the nine months ended September 30,2007), the health care institutions that are the end users for our products
are
located in most of the provinces in China. While we are developing our own
sales
and marketing capabilities and an internal distribution network to facilitate
direct sales, we will still need to cooperate with distributors who provide
lease financing for the health care institutions.
Materials
and Components
We
obtain
components for our products and assembly services from a network of third party
suppliers. We obtain our Cobalt 60 sources from Beijing Shuangyuan Isotope
Co.
Ltd. and Chengdu Zhonghe Isotope Co. Ltd.; electrical cabinets from Wuhan
Shankuo Mechanical & Electrical Equipment Co. Ltd; main engines from
Jiangsu Duoling Numerical Control Machine Tool Co. Ltd and Chengdu Aviation
Plastic Modeling Co. Ltd; and positioning beds from Shenzhen Tianda High-Tech
Material Co. Ltd. Although we work closely with these organizations, component
shortages may occur from time to time. Because of the close relationships that
have developed with our suppliers and their knowledge of our requirements,
we
would have some difficulties, in the short run, replacing a
supplier.
Our
major
assembly processes are “dry,” meaning that they do not involve significant
quantities of solvents, plating solutions or other types of materials that
lead
to the generation of large amounts of hazardous wastes, process wastewater
discharges or air pollutant emissions. Our GTS devices do use radioactive
isotopes, and the proper handling of that material, both prior to installation
and after removing it from a device for replacement, which must occur
periodically, is initially our responsibility. However, under current Chinese
law and the arrangements that we have with our waste handler, the responsibility
and liability for management of that waste transfers to the waste handler with
the waste itself.
Our
development activities are outsourced and performed by our suppliers. We
periodically review the performance of our suppliers, which includes an
evaluation of any quality issues and corrective actions.
43
Competition
The
international market for radiotherapy devices is currently dominated by just
a
few companies, the leaders being companies such as Elekta and Accuray. It has
traditionally been centered in Europe, where the GTS was first developed and
where large multinational corporations such as Siemens make many of the
components needed to build such equipment.
Huiheng
believes that it is the leading Chinese developer of radiotherapy equipment,
having a total installed base of 36 GTS devices in China as of December 31,2006. As the sophistication of China’s medical equipment industry increases and
its familiarity with the practices required by western governmental approval
authorities grows, we anticipate an increase in the amount of such development
that will be done in China, both for domestic Chinese sales and for export
to
foreign markets.
As
with
most other products, competitive advantages in radiotherapy equipment derives
from a favorable combination of price, quality and customer service. We believe
that we are well-positioned to compete effectively in all three of those areas.
China’s well-known labor cost advantages relative to other regions in which
competing devices are manufactured enables us to remain competitively priced
while enjoying favorable margins. The combination of features that our products
contain is also an advantage relative to the products of many of our
competitors. These advantages have enabled us to put price pressure on our
foreign rivals, thereby helping us to gain market share in the PRC while
maintaining profitability and margins, as our financial results
show.
Intellectual
Property
We
have
been issued 15 patents in China covering radiotherapy devices, switching
devices, and various other aspects of the Gamma Treatment System. The first
such
Chinese patent will expire in 2010, with the remainder expiring at various
times
from 2013 through 2027. We have also been issued one patent in the United States
and one patent in the European Union. These foreign patents expire between
2020
and 2027. We intend to patent our new inventions both in China and
internationally and have filed a total of approximately 15 patent
applications in the PRC, U.S. and EU.
Our
patents cover the intellectual property we use in our products; we do not
license patent rights from others for our products. Management is not aware
of
any current or previous infringement of the existing patents. If any
infringement occurs, our management intends to vigorously prosecute actions
to
halt the infringement and recover damages if the value of the patent is judged
at the time to be sufficient to justify that effort.
Properties
We
currently operate our business out of two properties located in the PRC. Wuhan
Kangqiao is headquartered in Wuhan, China where it owns a 287 square meter
office building that houses management, research and development personnel,
marketing, finance and administrative support staff.
Shenzhen
Hyper is headquartered in Shenzhen, China, where it leases office space of
4,000
square meters, with a monthly rental of RMB 160,000 (USD 21,934) per month,
that
houses management, research and development personnel, marketing, finance and
administrative support staff. This lease will expire at the end of December
2027. We relocated to this space at the beginning of 2008.
Neither
facility contains equipment or specialized improvements that would be difficult
to move to a new location. If we decided to relocate, we believe that there
are
many facilities in these locations that would be suitable for our
needs.
Employees
As
of
September 30, 2007, we had 98 employees, of which 69 are full-time employees
and
29 are part-time employees. Of such employees, 52 are in research and
development, 21 are in sales and customer support, and 25 are in finance and
administration. We consider our relations with our employees to be
good.
Legal
Proceedings
Neither
we nor any of our direct or indirect subsidiaries is a party to, nor is any
of
our property the subject of, any legal proceedings other than ordinary routine
litigation incidental to their respective businesses. There are no proceedings
pending in which any of our officers, directors, promoters or control persons
are adverse to us or any of our subsidiaries or in which they are taking a
position or have a material interest that is adverse to us or any of our
subsidiaries.
Neither
we nor any of our subsidiaries is a party to any administrative or judicial
proceeding arising under federal, state or local environmental laws or their
Chinese counterparts.
Huiheng
Medical’s Background
The
Acquisition ofAllied
Moral
On
May15, 2007, we entered into a share exchange agreement to acquire (i) all of
the
issued and outstanding shares of the common stock of Allied Moral Holdings,
Ltd.
in exchange for 13,000,000 shares of our common stock, and (ii) all of the
issued and outstanding Series A Preferred Stock of Allied Moral in exchange
for
266,666 shares of our Series A Preferred Stock. In connection with the share
exchange, we agreed to change our name from “Mill Basin Technologies, Ltd.” to
“Huiheng Medical, Inc.” As part of this transaction, holders of some of our
outstanding shares issued prior to May 15, 2007 contributed shares to the
company so that there were 450,000 shares of our common stock issued and
outstanding immediately prior to the share exchange. Taking into account the
shares issued in the share exchange, we now have 13,450,000 shares of common
stock issued and outstanding, 13,000,000 (96.65%) of which are owned by Allied
Moral’s former shareholders, with the balance being held by Mill Basin’s prior
shareholders, along with 266,666 shares of our Series A Preferred Stock, all
of
which are owned by former holders of Allied Moral’s Series A Preferred
Stock.
44
The
share
exchange is regarded as a reverse merger, since Allied Moral’s former
shareholders obtained control of Mill Basin. As a result, Allied Moral was
considered to be the acquirer for accounting purposes.
Allied
Moral
As
a
result of the share exchange, Huiheng Medical owns all of the issued and
outstanding stock of Allied Moral, which was incorporated in the British Virgin
Islands on July 26, 2006. Allied Moral, holds all of the issued and outstanding
stock of Changdu Huiheng, which in turn owns 100% of the issued and outstanding
stock of Wuhan Kangqiao, 75% of the issued and outstanding stock of Shenzhen
Hyper and 50% of the issued and outstanding stock of Beijing Kbeta. Private
companies in China own the other interests in these subsidiaries.
Changdu
Huiheng was founded in November 2004. At its inception, the Company's name
was
Tibet Changdu Shengfeng Industrial Development Co., Ltd. and its changed its
name in 2007. As a Tibet-based holding company, it enjoys certain financial
subsidies from the local government in Tibet. Its sole purpose is to hold the
operating subsidiaries of Allied Moral.
Shenzhen
Hyper was founded in September 2001. It is engaged in the business of research,
development and servicing of the Super Gamma System, a medical device that
uses
precisely targeted bursts of radiation in the treatment of cancerous tumors.
Shenzhen Hyper is also the subsidiary that conducts the majority of the
company’s research and development activities for product improvements and new
products.
Wuhan
Kangqiao was founded in September 2001. It is engaged in the research and
development, production and servicing of the company’s Head Gamma Treatment
System and Body Gamma Treatment System.
Beijing
Kbeta was founded in December 2004 as a collaboration between Changdu
Huiheng, the Beijing Shuangyuan Isotope Technology Co., Ltd. and Beijing Taihai
Tonghui Culture Technology Co., Ltd. The purpose of this arrangement is to
develop and maintain standards for radiation oncology technologies and materials
in China, including determining appropriate dosages of Cobalt 60 radiation
delivered by gamma treatment systems and to install and change new Cobalt 60
sources for the gamma treatment centers.
Until
August 2006, Changdu Huiheng was 90% owned by Shenzhen Jiancheng Investment
Co.
Ltd (“SZ Jiancheng”), a Chinese investment company, and 10% owned by Shenzhen
Huiheng Industry Co. Ltd. (“Huiheng Industry”), also a Chinese investment
company. Mr. Hui Xiaobing, our Chairman and CEO, in turn, owned 96.4% of Huiheng
Industry and 3.6% of SZ Jiancheng. Subsequently, SZ Jiancheng sold 89% of its
90% interest in Changdu Huiheng to Huiheng Industry for RMB 44,500,000, making
it a 99% owner of Changdu Huiheng, with the other 1% having been acquired by
Hui
Xiaobing for RMB 500,000. In order to move ownership of the Company offshore,
on
August 21, 2006, Huiheng Industry and Hui Xiaobing transferred their respective
ownership interests in Changdu Huiheng to Allied for RMB 50,000,000, which
at
the time was 100% owned by Clear Honest Holdings Limited (“Clear Honest”), a
British Virgin Island company that is 100% owned by Mr. Hui Xiaobing.
As
part
of this overall restructuring, SZ Jiancheng sold its 40% interest in Shenzhen
Hyper to Changdu Huiheng for RMB 16,000,000, which already owned 20% of Shenzhen
Hyper. Changdu Huiheng also acquired the 15% interest of Shenzhen Hyper held
by
Huang Jian for RMB 6,000,000, giving Changdu Huiheng its current 75% ownership
interest in Shenzhen Hyper. The remaining 25% is owned by Shenzhen OUR
International Technology Development Co. Ltd. Prior to this reorganization,
Wuhan Kangqiao had been 36% owned by Hui Xiaobing and 64% owned by Huiheng
Industry. As part of the reorganization, these ownership interests in Wuhan
Kangqiao were transferred to Changdu Huiheng for RMB 7,920,000 and RMB
14,080,000, respectively, making Wuhan Kangqiao a 100% owned subsidiary of
Changdu Huiheng.
The
50%
ownership of Beijing Kbeta now held by Changdu Huiheng had originally been
split
30% Changdu Huiheng and 20% Wuhan Kangqiao. To further enhance the tax benefits
associated with Changdu Huiheng’s acting as the direct holding company of
Beijing Kbeta, Wuhan Kangqiao transferred its 20% interest to Changdu Huiheng
for RMB 200,000. The remaining 50% continues to be owned by Beijing Shuangyuan
Isotope Technology Co., Ltd. and Beijing Taihai Tonghui Culture Technology
Co.,
Ltd. 30% and 20%, respectively.
In
January 2007, Allied Moral received an equity investment with gross proceeds
of
US $10 million, in exchange for which it issued 2,666,667 shares of Series
A
Preferred Stock. As a result of this investment, on a common-share equivalent
basis Clear Honest held 80% of the issued and outstanding stock of Allied Moral
and the holders of the Series A Preferred Stock held 20%
45
Previous
History of Mill Basin
Mill
Basin Technologies, Ltd. was, prior to the share exchange with the stockholders
of Allied Moral, an inactive company seeking merger opportunities or business
operations. On September 5, 2006 Mill Basin had ceased operations and
discontinued all previous business activities.
Mill
Basin was formed under the name Pinewood Imports, Ltd. as a limited liability
company in the State of Nevada in November 2002 and was converted into a Nevada
corporation on August 29, 2005. As a limited liability company, the results
of
the company’s operations were, for tax purposes, passed through to its
members.
The
company imported from Brazil molding and door component products, such as
framing materials, made from pine wood and sold the imported products to
retailers and/or distributors serving the residential building distribution
industry throughout the United States and Canada.
On
September 1, 2006, Keith S. Barton and Michelle M. Barton (the principal
stockholders of Pinewood Imports) and 33 other stockholders, as sellers, entered
into a Securities Purchase Agreement with Harborview Master Fund LP
(“Harborview”) and Diverse Trading Ltd. The sellers sold an aggregate of
10,044,600 shares of the company’s common stock, representing 98.96% of the
outstanding shares, to Harborview and Diverse Trading. All proceeds were paid
to
the sellers. No proceeds were paid to the company. On September 1, 2006, Keith
S. Barton and Michelle M. Barton, who had been officers and directors of
Pinewood Imports, resigned from those positions and the principals of Harborview
were elected as officers and directors of the company.
The
company transferred the discontinued operations and the assets relating to
those
operations to Keith S. Barton, former officer, director and stockholder of
the
company, in consideration of Mr. Barton’s assuming all of the liabilities
relating to such operations and assets. The transfer to Mr. Barton and his
assumption of the liabilities were effected on September 5, 2006. Mr. Barton
and
his wife, Michelle M. Barton, a former officer and director of the company,
agreed to indemnify the company against any loss or expense relating to the
transferred operations or assets and also released the company from any claims
which either of them may have had against the company. Among the assets
transferred to Mr. Barton was the name “Pinewood Imports, Ltd.,” and Mr. Barton
has the right to use that name or any similar name in the conduct of the
transferred business operations. On September 6, 2006, the company filed an
amendment to its certificate of incorporation changing the company’s name to
“Mill Basin Technologies, Ltd.” It then commenced its search for a business with
which to merge or otherwise combine.
Prior
to
the share exchange, Mill Basin had not conducted any operations since September
2006. As a result of the share exchange, the operations of Allied Moral’s
subsidiaries became our principal operations under the name Huiheng Medical,
Inc., and therefore all of the information provided in this Business section
relates to the operations of Allied Moral’s subsidiaries.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
In
connection with the share exchange, Mill Basin’s officers and directors resigned
and were completely replaced with Allied Moral’s officers and
directors.
The
following table and text set forth the names and ages (as of November 15, 2007)
of all of our directors and executive officers. The Board of Directors is
comprised of only one class. All of the directors will serve until the next
annual meeting of shareholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
There are no family relationships among directors and executive officers. Each
of our directors, other than Mr. Hui, is “independent” under the independence
standards adopted by the Nasdaq Capital Market. Also provided herein are brief
descriptions of the business experience of each director and executive officer
during the past five years and an indication of directorships held by each
director in other companies subject to the reporting requirements under the
Federal securities laws.
Name
Age
Position
Hui
Xiaobing
54
Chairman
and CEO
Huang
Jian
54
Vice
President
Li
Bo
35
Corporate
Secretary
Richard
Shen
42
Chief
Financial Officer
Cui
Zhi
38
Chief
Technology Officer
Tang
Sucheng
45
Director
of Marketing
Joe
Chang
43
Director
Kenneth
Borow
59
Director
Edward
Meng
40
Director
Li
Daxi
59
Director
Peter
Slate
41
Director
Huang
Jian
50
Director
46
Hui
Xiaobing, Chairman of the Board and CEO,
Mr.
Hui
currently serves as Chairman of the Board and Chief Executive Officer of
Huiheng, positions he has held (including with Allied Moral) since the inception
of that company in 2006, and Chairman of the Board and Chief Executive Officer
of Changdu Huiheng, positions he has held since 2005. In addition, Mr. Hui
has
been the Chief Executive Office of Huiheng Industry since 2004. Mr. Hui also
served from 1999 to 2006 as the President and Chairman of the Board of Shenzhen
OUR Technology Co., Ltd., the pioneer of the radiotherapy industry in China.
Mr.
Hui holds a Masters degree in Regional Economics from Tongji
University.
Huang
Jian, Vice President
Mr.
Huang
Jian has a background in business and management. He serves as the Vice
President of Huiheng, having begun his service as a Vice President of Allied
Moral in 2007. Mr. Huang is also the President and Director of Wuhan Kangqiao,
positions he has held since 2006. In addition, Mr. Huang has been a director
of
Shenzhen Hyper since 2006 and has been the President of Shenzhen Hyper since
2001. Mr. Huang has a degree from Beijing Broadcast and Television
University.
Li
Bo, CorporateSecretary
Mr.
Li Bo
has a background in business and engineering and holds a Ph.D in management
from
Huazhong University of Science and Technology. Since 2005, Mr. Li has served
as
the Assistant to the CEO of Huiheng. He was obtaining his Ph.D. degree from
2002
through 2004. Prior to that, from 1998 to 2001, Mr. Li was the Assistant to
the
President of Wuhan Huazhong Numerical Control System Co., Ltd.
Richard
Shen, Chief Financial Officer
Mr.
Shen
serves as Chief Financial Officer of Huiheng. In addition, he is also a managing
partner of Sunlight Investment Limited, an asset management and investment
consultant business, where he has served since 2005. From 2002 through 2005,
Mr.
Shen was a Vice President and Director of New Tech & Telecom Investment
Limited. Previously, he served as the General Manager of Touchstone Investment
Limited. Mr. Shen received his MBA from York University in Toronto,
Canada.
Mr.
Cui Zhi, Chief Technology Officer
Mr.
Cui
Zhi oversees Changdu Huiheng’s research and development operations as the Chief
Technology Officer, a position he has held since 2005. From 2002 to 2005, Mr.
Cui was the Chief Engineer for Shenzhen Hyper, where he played a key role in
the
development of the Super Gamma System. Mr. Cui holds a Ph.D in Physics from
China Science and Technology University.
Tang
Sucheng, Director of Marketing
Mr.
Tang
is responsible for the sales and marketing functions of Tibet Chengdu as
Director of Marketing, a position he has held since 2005. From 2000 to 2005,
Mr.
Tang was the Vice General Manager of SZ Jiancheng Investment Co., Ltd., a former
affiliate of Huiheng. Mr. Tang studied at the Austria National Science and
Technology Academy, where he earned a Ph.D. degree in physics.
Dr.
Joe Chang, Director
Dr.
Joe
Chang, a director since November 2007, presently serves as the Clinical Service
Chief of Thoracic Radiation Oncology at the University of Texas M.D. Anderson
Cancer Center in Houston, Texas, a position he has held since 2006, and is
responsible for clinical operation for thoracic service. Dr. Chang has worked
as
an attending physician in the Anderson Cancer Center for the past five years.
In
recent years, he has received a RSNA Research Scholar grant and the Career
Development Award from the University of Texas MD Anderson Cancer Center (NIH
grant), amongst other research grants, honors and awards. Dr. Chang earned
his
medical degree at Shanghai Medical University in the PRC in 1985 and his Ph.D.
from the University of Texas in 1997.
Dr.
Kenneth Borow, Director
Dr.
Kenneth Borow, a director since November 2007, is the President, CEO, and
Chairman of the Board of Directors at Encorium Group, Inc., a NASDAQ small
cap
listed company. He is an internist, pediatrician, adult cardiologist and
pediatric cardiologist with over 30 years of clinical research experience.
Dr.
Borow earned his medical degree at The Temple University School of Medicine
in
1974. He completed his post doctoral training at the Brigham & Women’s
Hospital, The Children’s Hospital Medical Center, and Harvard Medical School in
Boston. Subsequently, he was Professor of Medicine and Pediatrics at the
University of Chicago Medical Center. Dr. Borow has more than 100
medical/scientific publications. After completion of a 20 year academic career,
Dr. Borow was responsible for Clinical Research Operations in the United States
and Puerto Rico for Merck Research Laboratories. In this role, he oversaw
clinical research studies for over 200 different protocols conducted at more
than 2,500 investigative sites. While at Encorium Group, Inc., Dr. Borow has
been involved in the design and conduct of more than 50 clinical trials, many
of
them multinational in scope and landmark in importance. Over the past decade,
Dr. Borow has been a senior consultant to numerous pharmaceutical and
biotechnology companies as well as venture capital firms relative to study
design and conduct of trials in cardiovascular disease, hyperlipidemias,
oncology, medical imaging, diabetes, pulmonary arterial hypertension,
osteoporosis and multiple vaccines.
47
Mr.
Edward Meng, Director
Mr.
Edward Meng, a director since November 2007, is the CFO and a director of
NavStar Media Holdings, Inc. He has over ten years of experience in managing,
leading and advising corporations through complex restructurings, international
market expansion and capital markets transactions. Mr. Meng’s previous positions
include Senior Financial Consultant at Shell (China) Limited; CFO of Koch
Materials (China)Co., a subsidiary of Koch Industries, Inc.; and Director of
Finance of Intelsat Global Services Co. Mr. Meng earned his MBA from Georgetown
University.
Dr.
Li Daxi, Director
Dr.
Li
Daxi, a director since November 2007, founded the Chinese Association of Science
and Business, a organization devoted to bridging science with business and
bridging China with the world, in 1997. Dr. Li has 14 years experience in
investment banking and venture capital, including ten years on Wall Street
with
Salomon Brothers and Lehman Brothers. He is a director of the United Orient
Bank
where he oversees investments and auditing of the bank. In March 2005, he was
invited as an overseas representative to participate in the China National
Chinese People’s Political Consultative Conference. He is also a co-founder of
the Shenzhen Overseas Chinese Student Venture Park, a joint-venture with the
Shenzhen city government, which hosts 250 high-tech startup companies. Dr.
Li
received a Ph.D. in high energy physics from the City University of New
York.
Mr.
Peter Slate, Director
Mr.
Peter
Slate, a director since November 2007, is the President & CEO of
International Orthopedic Alliance. Previously, Mr. Slate was the President
&
CEO of Arizona Technology Enterprises, LLC. Mr. Slate received his BA from
University of Michigan, JD from George Washington University and MBA from
Northwestern University.
Mr.
Huang Jian, Director
Mr.
Huang
Jian, a director since November 2007, has a background in business and
management. He currently serves as the Vice President of the Company, a position
he assumed in 2007. Mr. Huang is also the President and Director of Wuhan
Kangqiao, positions he has held since 2006. In addition, Mr. Huang has been
a
director of Shenzhen Hyper since 2006 and has been the President of Shenzhen
Hyper since 2001. Mr. Huang has a degree from Beijing Broadcast and Television
University.
Involvement
in Certain Legal Proceedings
To
the
best of our knowledge, during the past five years, none of our directors or
executive officers were involved in any of the following: (1) any bankruptcy
petition filed by or against any business of which such person was a general
partner or executive officer either at the time of the bankruptcy or within
two
years prior to that time; (2) any conviction in a criminal proceeding or being
subject to a pending criminal proceeding (excluding traffic violations and
other
minor offenses); (3) being subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business, securities or
banking activities; and (4) being found by a court of competent jurisdiction
(in
a civil action), the SEC or the Commodities Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment
has
not been reversed, suspended or vacated.
PRINCIPAL
SHAREHOLDERS
As
used
in this section, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
as
consisting of sole or shared voting power (including the power to vote or direct
the vote) and/or sole or shared investment power (including the power to dispose
of or direct the disposition of) with respect to the security through any
contract, arrangement, understanding, relationship or otherwise, subject to
community property laws where applicable.
As
of
November 15, 2007, we had a total of 13,450,000 shares of common stock
outstanding and 266,666 shares of Series A Preferred Stock issued and
outstanding.
Common
Stock
The
following table sets forth, as of November 15, 2007: (a) the names and addresses
of each beneficial owner of more than five percent of our common stock known
to
us, the number of shares of common stock beneficially owned by each such person,
and the percent of our common stock so owned; and (b) the names and addresses
of
each director and executive officer, the number of shares our common stock
beneficially owned, and the percentage of our common stock so owned, by each
such person, and by all of our directors and executive officers as a group.
Unless otherwise indicated, the business address of each of our directors and
executive offices is c/o Huiheng Medical, Inc., Huiheng Building, Gaoxin 7
Street South, Keyaunnan Road, Nanshan District, Shenzhen Guangdong, P.R. China
51807. Each person has sole voting and investment power with respect to the
shares of our common stock, except as otherwise indicated. Beneficial ownership
consists of a direct interest in the shares of common stock, except as otherwise
indicated.
48
Name
of Beneficial Owner
Shares Owned
Beneficially
Percentage
Ownership
Hui
Xiaobing
11,750,000
72.0
%
Huang
Jian
0
*
Li
Bo
0
*
Richard
Shen
0
*
Cui
Zhi
0
*
Tang
Shucheng
0
*
Joe
Chang
0
*
Kenneth
Borow
0
*
Edward
Meng
0
*
Li
Daxi
0
*
Peter
Slate
0
*
Haung
Jian
0
*
All
Officers & Directors as a Group (12 person)
11,750,000
72.0
%
*
Individual owns less than 1% of our securities.
49
Preferred
Stock
The
following table sets forth, as of November 15, 2007: the names and
addresses of each beneficial owner of more than five percent of our Series
A
Preferred Stock known to us, the number of shares of preferred stock
beneficially owned by each such person, the percent of the preferred stock
so
owned, and the number of shares of common stock issuable upon conversion of
the
preferred stock. To our knowledge, none of our directors or executive officers
have any direct or beneficial ownership interest in shares of preferred stock
or
shares of common stock issuable upon conversion of the preferred
stock:
The
following table sets forth the information, on an accrual basis, with respect
to
the compensation of our and Allied Moral’s executive officers for the
fiscal years ended December 31, 2006.
During
the last fiscal year, neither we nor Allied Moral have granted any stock options
or Stock Appreciation Rights (“SARS”) to any executive officers or other
individuals listed in the table above.
Aggregated
Option/SAR exercised and Fiscal year-end Option/SAR value
table
Neither
our executive officers nor the other individuals listed in the tables above,
exercised options or SARs during the last fiscal year.
Stock
Option Plan
The
Company has adopted a stock option plan that reserves 1,566,666 shares for
issuance upon the exercise of options. No options have been issued under the
plan.
Long-term
incentive plans
No
Long
Term Incentive awards were granted in the last fiscal year.
Defined
benefit or actuarial plan disclosure
As
required by Chinese law, our Chinese subsidiaries contribute 10% of an
individual employee’s monthly salary to pension insurance.
Compensation
of Directors
We
have
recently decided to compensate our outside directors for their service through
a
combination of cash and stock options, in addition to the reimbursement of
their
expenses incurred in performing their duties. Each director (other than the
Chair of the Compensation Committee or Audit Committee) will receive $3,000
per
month and a stock option to purchase 30,000 shares vesting quarterly over a
period of three years. The Chair of the Compensation Committee will receive
$3,500 per month and options for 36,000 shares (with the same vesting schedule
as the other directors) and the Chair of the Audit Committee will receive $4,000
per month and options for 36,000 shares (with the same vesting schedule as
the
other directors).
Employment
contracts and termination of employment and change-in-control
arrangements
None
of
our officers or employees is under an employment contract or has contractual
rights triggered by a change in control of the Company.
Compensation
Committee Interlocks and Insider Participation
Neither
Mill Basin nor Allied Moral had a compensation committee of its respective
board
of directors during fiscal 2005 or 2006. Huiheng intends to establish such
a
committee in 2007. Mill Basin did not pay any salary or other compensation
during fiscal 2006. Mr. Hui, in consultation with others, determined the
compensation payable to officers and employees of Allied Moral and its
subsidiaries during 2006 and prior to the share exchange in 2007.
No
executive officer of Allied Moral served as a member of the compensation
committee or the equivalent of another entity during 2006. No executive officer
of Allied Moral served as a director of another entity, other than affiliates
of
Allied Moral, during 2006. No executive officer of Allied Moral served as a
member of a compensation committee or equivalent, of another entity, one of
whose executive officers served as a director of the registrant.
51
CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Transactions
with management and others
In
August
2005, Pinewood Imports issued 9,500,000 shares of its common stock to its
President, Keith S. Barton, in exchange for all of the outstanding membership
units of Pinewood Imports, LLC in effect converting Pinewood from a limited
liability company to a corporation. In addition, 50,000 shares of the Company’s
common stock were sold to Michelle M. Barton, Secretary/Treasurer and the wife
of Mr. Barton, in December 2005 for $50.
In
December 2005 the Company sold 700,000 shares of its common stock in a private
placement at a price of $.001 per share to 39 individuals. In April 2006, the
Company registered for resale 1,583,500 shares of its common stock belonging
certain shareholders (although the Company was not obligated to do so by virtue
of any registration rights agreement or other agreement), and subjected itself
to the Securities Exchange Act of 1934 reporting requirements because it
believed that its being a public entity would provide benefits in visibility
for
carrying on its business, and provide liquidity to its
shareholders.
On
September 1, 2006, Keith S. Barton and Michelle M. Barton, principal
stockholders of the Company, and 33 other stockholders, entered into a
Securities Purchase Agreement (the “Securities Purchase Agreement”) with
Harborview Master Fund LP (“Harborview”) and Diverse Trading Ltd., as
purchasers. Pursuant to the terms of the Securities Purchase Agreement, the
sellers sold an aggregate of 10,044,600 shares of the Company’s common stock,
representing 98.96% of the outstanding shares, to the purchasers for a total
of
$685,000. All proceeds were paid to the sellers. No proceeds were paid to the
Company. On September 1, 2006, Keith S. Barton and Michelle M. Barton, who
had
been officers and directors of the Company, resigned from those
positions.
By
Board
action on September 1, 2006, Richard Rosenblum, who had been elected as a
director of the Company, was elected as President, Chief Executive Officer
and
Chief Financial Officer of the Company, and David Stefansky was elected as
Secretary of the Company and as a director of the Company. Richard Rosenblum
and
David Stefansky are principals of the general partner of Harborview, one of
the
purchasers. Neither had an employment agreement with the Company.
The
Board
of Directors authorized the Company to discontinue its business operations
as
conducted prior to the sale to Harborview and Diverse Trading and to transfer
such operations and the assets relating thereto to Keith S. Barton in
consideration of Mr. Barton’s assuming all of the liabilities relating to such
operations and assets. The transfer to Mr. Barton and his assumption of the
liabilities were effected on September 5, 2006. Mr. Barton and his wife,
Michelle M. Barton, a former officer and director of the Company, indemnified
the Company against any loss or expense relating to the transferred operations
or assets and also released the Company from any claims which either of them
may
have had against the Company. Mr. Barton will have the right to use the name
“Pinewood Imports, Ltd.” or any similar name in the conduct of the transferred
business operations.
Clear
Honest International, Ltd., a corporation owned and controlled by Mr. Hui
Xiaobing, our CEO, became a holder of more than 5% of our outstanding shares
as
a result of the Allied Moral share exchange. As discussed more fully under
the
caption “Business-Huiheng Medical’s Background,” the previous holders of Allied
Moral capital stock exchanged their shares for shares of our capital stock.
Clear Honest, is entitled to receive approximately 96.9% of the incentive shares
that may be issued pursuant to the Allied Moral share exchange agreement. This
incentive share program was negotiated as part of the share exchange agreement
to provide the shareholders who controlled Allied Moral with an incentive to
achieve or exceed the stated growth in the Company earnings, which will benefit
all of our shareholders.
As
of
December 31, 2006, Allied Moral had advanced $688,100 to Huiheng Industry which
was under the control of Mr. Hui Xiaobing. This advance was unsecured and
interest free and was made to provide working capital to Shenzhen Huiheng.
These
amounts are repayable on demand,
and as
of September 30, 2007 $584, 207 remained outstanding. During August 2006,
Allied Moral acquired the equity interests in Changdu Huiheng from Shenzhen
Huiheng (99%) and Mr. Hui (1%), for $6,207,002 and $62,697 respectively. As
of
December 31, 2006 there was a balance of $6,342,820 due to Huiheng Industry
and
$65,092 due to Mr. Hui with respect to the acquisition. These amounts are
payable on demand,
and as
of September 30, 2007 $1,062 was owed to Mr. Hui.
Indebtedness
of Management
There
have been no borrowings by management from the Company.
UNDERWRITING
Underwriting
In
accordance with the terms and conditions contained in the underwriting
agreement, we have agreed to sell to each of the underwriters named below,
and
each of the underwriters, for which Chardan Capital Markets, LLC is acting
as
representative, have severally, and not jointly, agreed to purchase on a firm
commitment basis the number of shares offered in this offering set forth
opposite their respective names below:
52
Underwriters
Number
of Shares
Chardan
Capital Markets, LLC
Total
Overallotment
Option
We
have
granted to the representative of the underwriters an option, exercisable during
the 45-day period commencing on the date of this prospectus, to purchase from
us
at the offering price, less underwriting discounts, up to an aggregate of
_____________ additional shares for the sole purpose of covering
over-allotments, if any. The over-allotment option will only be used to cover
the net syndicate short position resulting from the initial distribution. The
representative of the underwriters may exercise the over-allotment option if
the
underwriters sell more shares than the total number set forth in the table
above. To the extent the option is exercised, each underwriter must purchase
a
number of additional shares approximately proportionate to that underwriter’s
initial purchase commitment.
Commissions
and Discounts
The
underwriters propose to offer some of the shares directly to the public at
the
public offering price set forth on the cover page of this prospectus and some
of
the shares to dealers at the public offering price less a concession not to
exceed $______ per share. The underwriters may allow, and dealers may reallow,
a
concession not to exceed $______ per share on sales to other dealers. Chardan
Capital Markets, LLC has advised us that the underwriters do not intend to
make
sales to discretionary accounts.
The
following table shows the public offering price, underwriting discount to be
paid by us to the underwriters and the proceeds, before expenses, to us. This
information assumes either no exercise or full exercise by the representative
of
the underwriters of its over-allotment option.
Per
Share
Without option
With Option
Public
offering price
$
Discount
payable on closing (1)
$
Non-accountable
expense allowance (2)
$
Proceeds
before expenses
$
(1)
The
underwriters are entitled to receive a fee equal to 6% ($0.___ per
share)
of each share sold in the offering.
(2)
The
underwriters are entitled to receive a non-accountable expense allowance
equal to 1% ($0.____) of each share sold in the
offering.
Determination
of
Offering Price
Although
our common stock is listed on the Over-the-Counter Bulletin Board, there is
a
very limited volume of sales, which management does not believe reflects the
actual value of our shares of common stock. Accordingly, the public offering
price for our common stock was negotiated between us and the underwriter. The
principal factors that were considered in determining the offering price
were:
•
prevailing market and general economic conditions;
•
our
results of operations, including, but not limited to, its recent financial
performance;
•
our
current financial position, including, but not limited to, our stockholders'
equity and the composition of assets and liabilities reflected on
our
balance sheet;
•
our
business potential and prospects in our principal market
area;
•
an
assessment of our management; and
•
the
present state of our business.
53
The
factors described above were not assigned any particular weight. Rather, these
factors, along with market valuations and the financial performance of other
similarly situated publicly traded companies, were considered as a totality
in
our negotiation with the underwriter over our initial public offering price.
Based on the initial public offering price per share of $ , but without giving
effect to the shares to be issued in this offering, the ratio of our initial
public offering price per share to our earning per share for the last twelve
months ended __________ is , and the ratio of our initial public offering price
per share to our book value per share as of ____________ is ______.
The
factors considered in determining the price were estimates of the prospects
of
the Company, the background and capital contributions of management and current
conditions in the securities markets and the data processing industry. There
is,
however, no relationship between the offering price of the Common Stock and
the
Company's assets, earnings, book value or any other objective criteria of
value.
Lock-up
Agreement
We
and
our officers and directors and the holders of a total of 13,000,000 of our
shares of common stock and all holders of Series A Preferred Stock are
expected to agree that, for a period of 90 days from the date of this
prospectus, we and they will not, without the prior written consent of Chardan
Capital Markets, LLC, offer, sell, contract to sell, transfer, encumber, dispose
of or hedge, directly or indirectly, any of our shares or any other securities
convertible into or exchangeable for our shares. Chardan Capital Markets, LLC,
in its sole discretion, may release any of the securities subject to these
lock-up agreements at any time without notice. The 90-day lock-up period will
be
automatically extended if: (i) during the last 17 days of the 90-day period
we
issue an earnings release or announce material news or a material event; or
(ii)
prior to the expiration of the 90-day period, we announce that we will release
earnings results during the 16-day period following the last day of the 90-day
period, in which case the restrictions will continue to apply until the
expiration of the 90-day period beginning on the issuance of the earnings
release or the announcement of the material news or event.
Indemnification
We
have
agreed to indemnify the underwriters against some liabilities, including civil
liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in this respect.
Listing
We
have
applied to list our common stock on the Nasdaq Capital Market.
Price
Stabilization, Short Positions and Penalty Bids
Rules
of
the SEC may limit the ability of the underwriters to bid for or purchase our
securities before the distribution of the securities is completed. However,
the
underwriters may engage in the following activities in accordance with the
rules:
·
Stabilizing
Transactions. The
underwriters may make bids or purchases for the purpose of preventing
or
retarding a decline in the price of our securities, so long as stabilizing
bids do not exceed the offering price of
$____.
·
Over-Allotments
and Syndicate Coverage Transactions. In
connection with the offering, the underwriters may make short sales
of the
issuer’s shares and may purchase the issuer’s shares on the open market to
cover positions created by short sales. Short sales involve the sale
by
the underwriters of a greater number of shares than they are required
to
purchase in the offering. Covered short sales are sales made in an
amount
not greater than the underwriters’ overallotment option to purchase
additional shares in the offering. The underwriters may close out
any
covered short position by either exercising their overallotment option
or
purchasing shares in the open market. In determining the source of
shares
to close out the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase in
the open
market as compared to the price at which they may purchase shares
through
the overallotment option. “Naked” short sales are sales in excess of the
overallotment option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned that
there
may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase
in the
offering. Similar to other purchase transactions, the underwriters’
purchases to cover the syndicate short sales may have the effect
of
raising or maintaining the market price of our stock or preventing
or
retarding a decline in the market price of our stock. As a result,
the
price of the our stock may be higher than the price that might otherwise
exist in the open market.
54
·
Penalty
Bids. The
representative may reclaim a selling concession from a syndicate
member
when the share originally sold by the syndicate member is purchased
in a
stabilizing or syndicate covering transaction to cover syndicate
short
positions.
Stabilization
and syndicate covering transactions may cause the price of the securities to
be
higher than they would be in the absence of these transactions. The imposition
of a penalty bid might also have an effect on the prices of the securities
if it
discourages resales of the securities.
Neither
we nor the underwriters make any representation or prediction as to the effect
that the transactions described above may have on the prices of the securities.
These transactions may occur on the OTC Bulletin Board, in the over-the-counter
market or on any trading market. If any of these transactions are commenced,
they may be discontinued without notice at any time.
The
restricted period under Regulation M for this offering will have ended when
all
of the shares have been distributed and after any over-allotment and
stabilization arrangements and trading restrictions in connection with the
offering have been terminated.
Other
terms
In
connection with the offering, we have agreed to sell to our underwriter and/or
its designees, for an aggregate of $100, a warrant to purchase up to an
aggregate of ______ shares of common stock equal to 7% of the total number
of
shares being sold in the offering, including the overallotment option. The
underwriter’s warrant is exercisable initially at a price of $ ______ per share
(115% of the per share offering price to investors) for a period of five years
commencing six months from the date of this prospectus except to the underwriter
and the selected dealers and their officers, managers or members. The
underwriter’s warrant will provide for a cashless exercise and will for a period
of five years after the offering contain provisions for certain demand rights
and unlimited “piggyback” rights with respect to the registration under the
Securities Act of the shares of common stock issuable upon the exercise of
the
warrant.
We
have
agreed to enter into a non-exclusive financial advisory agreement with Chardan
Capital Markets upon completion of the offering for a period of twenty-four
months whereby Huiheng will retain Chardan Capital Markets as its investment
banker and financial advisor. Huiheng will pay Chardan Capital Markets a $10,000
monthly retainer for its advisory services.
In
addition, Huiheng has agreed to grant to Chardan Capital Markets a right of
first refusal to manage or co-manage any public underwriting or private
placement of debt or equity securities with certain specified
exclusions.
The
underwriting agreement provides that the obligations of the underwriters to
purchase the shares are subject to the following material conditions: the
registration statement of which this prospectus forms a part being effective,
delivery of legal opinions, the accuracy of the representations and warranties
made by the company in the underwriting agreement, delivery of an accountant’s
“comfort letter,” FINRA approval of the underwriters’ compensation arrangements,
listing of the securities on the Nasdaq Capital Market and the execution and
delivery of certain agreements including those to be filed as exhibits to the
registration statement, which can be waived by the underwriters in their sole
discretion. The underwriters are obligated to purchase all of the shares (other
than those covered by the underwriters’ over-allotment option described below)
if they purchase any of the shares. A copy of the underwriting agreement has
been filed as an exhibit to the registration statement of which this prospectus
forms a part.
SHARES
ELIGIBLE FOR FUTURE SALE
Prior
to
this offering, there has been a very limited public market for our common stock.
Future sales of our common stock in the public market, or the availability
of
such shares for sale in the public market, could adversely affect market prices
prevailing from time to time. As described below, only a limited number of
shares will be available for sale shortly after this offering due to contractual
and legal restrictions on resale. Nevertheless, sales of our common stock in
the
public market after such restrictions lapse, or the perception that those sales
may occur, could adversely affect the prevailing market price at such time
and
our ability to raise equity capital in the future.
Shares
Issuable
A
total
of 2,810,713 shares of common stock are issuable upon conversion of our
Series A convertible preferred stock. We do not have any stock options or
warrants currently outstanding. Additionally, a total of up to 1,600,000 shares
are issuable as incentive shares pursuant to the Allied Moral Holdings share
exchange agreement.
Sale
of Restricted Shares
Upon
the
closing of this offering, we will have outstanding an aggregate of 20,260,713
shares of common stock (assuming the conversion of our outstanding preferred
stock and the issuance of 4,000,000 shares in this offering). Of these
shares, the 4,000,000 shares of common stock to be sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, unless the shares are held by any of our “affiliates”
as such term is defined in Rule 144 of the Securities Act. All remaining shares
held by our existing stockholders were issued and sold by us in private
transactions and are eligible for public sale only if registered under the
Securities Act or if they qualify for an exemption from registration under
Rule
144 under the Securities Act.
55
As
a
result of the lock-up agreements described below and the provisions of Rule
144
under the Securities Act, the shares of our common stock (excluding the shares
sold in this offering) will be available for sale in the public market as
follows:
·
________
shares will be eligible for sale on the date of this prospectus;
and
·
________
shares will be eligible for sale 90 days after the date of this
prospectus.
The
remaining ____________ shares held by existing stockholders will become eligible
for sale at various times on or before May 15, 2008, subject to the volume
limitations of Rule 144.
Lock-up
Agreements
The
holders of an aggregate of approximately ______________ shares of our common
stock are expected to sign lock-up agreements which prevent them from selling
any of our common stock owned by them as of the date hereof for a period of
90
days from the date of this prospectus without the prior written consent of
Chardan Capital Markets. In addition, holders of shares of our Series A
Preferred Stock which are convertible into __________ shares of our common
stock
are expected to enter into similar lock-up agreements with the underwriters.
Chardan Capital Markets may in its sole discretion and at any time without
notice release some or all of the shares subject to lock-up agreements prior
to
the expiration of the 90-day period. When determining whether or not to release
shares from the lock-up agreements, Chardan Capital Markets will consider,
among
other factors, the stockholder’s reasons for requesting the release, the number
of shares for which the release is being requested and market conditions at
the
time.
Rule
144
In
general, under Rule 144 of the Securities Act, a person deemed to be our
“affiliate,” or a person holding restricted shares who beneficially owns shares
that were not acquired from us or any of our “affiliates” within the previous
year, is entitled to sell within any three-month period a number of shares
that
does not exceed the greater of either 1% of the then outstanding shares of
our
common stock (or approximately ___________ shares immediately after this
offering assuming no exercise of the underwriters’ over-allotment option and no
conversion of our Series A Preferred Stock), or the average weekly trading
volume of our common stock during the four calendar weeks preceding the filing
with the Securities and Exchange Commission of a notice on Form 144 with respect
to such sale. Sales under Rule 144 of the Securities Act are also subject to
prescribed requirements relating to the manner of sale, notice and availability
of current public information about us. However, if a person, or persons whose
shares are aggregated, is not deemed to be our affiliate at any time during
the
90 days immediately preceding the sale, he or she may sell his or her restricted
shares under Rule 144(k) without regard to the limitations described above,
if
at least two years have elapsed since the later of the date the shares were
acquired from us or any of our “affiliates.” The SEC has adopted amendments to
Rule 144 that will become effective in Febrauary 2008. In part, those amendments
would shorten the holding periods and simplify Rule 144 compliance requirements
for holders who are not “affiliates”.
Stock
Plans
We
intend
to file a registration statement on Form S-8 under the Securities Act to
register 1,566,666 shares of our common stock reserved for issuance under our
option plan. We expect to file the S-8 promptly after we are eligible to use
that form. Accordingly, shares registered under that registration statement
will
be available for sale in the open market, unless such shares are subject to
vesting restrictions with us or the lock-up restrictions described above.
DESCRIPTION
OF CAPITAL STOCK
Huiheng
Medical, Inc. is a Nevada corporation. It is authorized to issue 74,000,000
shares of common stock and 1,000,000 shares of preferred stock.
Preferred
Stock
Huiheng’s
articles of incorporation authorizes the issuance of 1,000,000 shares of
preferred stock with designations, rights and preferences determined from time
to time by our board of directors. Our Board of Directors has created a series
of preferred stock with rights and preferences described below. Accordingly,
our
board of directors is empowered, without stockholder approval, to issue up
to
700,000 additional shares of preferred stock with voting, liquidation,
conversion, or other rights that could adversely affect the rights of the
holders of the common stock. Although we have no present intention to issue
any
additional shares of preferred stock, there can be no assurance that we will
not
do so in the future.
Among
other rights, our board of directors may determine, without further vote or
action by our stockholders:
56
·
the
number of shares and the designation of the
series;
·
whether
to pay dividends on the series and, if so, the dividend rate, whether
dividends will be cumulative and, if so, from which date or dates,
and the
relative rights of priority of payment of dividends on shares of
the
series;
·
whether
the series will have voting rights in addition to the voting rights
provided by law and, if so, the terms of the voting
rights;
·
whether
the series will be convertible into or exchangeable for shares of
any
other class or series of stock and, if so, the terms and conditions
of
conversion or exchange;
·
whether
or not the shares of the series will be redeemable and, if so, the
dates,
terms and conditions of redemption and whether there will be a sinking
fund for the redemption of that series and, if so, the terms and
amount of
the sinking fund; and
·
the
rights of the shares of the series in the event of our voluntary
or
involuntary liquidation, dissolution or winding up and the relative
rights
or priority, if any, of payment of shares of the
series.
We
presently do not have plans to issue any additional shares of preferred stock.
However, preferred stock could be used to dilute a potential hostile acquirer.
Accordingly, any future issuance of preferred stock or any rights to purchase
preferred shares may have the effect of making it more difficult for a third
party to acquire control of us. This may delay, defer or prevent a change of
control in our company or an unsolicited acquisition proposal. The issuance
of
preferred stock also could decrease the amount of earnings attributable to,
and
assets available for distribution to, the holders of our common stock and could
adversely affect the rights and powers, including voting rights, of the holders
of our common stock.
Series
A 7% Convertible Preferred Stock
On
May14, 2007, the Board of Directors designated its Series A 7% Convertible
Preferred Stock, consisting of 300,000 shares, par value $.001 per share. We
amended the rights and preferences of the Series A stock in January 2008. These
terms can be amended further with the consent of the holders of a majority
of
the Series A stock. There are 266,666 shares of Series A Preferred Stock
outstanding.
The
stated value of each share of the Series A stock is $37.50. Those shares accrue
dividends at the rate of 7% per annum, which dividends are payable on the
occurrence of a liquidation event.
Each
share of Series A preferred is convertible at the election of the holder into
10.5402 shares of Common Stock of the Company. This ratio is subject to
equitable adjustment in the event of a stock split or stock dividend of the
Company’s Common Stock. The ratio will also be adjusted for certain issuances of
equity securities at a price less than $3.57 per share, including if the shares
offered by this prospectus are sold at less than $3.57 per share. Any
outstanding shares of the Series A stock will be automatically converted into
Common Stock at the same ratio if one of the following conditions is satisfied:
(i) the holders of a majority of such outstanding shares consent in writing
to
such conversion, (ii) there is a closing of an underwritten public offering
of
shares of Common Stock with gross proceeds of not less than $24 million (reduced
by the gross amount of any private placements consummated by the Company after
the filing of the Certificate of Designations and prior to such public offering)
at a public offering price of not less than $6.43 per share (subject to
adjustment for stock splits, dividends or similar reclassifications), or (iii)
there is a merger or business combination with a publicly traded company whose
securities on listed or quoted on one of certain specified markets.
The
Company is required to have on reserve at all times a number of shares of Common
Stock equal to 125% of the number of shares which would be issuable on the
conversion of all of the then outstanding Series A shares. If necessary, the
Company will undertake to obtain the appropriate approvals necessary to increase
the authorized shares of the Company’s Common Stock.
In
the
event of certain “liquidation events” (such as, but not limited to, a bankruptcy
or similar event, an assignment for the benefit of its creditors, the sale
or
transfer of all or substantially all of the Company’s assets in one transaction
or in a series of related transactions, or a merger or consolidation of the
Company in which the stockholders of the Company immediately before the
transaction thereafter own less than 50% of voting securities of the combined
or
surviving entity), the shares of the Series A stock have a preference over
holders of other common or preferred shares in the allocation of the Company’s
assets which are distributable to shareholders of the Company.
The
holders of Series A stock will vote separately as a class on all matters which
may adversely alter, reduce or affect any of the preferences, rights, privileges
or powers of, or the restrictions provided for the benefit of, any of the Series
A stock or which increase or decrease the number of authorized shares of the
Series A stock.
57
The
Company may not take certain actions with the affirmative consent of a majority
in interest of the then outstanding Series A shares. Such actions include,
but
are not limited to: (i) selling, transferring or disposing of all or
substantially all of the Company’s undertakings or assets; (ii) entering into
any partnership or joint venture with any person to which the Company devotes
or
commits a majority of its assets or resources; (iii) the declaration and payment
of any dividend with respect to any other shares; (iv) passing any resolution
for the Company’s winding up or dissolution; (v) the licensing by the Company of
its technology or other rights in such a manner as to have the same economic
effect as a sale or disposition of all or substantially all of the assets of
the
Company; (vii) the making or permitting of any material alteration (including
cessation) to the general nature of the Company’s business; (viii) authorizing
and approving any issuance of shares that have rights, preferences or privileges
that are senior to those of the Series A shares; or (ix) the repurchase by
the
Company of any of its issued and outstanding shares (with certain limited
exceptions).
Common
Stock
Our
articles of incorporation authorizes the issuance of 74,000,000 shares of common
stock. The holders of our common stock:
·
have
equal ratable rights to dividends from funds legally available for
payment
of dividends when, as and if declared by the board of
directors;
·
are
entitled to share ratably in all of the assets available for distribution
to holders of common stock upon liquidation, dissolution or winding
up of
our affairs;
·
do
not have preemptive, subscription or conversion rights, or redemption
or
access to any sinking fund; and
·
are
entitled to one non-cumulative vote per share on all matters submitted
to
stockholders for a vote at any meeting of
stockholders.
Nevada
law does not require stockholder approval for any issuance of authorized shares.
However, the marketplace rules of the Nasdaq Capital Market, which would apply
only if our common stock were listed on the Nasdaq Capital Market, require
stockholder approval of certain issuances of common stock equal to or exceeding
20% of the then outstanding voting power or then outstanding number of shares
of
common stock, including in connection with a change of control of Huiheng,
the
acquisition of the stock or assets of another company or the sale or issuance
of
common stock below the book or market value price of such stock. These
additional shares may be used for a variety of corporate purposes, including
future public offerings to raise additional capital or to facilitate corporate
acquisitions.
One
of
the effects of the existence of un-issued and unreserved common stock may be
to
enable our board of directors to issue shares to persons friendly to current
management, which issuance could render more difficult or discourage an attempt
to obtain control of our board by means of a merger, tender offer, proxy contest
or otherwise, and thereby protect the continuity of our management and possibly
deprive the stockholders of opportunities to sell their shares of our common
stock at prices higher than prevailing market prices.
Shareholder
Matters
As
a
Nevada corporation, we are subject to the Nevada Revised Statutes (“NRS” or
“Nevada law”). Certain provisions of Nevada law create rights that might be
deemed material to our shareholders. Other provisions might delay or make more
difficult acquisitions of our stock or changes in our control or might also
have
the effect of preventing changes in our management or might make it more
difficult to accomplish transactions that some of our shareholders may believe
to be in their best interests.
Directors’
Duties.
Section
78.138 of the Nevada law allows our directors and officers, in exercising their
powers to further our interests, to consider the interests of our employees,
suppliers, creditors and customers. They can also consider the economy of the
state and the nation, the interests of the community and of society and our
long-term and short-term interests and shareholders, including the possibility
that these interests may be best served by our continued independence. Our
directors may resist a change or potential change in control if they, by a
majority vote of a quorum, determine that the change or potential change is
opposed to or not in our best interest. Our board of directors may consider
these interests or have reasonable grounds to believe that, within a reasonable
time, any debt which might be created as a result of the change in control
would
cause our assets to be less than our liabilities, render us insolvent, or cause
us to file for bankruptcy protection
Amendments
to Bylaws –
Our articles of incorporation provide that the power to adopt, alter, amend,
or
repeal our bylaws is vested exclusively with the board of directors. In
exercising this discretion, our board of directors could conceivably alter
our
bylaws in ways that would affect the rights of our shareholders and the ability
of any shareholder or group to effect a change in our control; however, the
board would not have the right to do so in a way that would violate law or
the
applicable terms of our articles of incorporation.
58
Transfer
Agent
The
Transfer Agent for our common stock is Action Stock Transfer Company, 7069
S.
Highland Drive, Suite 30, Salt Lake City, UT84121. Its telephone number is
801-274-1088.
LEGAL
MATTERS
The
validity of the issuance of the shares of common stock offered hereby will
be
passed upon for us by Nevada counsel.
Loeb
& Loeb LLP, New York, New York, is acting as counsel for the underwriters in
this offering.
EXPERTS
The
financial statements of Huiheng Medical as of December 31, 2006 and the
years ended December 31, 2006 and 2005, included in this prospectus have
been audited by independent registered public accountants and have been so
included in reliance upon the report of UHY ZTHZ HK CPA Limited given on the
authority of such firm as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
As
noted
above, to date, we have not registered securities pursuant to Section 12 of
the
Act and our Section 15(d) reporting obligations have been suspended, which
means
we are considered a “voluntary filer” under SEC regulations. We are, therefore,
not currently obligated to file any periodic reports under the Exchange Act,
to
follow the SEC’s proxy rules or to distribute an annual report to our securities
holders. However, we intend to file annual, quarterly and special reports,
and
other information with the SEC, even though we are not required to do so. We
intend to become a Section 12 registrant prior to or upon the effective date
of
the registration statement containing this prospectus, which will subject us
to
the Exchange Act periodic reporting obligations (including, without limitation,
the requirement to file annual reports) and the SEC proxy and annual report
requirements, with which we will comply. You may read or obtain a copy of the
registration statement to be filed or any other information we file with the
SEC
at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. You may obtain information regarding the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also
available to the public from the SEC web site at www.sec.gov,
which contains our reports, and other information we file electronically with
the SEC.
Report
of Independent Registered Public Accounting Firm
F-1
Consolidated
Balance Sheets
F-2
Consolidated
Statements of Operations
F-3
Consolidated
Statements of Owners' Equity
F-4
Consolidated
Statements of Cash Flows
F-5
-F-6
Notes
to the Consolidated Financial Statements
F-7
- F-23
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
TO
THE BOARD OF DIRECTORS
HUIHENG
MEDICAL INC.
We
have
audited the accompanying consolidated balance sheets of Huiheng Medical
Inc.
(the “Company”) and subsidiaries as of December 31, 2005 and 2006, and the
related consolidated statements of income, owners’ equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audit to obtain reasonable assurance about whether
the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the
overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Huiheng Medical
Inc. and
subsidiaries as of December 31, 2005 and 2006, and the consolidated
results of
their operations and their cash flows for the years then ended in conformity
with U.S accounting principles.
The
accompanying consolidated financial statements for the years ended
December 31,2005 and 2006 have been translated into United States dollars solely
for the
convenience of the reader. We have audited the translation and, in
our opinion,
such financial statements expressed in Renminbi have been translated
into United
States dollars on the basis set forth in Note 2 to the consolidated
financial
statements.
UHY
ZTHZ
HK CPA LIMITED
Certified
Public Accountants
David
Tze
Kin Ng, Auditor
Practising
Certified Number P553
Hong
Kong, the People’s Republic of China, January 8,2008
F-1
HUIHENG
MEDICAL INC.
CONSOLIDATED
BALANCE SHEETS
2006
2005
December
31
December
31
USD
USD
Assets
Current
assets
Cash
(note 4)
338,039
136,608
Accounts
receivable (note 5)
2,649,300
7,377,215
Prepayments
and other receivables (note 6)
2,786,518
3,143,396
Due
from related party (note 15(b))
688,100
-
Inventories
(note 7)
1,624,675
1,440,133
Deferred
income tax assets (note 14)
18,879
18,257
Total
current assets
8,105,511
12,115,609
Property,
plant and equipment, net (note 8)
435,705
497,810
Intangible
assets, net (note 9)
896,363
1,039,420
Investment
in affiliated company
63,689
55,731
Deferred
income tax assets (note 14)
5,377
7,800
Total
assets
9,506,645
13,716,370
Liabilities,
minority interest and owners' equity
Current
liabilities
Accounts
payable
637,984
727,999
Income
taxes payable
827,828
270,976
Accrued
liabilities and other payables (note 10)
1,562,264
3,235,162
Due
to related parties (note 15(b))
6,407,912
7,063,021
Total
current liabilities
9,435,988
11,297,158
Minority
interest (Note 21)
940,630
944,785
Owners'
equity (deficit)
Preferred
stock, $0.001 par value; 1,000,000 shares authorized; Series
A 7%
convertible preferred stock, $0.001 par value; 300,000 shares
authorized;
266,666 shares issued and oustanding with liquidation preference
of
$9,999,975
267
267
Common
stock, $0.001 par value; 74,000,000 shares authorized; 23,150,000
shares
issued and 13,450,000 shares outstanding
13,450
13,450
Treasury
stock, 9,700,000 shares at $0.001 par value
-
-
Additional
paid-in capital
(1,591,271
)
(1,591,271
)
Retained
earnings
712,279
3,060,671
Accumulated
other comprehensive income Foreign currency translation
gain
(4,698
)
(8,690
)
Total
owners' equity (deficit)
(869,973
)
1,474,427
Total
liabilities, minority interest and owners' equity
(deficit)
9,506,645
13,716,370
See
accompanying notes to consolidated financial statements.
Huiheng
Medical, Inc. (the “Company” or “Huiheng”) is a China-based medical device
company that, through its subsidiaries, designs, develops, manufactures 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
2005,
the ownership interests of Shenzhen Hyper Technology Company, Ltd. (“Shenzhen
Hyper”), Wuhan Kangqiao Medical New Technology Company, Ltd. (“Wuhan Kangqiao”)
and Beijing Yuankang Kbeta Nuclear Technology Company, Ltd. (“Beijing Kbeta”)
were reorganized under Tibet Changdu Huiheng Industry Development Company,
Ltd.
(“Changdu Huiheng”) a Chinese holding company established in Tibet. Upon the
completion of the reorganization, Changdu Huiheng owned 75% of the equity
interest in Shenzhen Hyper, 100% of the equity interest of Wuhan Kangqiao
and
50% of the equity interest of Beijing Kbeta. Remaining equity interests in
Shenzhen Hyper and Beijing Kbeta are owned by unrelated and unaffiliated
parties.
In
2006,
Huiheng established Allied Moral Holdings, Ltd. in the British Virgin Islands
as
a holding company and transferred 100% of the ownership interests of Changdu
Huiheng, to Allied Moral as part of an ownership restructuring to facilitate
investments by foreign investors.
In
May
2007, we entered into a share exchange agreement to acquire (i) all of the
issued and outstanding shares of the common stock of Allied Moral Holdings,
Ltd.
in exchange for 13,000,000 shares of our common stock, and (ii) all of the
issued and outstanding Series A Preferred Stock of Allied Moral in exchange
for
266,667 shares of our Series A Preferred Stock. In connection with the share
exchange, we agreed to change our name from “Mill Basin Technologies, Ltd.” to
“Huiheng Medical, Inc.” As part of this transaction, holders of some of our
outstanding shares issued prior to May 15, 2007 contributed shares to the
company so that there were 450,000 shares of our common stock issued and
outstanding immediately prior to the share exchange. Taking into account
the
shares issued in the share exchange, we now have 13,450,000 shares of common
stock issued and outstanding, 13,000,000 (96.65%) of which are owned by Allied
Moral’s former shareholders, with the balance being held by Mill Basin’s prior
shareholders, along with 266,666 shares of our Series A Preferred Stock,
all of
which are owned by former holders of Allied Moral’s Series A Preferred
Stock.
The
share
exchange is regarded as a reverse merger, since Allied Moral's former
shareholders obtained control of Mill Basin. As a result, Allied Moral was
considered to be the acquirer for accounting purposes.
As
a
result of the share exchange, Huiheng Medical owns all of the issued and
outstanding stock of Allied Moral, which was incorporated in the British
Virgin
Islands on July 26, 2006. Allied Moral, holds all of the issued and outstanding
stock of Changdu Huiheng Development Co., Ltd. (“Changdu Huiheng”), which in
turn owns 100% of the issued and outstanding stock of Wuhan Kangqiao Medical
New
Technology Co., Ltd. (“Wuhan Kangqiao”), 75% of the issued and outstanding stock
of Shenzhen Hyper Technology Co., Ltd (“Shenzhen Hyper”) and 50% of the issued
and outstanding stock of Beijing Yuankang Kbeta Nuclear Technology Co., Ltd.
(“Beijing Kbeta”). Private companies in China own the other interests in these
subsidiaries.
The
Company's consolidated financial statements for the years ended December31,2005 and 2006 are presented in accordance with generally accepted accounting
principles in the United States of America ("U.S. GAAP") for the interest
of the
investors.
Because
the Company, Changdu Huiheng, Wuhan Kangqiao and Shenzhen Hyper were under
common control, the Company's acquisition of Changdu Huiheng and Changdu
Huiheng's acquisition of Wuhan Kangqiao and Shenzhen Hyper has been accounted
for in a manner similar to a pooling of interests. Accordingly, the assets
and
liabilities of Changdu Huiheng and its Subsidiaries transferred to the Company
have been recognized at their historical carrying amount.
In
a
reverse acquisition all accounting history becomes, that of the accounting
acquirer, therefore all historical information prior to the acquisition is
that
of Huiheng. The shares issued to the shareholders of Huiheng have been stated
retroactively. The reverse merger adjustment is therefore all the shares
held by
Mill Basin shareholders prior to the acquisition.
The
consolidated financial statements include all accounts of the Company and
its
wholly-owned and majority-owned subsidiaries. All material inter-company
balances and transactins have been eliminated.
The
Company's functional currency is the Chinese Renminbi ("RMB"). For the
convenience of the reader, the U.S. dollar translation amounts are included
in
the accompanying consolidated financial statements. Opening balances of owners'
equity for the year 2005 is translated to US$ at the rate of US$1.00=RMB8.2765
on December 31, 2004, assets and liabilities are translated to US$ at the
rate
of US$1.00=RMB8.0702 on December 31, 2005 and US$1.00=RMB 7.8041 on December31,2006. Income and expenses are incurred during the years 2005 and 2006 are
translated to US$ at the average monthly ended rate of US$1.00=RMB8.1826
for the
year 2005 and US$1.00=RMB7.9579 for the year 2006. The translation rates
represent the noon buying rate by the Federal Reserve Bank of New York. No
representation is made that the Renminbi amounts could have been, or could
be,
converted into U.S. dollars at that rate or at any particular average monthly
ended rates for the years 2005 and 2006, and on December 31, 2005 and 2006
or at
any other date. All translation differences between RMB and U.S. dollar are
recorded in the consolidated statement of operations.
3.
Summary
of Significant Accounting
Policies
(a)
Principles
of Consolidation
The
Consolidated financial statements include the Company and its three
subsidiaries. All significant intercompany balances and transactions have
been
eliminated in consolidation.
Summary
of Significant Accounting Policies
(.../Cont'd)
(c)
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amount after deduction of trade
discounts, value added taxes and allowance, if any, and do not bear interest.
The allowance for doubtful accounts is management's best estimate of the
amount
of probable credit losses in the existing accounts receivable. Management
determines the allowance based on historical write-off experience, customer
specific facts and economic condition. No allowance has been provided for
doubtful accounts as of December 31, 2005 and 2006 (Note 5).
(d)
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the weighted
average cost method. Cost of work in progress and finished goods comprise
direct
material, direct production and an allocated proportion of production
overheads.
(e)
Property,
Plant, and Equipment
Property,
plant, and equipment are stated at cost less accumulated depreciation or
amortization. Depreciation expense is recognized using the straight-line
method
to the asset's estimated residual value over the estimated useful lives of
the
assets as follows:
Years
Leasehold
improvement
3-5
Buildings
20
Production
equipment
3-5
Furniture,
fixtures and office equipment
3-5
Motor
vehicles
5-10
Leasehold
improvements are amortized straight line over the shorter of the lease term
or
estimated useful life of the asset. Depreciation of property, plant, and
equipment attributable to manufacturing activities is capitalized as part
of
inventory, and expensed to cost of revenues as inventory is sold.
(f)
Intangible
Assets
Intangible
assets were contributed to the Company and are stated at cost, representing
the
fair value at the time of contribution by minority owner of a subsidiary.
Fair
value was supported by cash contributed contemporaneously by another investor.
Cost is net of accumulated amortization and impairment losses. Amortization
expense is recognized on the straight-line basis over the estimated respective
useful lives of these intangible assets as follows:
Summary
of Significant Accounting Policies
(.../Cont'd)
(g)
Investment
in an affiliate
Beijing
Kbeta was established in December 15, 2004 at which time Changdu Huiheng
acquired a 20% equity interest. During fiscal year 2005, Changdu Huiheng
acquired an additional 30% equity interest in Beijing Kbeta for RMB 300,000.
The
cost for each acquisition approximated fair value of the proportion of the
net
assets acquired and accordingly, no investor level goodwill was
recognized.
The
Company owns 50% equity interest of Beijing Kbeta and is accounted for used
the
equity method of accounting because 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.
(h)
Impairment
of Long-Lived Assets
Long-lived
assets, including property, plant, and equipment 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
assets to be held and used is measured by a comparison of the carrying
amount of
an 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
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 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. The assets and liabilities of a disposed group classified as
held
for sale are presented separately in the appropriate asset and liability
sections of the balance sheet.
No
Impairment was recognized in 2005 and 2006.
(i)
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, prepayments 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.
Summary
of Significant Accounting Policies
(.../Cont'd)
(j)
Revenue
Recognition
The
Company generates revenue primarily from sales of medical equipment and
provision of maintenance and support services. Revenue is recognized as
follows:
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 and installation services. 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 the delivered items
(training and installation services) do not have 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 invoice amount 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 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, net" in the consolidated statements
of
income and is recorded on an accrual basis. VAT refunds included in revenue
for
the year ended December 31, 2006 was USD169,159. There were no VAT refunds
for
the year ended December 31, 2005.
Pursuant
to the document dated December 16, 2004 with No.173 issued by Tibet Finance
Bureau, the profits tax payment of Changdu Huiheng in excess of RMB 900,000
for
a year will be refundable by Tibet Finance Bureau. The 31% and 38.75% of
business tax payment and value added tax payment respectively for a year
will be
refundable by Tibet Finance Bureau provided that the business tax payment
and
value added tax payment should be arrived at RMB 1 million and RMB 1.5 million
for a year respectively. Such tax incentive policy will be valid for 5 years
from the year of commencement of tax refund. The tax subsidy income from
Tibet
Finance Bureau was included in the Company's revenue for 2006 (Note
12).
The
medical equipment sold by the Company has embedded self-developed software.
In
all cases, the medical equipment is marketed and sold based on its performance
and functionality as a whole. The self-developed software is not sold on
a
standalone basis.
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 equipments.
According to the agreements, the Company provides comprehensive services
including exchange of cobalt, training to users of the medical equipment,
maintenance of medical equipment, upgraded software and consulting. Fees
for the
services are recognized by the
life of the contract on monthly basis.
Summary
of Significant Accounting Policies
(.../Cont'd)
(k)
Research
and Development Costs
Research
and development costs are expensed as incurred.
(l)
Income
Taxes
The
Company accounts for income taxes under FASB Statement No. 109,
Accounting for 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 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.
(m)
Retirement
and Other Postretirement
Benefits
Contributions
to retirement schemes (which are defined contribution plans) are charged
to
consolidated statements of operations as and when the related employee service
is provided.
(n)
Warranty
The
Company provides a product warranty to its customers to repair any product
defects that occur generally within twelve months of the date of sales. 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.
(o)
Use
of Estimates
The
preparation of the consolidated financial statements 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 consolidated financial statements and the
reported amounts of revenues and expenses during the period. Significant
items
subject to such estimates and assumptions include the recoverability of the
carrying amount and the estimated useful lives of long-lived assets; valuation
allowances for receivables, realizable values for inventories and deferred
income tax assets. Actual results could differ from those
estimates.
Summary
of Significant Accounting Policies
(.../Cont'd)
(p)
Comprehensive
income
The
Company
has adopted SFAS No. 130 Reporting Comprehensive Income. This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the Consolidated Statements of Income and
the
Consolidated Statement of Stockholders' Equity.
(q)
Earning
Per Share
Net
earnings per common share is computed pursuant to SFAS No. 128, "Earnings
Per
Share". Basic earnings per common share is computed by taking net income
divided
by the weighted average number of common shares outstanding for the period.
Diluted earnings per common share is computed by dividing net earnings by
the
weighted average number of shares of common stock and potentially outstanding
shares of common stock during each period to reflect the potential dilution
that
could occur from common shares issuable through preferred stock and stock
options.
(r)
Commitments
and contingencies
In
the
normal course of business, the Company is subject to contingencies, including
legal proceedings and claims arising out of the businesses that relate to
a wide
range of matters, including among others, product liability. The Company
records
accruals for such contingencies based upon the assessment of the probability
of
occurrence and, where determinable, an estimate of the liability. Management
may
consider many factors in making these assessments including past history,
scientific evidence and the specifics of each matter. As management has not
become aware of any product liability claim arising from any medical incident
over the last three years, the Company has not recognized a liability for
product liability claims.
(s)
Segment
reporting
The
Company has no operating segments, as that term is defined in FASB Statement
No.
131, Disclosure
About Segments of an Enterprise and Related Information.
All of
the Company's operations and customers are in the PRC. Accordingly, no
geographic information is presented.
(t)
Recently
Issued Accounting
Standards
In
December 2004, the Financial Accounting Standard Board ("FASB") issued FASB
Statement No. 123R (revised 2004), Share-Based
Payments,
which
addresses the accounting for transactions in which an entity exchanges its
equity instruments for goods or services, with a primary focus on transactions
in which an entity obtains employee services, in share-based payment
transactions. This Statement is a revision to Statement 123 and supersedes
Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees,
and its
related implementation guidance. For nonpublic companies, this Statement
requires measurement of the cost of employee services received in exchange
for
stock compensation based on the grant-date fair value of the employee stock
options. The Company has not been engaged in any share-based payment
transactions.
Summary
of Significant Accounting Policies
(.../Cont'd)
(t)
Recently
Issued Accounting Standards
(…/Cont'd)
In
December 2004, the FASB issued FASB Statement No. 151, Inventory
Costs,
which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling cost, and wasted material (spoilage). Under this Statement, such
items
will be recognized as current-period charges. In addition, the Statement
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities.
This
Statement will be effective for the Company for inventory costs incurred
on or
after January 1, 2007. Management anticipates that this new Statement will
not
have a material impact on the Company.
In
December 2004, the FASB issued FASB Statement No. 153, Exchanges
of Nonmonetary Assets,
which
eliminates an exception in APB 29 for recognizing nonmonetary exchanges of
similar productive assets at fair value and replaces it with an exception
for
recognizing exchanges of nonmonetary assets at fair value that do not have
commercial substance. This Statement will be effective for the Company for
nonmonetary asset exchanges occurring on or after January, 1, 2007. Management
currently does not contemplate entering into any transactions within the
scope
of FASB Statement No. 153. Consequently, management does not believe the
adoption of the statement will have material impact on its consolidated
financial statements.
In
September 2005, the Emerging Issues Task Force ("EITF") issued EITF issue
No.
04-13 Accounting
for Purchases and Sales of Inventory with the Same Counterparty,
EITF
04-13 provides guidance as to when purchases and sales of inventory with
the
same counterparty should be accounted for as a single exchange transaction.
EITF
04-13 also provides guidance as to when a nonmonetary exchange of inventory
should be accounted for at fair value. EITF 04-13 will be applied to new
arrangements entered into, and modifications or renewals of existing
arrangements occurring after January 1, 2007. The Company does not have such
transactions within the scope of EITF 04-13. Consequently, management doesn't
believe the adoption of the statement will have material impact on its
consolidated financial statements.
In
July
2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for
Uncertainty in Income Taxes". FIN 48 establishes the threshold for recognizing
the benefits of tax-return positions in the consolidated financial statements
as
"more-likely-than-not" to be sustained by the taxing authority, and prescribes
a
measurement methodology for those positions meeting the recognition threshold.
FIN 48 is effective the fiscal year beginning after December 15, 2006.
Management is currently evaluating the effect that the adoption of FIN 48
will
have on its consolidated financial position and results of
operations.
4.
Cash
Cash
represents cash in bank and cash on hand. There were no cash equivalents
as of
December 31, 2005 and 2006.
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.
The
Company performs ongoing credit evaluations of its customers' financial
conditions. The Company generally requires its customers to provide advanced
cash deposits for their purchases. The Company has historically been able
to
collect all of its receivable balances, and accordingly, has not provided
any
allowance for doubtful accounts as of December 31, 2005 and 2006.
Patented
technology represents a patent for the production of a component of the
radiation treatment system. The patent was applied prior to its injection
to
Shenzhen Hyper as a capital contribution. Pursuant to the patent certificate,
the patent was valid for 20 years from the application date, May 1999. Therefore
it was amortized over the rest of the valid patent period, which is the
estimated remaining useful life.
Software
is utilized in the manufacture of medical equipment and is amortized over
its
estimated useful life.
Estimated
amortization expenses for the years ending December 31, 2007, 2008, 2009,
2010
and 2011 is USD74,155 each year which based on the average rate in
2007.
10.
Accrued
Liabilities and Other
Payable
Accrued
liabilities and other payables as of December 31, 2005 and 2006 consist of
the
following:
2005
2006
USD
USD
VAT,
other taxes payable and surcharges
432,104
859,073
Accrued
expenses
35,394
73,858
Accruals
for salaries and welfare
142,360
159,872
Receipts
in advance
-
300,558
Advances
from third party
2,625,304
168,903
3,235,162
1,562,264
Receipts
in advance represent cash deposits received from customers in connection
with
the sales of products.
Advances
from third party represent unsecured, interest-free advances which are repayable
on demand.
The
Company is a limited liability company established in November 2002. The
authorized common stock of the Company is USD 74,000, with par value of USD
0.001 per share and issued common stock is USD 13,000. In addition, 266,667
shares out of a total of 300,000 shares of Series A 7% convertible preferred
stock at par value of USD 0.001 had been issued and outstanding with liquidation
preference of USD 9,999,975. There are also 1,000,000 authorized preferred
stock
at par value of USD 0.001 and none had been issued.
(b)
Retained
earnings
(i)
Retained
earnings include the following:
Retained
earnings for the years ended December 31, 2005 and December 31, 2006 include
a
General Reserve Fund amounted USD 578,061 and USD 1,310,516 respectively,
less
dividends paid in 2006.
(ii)
General
reserve fund includes statutory surplus reserve and statutory public
welfare reserve.
Statutory
surplus reserve
In
accordance with PRC Company Law, Changdu Huiheng is required to appropriate
at
least 10% of the profit arrived at for each year to the statutory surplus
reserve. Appropriation to the statutory surplus reserve by Changdu Huiheng
is
based on profit arrived at under PRC accounting standards for business
enterprises for each year.
The
profit arrived at must be set off against any accumulated losses sustained
by
Changdu Huiheng in prior years, before allocation is made to the statutory
surplus reserve. 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 registered capital. This
statutory surplus reserve is not distributable in the form of cash
dividends.
Statutory
public welfare reserve
In
accordance with PRC Company Law, Changdu Huiheng appropriates 5% of the profit
arrived at for each year to the statutory public welfare reserve prior to
December 31, 2005. No statutory public welfare reserve is mandatory after
December 31, 2005. Appropriation to the statutory public welfare reserve
by
Changdu Huiheng is based on profit arrived at under PRC accounting standards
for
business enterprises for each year.
General
reserve fund includes statutory surplus reserve and statutory public
welfare reserve.
The
fund
can only be utilized for capital items for the collective benefit of Changdu
Huiheng's employees such as construction of dormitories, canteens and other
staff welfare facilities. This fund is non-distributable other than on
liquidation. The transfer to this fund must be made before distribution of
any
dividends.
According
to PRC Company Law, aForeign
Investment Enterprise is not required to make aprovision
for statutory public welfare reserve.
(c)
Dividend
Pursuant
to the resolution passed at the Board of Directors' meeting in 2006, total
dividends of USD 9,164,866 were declared and paid to Changdu Huiheng's equity
owner prior to the restructuring. The dividend is based on retained earnings
arrived at under PRC accounting standards for business enterprise. It is
also a
payment before the restructing of the Company.
Government
subsidy for high and new technology business
-
102,829
Regional
government tax subsidy
-
1,106,412
Other
revenue
10,217
4,524
9,800,487
12,346,672
The
high
and new technology business subsidy was granted by the government authorities
to
Shenzhen Hyper which can be used for enterprise development and technology
innovation purposes.
13.
General
and Administrative
Expenses
The
amount for the year ended December 31, 2005 included a loss on disposal of
leasehold improvement amounted USD 135,712 (None in 2006)
As
Changdu Huiheng 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 the Company is 15%.
Wuhan
Kangqiao is a high-tech enterprise with operations in an economic-technological
development area in the PRC, the applicable tax rate is 15%.
Shenzhen
Hyper is a high-tech manufacturing company located in Shenzhen special economic
region. Therefore, the applicable tax rate is also 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. Shenzhen Hyper has not turned from
accumulated losses to retained profits as of December 31, 2006.
A
reconciliation of the expected income tax expense to the actual income tax
expense for the years ended December, 2005 and 2006 are as follows:
2005
2006
USD
USD
Income
before minority interest and income tax
4,378,742
8,176,593
Expected
PRC income tax expense at statutory tax rate of 33%
1,444,985
2,698,276
Non-deductible
expenses
-
Non-deductible entertainment expenses
5,482
-
-
Non-deductible salaries and welfare
15,538
-
-
Others
1,979
31,893
Non-taxable
income
(30,255
)
(35,855
)
Others
(298,011
)
173,258
Tax
rate differences
(788,174
)
(1,471,787
)
Actual
income tax expense
351,544
1,395,785
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. There can be no assurance that changes in PRC tax laws or their
interpretation or their application will not subject the Company to substantial
PRC taxes in the future.
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets as of December 31, 2005 and 2006 are presented
below.
2005
2006
USD
USD
Current
deferred tax assets:
Provisions
for other receivables
18,257
18,879
Current
deferred tax assets
18,257
18,879
Non-current
deferred tax assets:
Deferred
expenses
7,800
5,377
Non-current
deferred tax assets
7,800
5,377
Total
deferred tax assets
26,057
24,256
In
assessing the realizability of deferred tax assets, management considers
whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in
which those temporary differences become deductible. Management considers
the
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred taxes are
deductible, management believes it is more likely than not that Changdu Huiheng
and subsidiaries will realize the benefits of these deductible differences
at
December 31, 2006. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable
income
during the carry forward period are reduced.
15.
Related
Party Transactions
(a)
Summary
of significant related party
transactions
The
significant related party transactions of the Company are summarized as
follows:
2005
2006
USD
USD
Sales
of medical equipment (i)
6,358,604
1,933,251
Cash
advance to related party (ii)
-
688,100
Repayments
of advances to related party (iii)
477,064
896,964
Transfer
from receivable from third party (iv)
619,563
-
Acquisition
of Changdu Huiheng (v)
-
6,269,699
(i)
Represents
the sales of medical equipment and income from service provided
to
Shenzhen Jiancheng prior to October 1, 2005. Shenzhen Jiancheng
was owned
by Mr. Hui Xiaobing until it was sold to third parties effective
from
October 1, 2005.
Summary
of significant related party transactions
(…/Cont'd)
The
total
sales of medical equipment and income from services provided to Shenzhen
Jiancheng for the years ended December 31, 2005 and 2006 are USD 6,980,350
and
USD 7,709,572, respectively. The contracts with Shenzhen Jiancheng were made
before October 1, 2005 which are disclosed as related party transactions.
Sales
of medical equipment to Shenzhen Jiancheng and contracted before October1, 2005
were included in revenue for the year ended December 31, 2005 and 2006 are
USD
6,358,604 and USD 1,906,348 respectively.
(ii)
Amount
is unsecured, interest-free advance for working capital purposes
to/from
Shenzhen Huiheng Industry Co., Ltd., which is under same control
of Mr.
Hui Xiaobing. Amount is repayable on
demand.
(iii)
Amounts
are unsecured, interest-free advances for working capital purposes
to
Shenzhen Huiheng Industry Co., Ltd. Amounts are repayable on
demand.
(iv)
Amount
represents the receivable from Shenzhen Huiheng Industry Co., Ltd.
The
amount was an assignment of advances to third
party.
(v)
In
August 2006, the Company acquired equity interest of Changdu Huiheng
99%
from Shenzhen Huiheng Industry Co., Ltd. and 1% from Mr. Hui Xiaobing
in
consideration of USD6,207,002 and USD62,697 respectively (Note
15(b)).
(b)
Amounts
due from/to related
parties
Amount
due from a related party
2005
2006
USD
USD
Shenzhen
Huiheng Industry Co., Ltd. (ii)
-
688,100
Amount
due to related parties
2005
2006
USD
USD
Shenzhen
Huiheng Industry Co., Ltd. (iii)
7,001,066
6,342,820
Hui
Xiaobing (iii)
61,955
65,092
7,063,021
6,407,912
(i)
Because
Shenzhen Jiancheng was not a related party of the Company subsequent
to
October 1, 2005, the balances with Shenzhen Jiancheng are not included
in
the amounts due from/(to) related parties as of December 31, 2005.
The
balances with Shenzhen Jiancheng as of December 31, 2005 is summarized
below:
Amount
represents interest-free advances to Shenzhen Huiheng Industry
Co., Ltd.
of USD 688,100 for working capital purpose and repayable on
demand.
(iii)
As
disclosed in Note 15 (a), the amount represents the balance of
the
purchase price related to the acquisition of Changdu Huiheng in
August
2006. The amount is payable on
demand.
16.
Pension
and Other Postretirement
Benefits
Pursuant
to the relevant laws and regulation in the PRC, the Company participates
in
defined contribution retirement plans for its employees arranged by a
governmental organization. The Company makes contributions to the retirement
scheme at the applicable rate based on the employees' salaries. The required
contributions under the retirement plans are charged to the consolidated
statements of operations on an accrual basis. The Company's contributions
totalled USD 29,146 and USD 52,526 for the years ended December 31, 2005
and
2006 respectively.
The
Company has no other obligation to make payments in respect of retirement
benefits of its employees.
17.
Derivative
Financial Instruments and Hedging
Activities
The
Company did not enter into any derivative financial instruments for any purpose
during the years presented. The Company does not hedge risk exposures or
speculate using derivative instruments.
18.
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
amount
of financial instruments, such as accounts receivable, other receivables,
accounts payable, and other payables, approximates their fair values because
of
the short term maturity of these instruments.
All
of
the Company's customers are located in the PRC. Four customers represented
85%
and 89% of consolidated revenues for 2005 and 2006, respectively. These
customers also represented 97% of the accounts receivable as of December31,2005 and 2006.
The
Company expects that a substantial portion of the sales will continue to
be
generated by a relatively small group of distributors, including Shenzhen
Jiancheng, that may change from year to year primarily due to the fragmented
nature of the medical equipment distribution industry in China.
20.
Operating
Lease Commitments
Rental
expense for obligations under operating leases was USD 81,547 and USD 44,746
for
the years ended December 31, 2005 and 2006, respectively. As of December31,2006, the total future minimum lease payments under non-cancellable operating
leases in respect of premises are payable as follows:
Minority
interest represents the share of 25% equity interest of Shenzhen Hyper owned
by
Shenzhen OUR International Limited as of December 31, 2005 and
2006.
Huiheng
Medical, Inc. (the “Company” or “Huiheng”) is a China-based medical device
company that, through its subsidiaries, designs, develops, manufactures 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
2005,
the ownership interests of Shenzhen Hyper Technology Company, Ltd. (“Shenzhen
Hyper”), Wuhan Kangqiao Medical New Technology Company, Ltd. (“Wuhan Kangqiao”)
and Beijing Yuankang Kbeta Nuclear Technology Company, Ltd. (“Beijing Kbeta”)
were reorganized under Tibet Changdu Huiheng Industry Development Company,
Ltd.
(“Changdu Huiheng”) a Chinese holding company established in Tibet. Upon the
completion of the reorganization, Changdu Huiheng owned 75% of the equity
interest in Shenzhen Hyper, 100% of the equity interest of Wuhan Kangqiao
and
50% of the equity interest of Beijing Kbeta. Remaining equity interests in
Shenzhen Hyper and Beijing Kbeta are owned by unrelated and unaffiliated
parties.
In
2006,
Huiheng established Allied Moral Holdings, Ltd. in the British Virgin Islands
as
a holding company and transferred 100% of the ownership interests of Changdu
Huiheng, to Allied Moral as part of an ownership restructuring to facilitate
investments by foreign investors.
In
May
2007, we entered into a share exchange agreement to acquire (i) all of the
issued and outstanding shares of the common stock of Allied Moral Holdings,
Ltd.
in exchange for 13,000,000 shares of our common stock, and (ii) all of the
issued and outstanding Series A Preferred Stock of Allied Moral in exchange
for
266,667 shares of our Series A Preferred Stock. In connection with the share
exchange, we agreed to change our name from “Mill Basin Technologies, Ltd.” to
“Huiheng Medical, Inc.” As part of this transaction, holders of some of our
outstanding shares issued prior to May 15, 2007 contributed shares to the
company so that there were 450,000 shares of our common stock issued and
outstanding immediately prior to the share exchange. Taking into account
the
shares issued in the share exchange, we now have 13,450,000 shares of common
stock issued and outstanding, 13,000,000 (96.65%) of which are owned by Allied
Moral’s former shareholders, with the balance being held by Mill Basin’s prior
shareholders, along with 266,666 shares of our Series A Preferred Stock,
all of
which are owned by former holders of Allied Moral’s Series A Preferred
Stock.
The
share
exchange is regarded as a reverse merger, since Allied Moral's former
shareholders obtained control of Mill Basin. As a result, Allied Moral was
considered to be the acquirer for accounting purposes.
As
a
result of the share exchange, Huiheng Medical owns all of the issued and
outstanding stock of Allied Moral, which was incorporated in the British
Virgin
Islands on July 26, 2006. Allied Moral, holds all of the issued and outstanding
stock of Changdu Huiheng Development Co., Ltd. (“Changdu Huiheng”), which in
turn owns 100% of the issued and outstanding stock of Wuhan Kangqiao Medical
New
Technology Co., Ltd. (“Wuhan Kangqiao”), 75% of the issued and outstanding stock
of Shenzhen Hyper Technology Co., Ltd (“Shenzhen Hyper”) and 50% of the issued
and outstanding stock of Beijing Yuankang Kbeta Nuclear Technology Co., Ltd.
(“Beijing Kbeta”). Private companies in China own the other interests in these
subsidiaries.
NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis
of Presentation
The
accompanying unaudited consolidated financial statements and related notes
have
been prepared in accordance with accounting principles generally accepted
in the
United States of America (US GAAP) for interim financial information and
with
the rules and regulations of the Securities and Exchange Commission for Form
10-QSB
and Item
310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America
for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position, results of operations and cash flows
for
the interim periods have been included. These consolidated financial statements
should be read in conjunction with the financial statements of the Company
for
the year ended November 30, 2006 and notes thereto contained in Form 8-K/A
as
filed with the Securities and Exchange Commission on May 17, 2007. Interim
results are not necessarily indicative of the results for the full
year.
F-29
In
a
reverse acquisition all accounting history becomes, that of the accounting
acquirer, therefore all historical information prior to the acquisition is
that
of Allied Moral. The shares issued to the shareholders of Allied Moral have
been
stated retroactively. The reverse merger adjustment is therefore all the
shares
held by Mill Basin shareholders prior to the acquisition.
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.
Summary
of significant accounting policies
Estimates
The
preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Accounts
receivable
Accounts
receivable are recorded at the invoiced amount, net of allowances for doubtful
accounts and sales returns and 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 determines the allowance based on historical write-off experience,
customer specific facts and economic conditions. Bad debt expense is included
in
general and administrative expenses. The allowance for doubtful accounts
approximated $4,600 at September 30, 2007.
Outstanding
account balances are reviewed individually for collectibility. 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 Company
does
not have any off-balance-sheet credit exposure to its customers.
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 and finished goods comprises
direct materials, direct production cost and an allocated portion of production
overhead.
Property
and equipment
Property
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 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, if any, are amortized on a straight-line basis over the estimated
useful life. Depreciation of property and equipment are stated at cost less
accumulated depreciation. Upon
sale
or retirement of property 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
Building
improvements
3
to 5
Buildings
20
Production
equipment
3
to 5
Furniture
fixtures and office equipment
3
to 5
Motor
vehicles
5
to 10
F-30
Intangible
assets
Intangible
assets were contributed to the Company and are stated at cost, representing
the
fair value at the time of contribution by minority owner of a subsidiary.
Fair
value was supported by cash contributed contemporaneously by another investor.
Cost is net of accumulated amortization and impairment losses. Amortization
expense is recognized on the straight-line basis over the estimated respective
useful lives of these intangible assets as follows:
Estimated Life
Patented
technology
20
Software
5
Investment
in an affiliate
The
Company owns 50% equity interest of Beijing Kbeta and is accounted for used
the
equity method of accounting because 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.
Impairment
of long-lived assets
Long-lived
assets, which include property and equipment 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 September30,
2007 and 2006, 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, prepayments and other current assets, accounts
payable, income taxes payable, accrued expenses and other current liabilities,
approximate their fair values because of the short maturity of these instruments
and market rates of interest.
Revenue
recognition
The
Company generates revenue primarily from sales of medical equipment and
provision of maintenance and support services. Revenue is recognized as follows:
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 and installation services. 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 and installation
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 invoice amount is collected in respect
of
the sales of goods on behalf of 1nrtax 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.
F-31
Pursuant
to the laws and regulations of the PRC, Shenzhen Hyper 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, net" in the consolidated statements
of
income and is recorded on an accrual basis.
Pursuant
to the document dated December 16, 2004 with No.173 issued by Tibet Finance
Bureau, the profits tax payment of Changdu Huiheng in excess of RMB 900,000
for
a year will be refundable by Tibet Finance Bureau. The 31% and 38.75% of
business tax payment and value added tax payment respectively for a year
will be
refundable by Tibet Finance Bureau provided that the business tax payment
and
value added tax payment should be arrived at RMB 1 million and RMB 1.5 million
for a year respectively. Such tax incentive policy will be valid for five
(5)
years from the year of commencement of tax refund, starting from September
2006.
The
medical equipment sold by the Company has embedded self-developed software.
In
all 6cases, the medical equipment is marketed and sold based on its performance
and functionality as a whole. The self-developed software is not sold on
a stand
alone basis.
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 equipments.
According to the agreements, the Company provides comprehensive services
including exchange of cobalt, training to users of the medical equipment,
maintenance of medical equipment, upgraded software and consulting. Fees
for the
services are recognized by the life of the contract on monthly
basis.
Warranty
The
Company provides a product warranty to its customers to repair any product
defects that occur generally within twelve months of the date of sales. Based
on
the limited number of actual warranty claims and the historically low cost
of
such repairs, the Company has not recognized a liability for warranty claims,
but rather recognizes such cost when product repairs are made.
Research
and development
Research
and development costs are charged to expense as incurred. Research
and developement costs mainly consist of remuneration for research and
development staffs and material costs for research and development. The
Company incurred $336,677 and $103,956 for
the
nine months ended September 30, 2007 and 2006, respectively.
Advertising
costs
Advertising
costs are expensed as incurred. The Company had not incurred advertising
costs
for
the
nine months ended September 30, 2007 and 2006,
respectively.
Shipping
and handling
The
Company accounts for shipping and handling fees in accordance with Emerging
Issues Task Force Consensus No. 00-10, "Accounting for Shipping and Handling
Fees and Costs". While amounts charged to customers for shipping product
are
included in revenues, the related costs are classified in cost of goods
sold as incurred. The Company had not incurred shipping and handling costs
for
the
nine months ended September 30, 2007 and 2006,
respectively.
Income
taxes
The
Company accounts for income taxes under FASB Statement No. 109, Accounting
for 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.
F-32
Foreign
currency translation
Transactions
and balances originally denominated in U.S. dollars are presented at their
original amounts. Transactions and balances in other currencies are converted
into U.S. dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, "Foreign Currency Translation," and are included in determining
net income or loss.
The
financial records of the Company are maintained in their local currency,
the
Renminbi (“RMB”), which is the functional currency. Assets and liabilities are
translated from the local currencies into the reporting currency, U.S. dollars,
at the exchange rate prevailing at the balance sheet date. Revenues and expenses
are translated at weighted average exchange rates for the period to approximate
translation at the exchange rates prevailing at the dates those elements
are
recognized in the financial statements. Translation adjustments resulting
from
the process of translating the local currency financial statements into U.S.
dollars are included in determining accumulated other comprehensive income
in
the statement of stockholders’ equity.
RMB
is
not a fully convertible currency. All foreign exchange transactions involving
RMB must take place either through the People’s Bank of China (the “PBOC”) or
other institutions authorized to buy and sell foreign exchange. The exchange
rate adopted for the foreign exchange transactions are the rates of exchange
quoted by the PBOC, which are determined largely by supply and demand.
Translation of amounts from RMB into United States dollars (“US$”) has been made
at the following exchange rates for the respective periods:
The
Company’s functional currency is the Chinese Renminbi ("RMB"). Assets and
liabilities are translated to US$ at the rate of US$1.00=RMB7.9040 on September30, 2006 and US$1.00=RMB 7.5196 on September 30, 2007. Income and expenses
are
incurred during the nine months ended September 30, 2006 and 2007 are translated
to US$ at the average monthly ended rate of US$1.00=RMB7.9976 and
US$1.00=RMB7.6530, respectively.
The
translation rates represent the noon buying rate by the Federal Reserve Bank
of
New York. No representation is made that the Renminbi amounts could have
been,
or could be, converted into U.S. dollars at that rate or at any particular
average monthly ended rates for the nine months ended September 30, 2007
and
2006, and on September 30, 2007 and 2006 or at any other date. All translation
differences between RMB and U.S. dollar are recorded as other comprehensive
income in the consolidated statements of income and reflected as accumulated
other comprehensive income in the consolidated balance sheet and statement
of
shareholders’ equity.
The
translation adjustment and effect of exchange rate changes on cash flow at
September 30, 2007 were $285,718 and $306,168, respectively.
Comprehensive
income
The
Company has adopted SFAS No. 130 Reporting Comprehensive Income. This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the Consolidated Statements of Income and
the
Consolidated Statement of Stockholders’ Equity.
Earning
Per Share
Net
earnings per common share is computed pursuant to SFAS No. 128, “Earnings Per
Share”. Basic earnings per common share is computed by taking net income divided
by the weighted average number of common shares outstanding for the period.
Diluted earnings per common share is computed
by dividing net earnings by the weighted average number of shares of common
stock and potentially outstanding shares of common stock during each
period
to
reflect the potential dilution that could occur from common shares issuable
through preferred stock and stock options.
F-33
Commitments
and Contingencies
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines
and
penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment can be reasonably
estimated.
Segment
reporting
The
Company has no operating segments, as that term is defined in FASB Statement
No.
131, Disclosure
About Segments of an Enterprise and Related Information.
All of
the Company's operations and customers are in the PRC. Accordingly, no
geographic information is presented.
Impact
of
New Accounting Standards
In
July
2006, the FASB issued FASB Interpretation Number 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109
(“FIN
48”). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken
in a
tax return. The Company must determine whether it is “more-likely-than-not” that
a tax position will be sustained upon examination, including resolution of
any
related appeals or litigation processes, based on the technical merits of
the
position. Once it is determined that a position meets the more-likely-than-not
recognition threshold, the position is measured to determine the amount of
benefit to recognize in the financial statements. FIN 48 applies to all tax
positions related to income taxes subject to FASB Statement No. 109,
Accounting
for Income Taxes. The
interpretation clearly scopes out income tax positions related to FASB Statement
No. 5, Accounting
for Contingencies. The
Company adopted the provisions of this statement on July 1, 2007. The cumulative
effect of applying the provisions of FIN 48 would be reported as an adjustment
to the opening balance of retained earnings on July 1, 2007. The Company
did not
anticipate that the adoption of this statement would have a material effect
on
the Company’s financial condition and results of operations.
On
September 15, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 is effective as of the beginning of the first
fiscal year beginning after November 15, 2007. The
Company does not anticipate that the adoption of this statement will have
a
material effect on the Company’s financial condition and results of
operations.
In
September 2006, FASB issued SFAS No. 158,
Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No 87, 88, 106 and
132(R)
(SFAS
158)
.
SFAS 158
requires the recognition of the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability in the statement of
financial position and the recognition of changes in that funded status in
the
year in which the changes occur through comprehensive income. SFAS 158 also
requires the measurement of the funded status of a plan as of the date of
the
year-end statement of financial position.
The
Company does not anticipate that the adoption of this statement will have
a
material effect on the Company’s financial condition and results of
operations.
On
February 15, 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities: Including
an
amendment of FASB Statement No. 115
(SFAS
159). SFAS 159 permits all entities to elect to measure many financial
instruments and certain other items at fair value with changes in fair value
reported in earnings. SFAS 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007, with earlier adoption
permitted.
The
Company does not anticipate that the adoption of this statement will have
a
material effect on the Company’s financial condition and results of
operations.
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.
At
September 30, 2007, prepayments and other current assets consisted of the
following:
Prepayments
to suppliers
$
2,262,033
Advances
to third parties
175,808
Other
receivables
713,219
$
3,151,060
NOTE
5 – PROPERTY AND EQUIPMENT
At
September 30, 2007, property and equipment consisted of the
following:
Building
improvements
$
156,368
Buildings
100,224
Production
equipment
398,043
Furniture,
fixture and office equipment
173,114
Motor
vehicles
170,056
Construction
in progress
3,058,023
$
4,055,828
Less:
Accumulated depreciation
(569,308
)
$
3,486,520
Depreciation
expense is included in the consolidated statements of income. For the nine
months ended September 30, 2007 and 2006, depreciation expense was $64,176
and
$78,375, respectively.
Construction
in progress represents buildings or construction, which is stated at actual
construction cost less any impairment cost. Construction in progress is
transferred to property and equipment when completed and ready for
use.
Patented
technology represents a patent for the production of a component of the
radiation treatment system. The patent was applied prior to its injection
to
Shenzhen Hyper as a capital contribution. Pursuant to the patent certificate,
the patent was valid for 20 years from the application date, May 1999. Therefore
it was amortized over the rest of the valid patent period, which is the
estimated remaining useful life.
Software
is utilized in the manufacture of medical equipment and is amortized over
its
estimated useful life.
For
the
nine months ended September 30, 2007 and 2006, amortization expense was $22,278
and $136,567.
NOTE
7 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
At
September 30, 2007 accrued expenses and other current liabilities consisted
of
the following:
Accrued
expenses
$
257,524
Accrued
payroll and welfare
235,221
Value
added tax, other taxes payable
468,422
Customer
deposits
3,002,565
$
3,963,732
NOTE
8 – MINORITY INTEREST
Minority
interest represents 25% equity interest of Shenzhen Hyper as of September30,2007.
F-35
NOTE
9 – RELATED PARTY TRANSACTIONS
(a)
Summary of significant related party transactions
The
significant related party transactions of the Company are summarized as
follows:
Amount
is
unsecured, interest-free advance for working capital purposes to Shenzhen
Huiheng Industry Co., Ltd. (“Shenzhen Huiheng”), which is under same control of
Mr. Hui Xiaobing. Amount is repayable on demand.
(b)
Due
to/from related parties
Due
from
a related party
Huiheng
Industry (i)
$
584,207
Due
to related parties
Hui
Xiaobing (ii)
$
1,062
Clear
Honest International Limited (iii)
112,594
$
113,656
(i)
Represents
interest-free advances to Shenzhen Huiheng for working capital
purpose and
repayable on demand.
(ii)
Represents
the balance of the settlement relating to the acquisition of Changdu
Huiheng in August 2006. The amount is payable on
demand.
(iii)
Represents
the balance of settlement relating to the redemption of 957,265
common
shares prior to acquisition from Clear Honest International
Limited
NOTE
10–
REGISTERED CAPITAL AND RETAINED EARNINGS
At
September 30 2007, details of the registered capital and retained earnings
are
as the following:
Preferred
stock at $0.001 par value; 1,000,000 shares authorized; no shares issued
or
outstanding;
Series
A
7% convertible preferred stock at $0.001 par value; 300,000 shares authorized,
266,667 shares issued and outstanding with liquidation preference of
$9,999,975;
Common
stock at $0.001 par value; 74,000,000 shares authorized; 23,150,000 shares
issued and 13,450,000 shares were outstanding.
Additional
paid-in-capital amounted to $7,723,698;
Retained
earnings for the nine months ended September 30, 2007 amounted to
$3,339,758
NOTE
11 – REVENUE
For
the
nine months ended September 30 2007, revenue consisted of the
following:
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 (the “PRC Income
Tax Law”).
Income
tax expense for the nine months ended September 30, 2007 and 2006 were $730,338
and $919,426, 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%.
The
applicable tax rate for Wuhan Kangqiao, subsidiary of Changdu Huiheng is
33%.
Shenzhen
Hyper, another subsidiary of Changdu Huiheng is a high-tech manufacturing
company located in Shenzhen special economic region. Therefore, the applicable
tax rate is also 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. Shenzhen Hyper has not been making profit since its commencement to
September 30, 2007.
A
reconciliation of the expected income tax expense to the actual income tax
expense for the nine months ended September 30, 2007 and 2006 are as
follows:
Expected
PRC income tax expense at statutory tax rate of 33%
2,291,688
1,981,362
Non-deductible
expenses
(61,996
)
(2,861
)
Others
110,261
21,668
Tax
rate differences
(1,609,615
)
(1,080,743
)
Actual
income tax expense
$
730,338
$
919,426
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.
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets as of September 30, 2007 are presented below.
Current
deferred tax assets:
Provision
for doubtful accounts
$
2,734
Provision
for other receivables
16,860
Current
deferred tax assets
$
19,594
Non-current
deferred tax assets:
Deferred
expenses
$
5,581
Non-current
deferred tax assets
$
5,581
Total
deferred tax assets
$
25,175
In
assessing the realizability of deferred tax assets, management considers
whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in
which those temporary differences become deductible or utilized.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon an assessment of the level of historical taxable
income and projections for future taxable income over the periods in which
the
deferred tax assets are tested whether they are deductible or can be utilized,
management believes that the deferred tax assets as of September 30, 2007
are
more likely than not that it will not be realized.
F-37
The
amount of the deferred tax assets considered realizable, however, could be
reduced in the near term if estimates of future taxable income are
reduced.
NOTE
13 – CONCENTRATION OF CREDIT RISK
(i)
Customers
and Credit Concentrations
Two
customers accounted for 89% and four customers accounted for 95% of net sales
for the nine months ended September 30, 2007 and 2006 respectively. These
customers also accounted for 79% and 97% of accounts receivable as of September30, 2007 and 2006, 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.
(ii)
Credit
Risk
Financial
instruments that potentially subject the Company to significant concentration
of
credit risk consist primarily of cash and cash equivalents. As of September30, 2007, all of the Company’s cash and cash equivalents were held by major
financial institutions located in the PRC, none of which were insured or
collateralized. However, management believes those financial institutions
are of
high credit quality and has assessed the loss arising from the non-insured
cash
and cash equivalents from those financial institutions to be immaterial to
the
consolidated financial statements. Therefore, no loss in respect of the cash
and
cash equivalent were recognized as of September 30, 2007.
NOTE
14 – FOREIGN OPERATIONS
Operations
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.
Dividends
and Reserves
Under
laws of the PRC, net income after taxation can only be distributed as dividends
after appropriation has been made for the following: (i) cumulative prior
years'
losses, if any; (ii) allocations to the "Statutory Surplus Reserve" of at
least
10% of net income after tax, as determined under PRC accounting rules and
regulations, until the fund amounts to 50% of the Company's registered capital;
(iii) allocations of 5-10% of income after tax, as determined under PRC
accounting rules and regulations, to the Company's "Statutory Common Welfare
Fund", which is established for the purpose of providing employee facilities
and
other collective benefits to employees in China; and (iv) allocations to
any
discretionary surplus reserve, if approved by stockholders.
As
of
September 30, 2007, the Company established
and segregated in retained earnings an aggregate amount for the Statutory
Surplus Reserve and the Statutory Common Welfare Fund of
$1,185,256.
The
Company has a provision in its Certificate of Incorporation at Article XI
thereof providing for indemnification of its officers and directors as
follows.
“The
corporation shall indemnify all directors, officers, employees, and agents
to
the fullest extent permitted by Nevada law as provided within NRS 78.751 or
any
other law then in effect or as it may hereafter be amended.
The
corporation shall indemnify each present and future director, officer, employee,
or agent of the corporation who becomes a party or is threatened to be made
a
party to any suit or proceeding, whether pending, completed, or merely
threatened, and whether said suit or proceeding is civil, criminal,
administrative, investigative, or otherwise, except an action by or in the
right
of the corporation, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request
of
the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses, including but not limited to attorneys = fees, judgments, fines,
and
amounts paid in settlement actually and reasonably incurred by him in connection
with the action, suit, or proceeding if he acted in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interest of
the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
The
expenses of directors and officers incurred in defending a civil or criminal
action, suit, or proceeding must be paid by the corporation as they are incurred
and in advance of the final disposition of the action, suit, or proceeding
if
and only if the director or officer undertakes to repay said expenses to the
corporation if it is ultimately determined by a court of competent jurisdiction
that he is not entitled to be indemnified by the corporation.
The
indemnification and advancement of expenses may not be made to or on behalf
of
any director or officer if a final adjudication establishes that the director’s
or officer’s acts or omission involved intentional misconduct, fraud, or a
knowing violation of the law and was material to the cause of
action.”
Insofar
as indemnification for liabilities arising under the Securities Act of 1933,
as
amended, may be permitted to directors officers and controlling persons of
the
Company pursuant to the foregoing provisions, or otherwise, the registrant
has
been advised that in the opinion of the Securities and Exchange Commission
such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred
or
paid by a director, officer or controlling person of the registrant in the
successful defense of any such action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of
such issue.
ITEM
25
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
The
Registrant is bearing all expenses in connection with this registration
statement other than sales commissions, underwriting discounts and underwriter’s
expense allowances designated as such. Estimated expenses payable by the
Registrant in connection with the registration and distribution of the Common
Stock registered hereby are as follows:
SEC
Registration fee
$
1,060
*Accounting
fees and expenses
$
*Legal
fees and expenses
$
*Transfer
Agent fees
$
*Blue
Sky fees and expenses
$
*Miscellaneous
expenses
$
Total
$
*Indicates
expenses that have been estimated for filing purposes.
ITEM
26
RECENT
SALES OF UNREGISTERED SECURITIES
During
the three years preceding the filing of this post-effective amendment to Form
SB-2, we issued securities without registration under the Securities Act on
the
terms and circumstances described in the following paragraphs:
To
accomplish the Share Exchange with Allied Moral’s shareholders, we issued on May15, 2007 an aggregate of 13,000,000 shares of our common stock in exchange
for
all of Allied Moral’s issued and outstanding common stock and we issued 266,666
shares of our Series A Preferred Stock in exchange for 2,666,667 shares of
Allied Moral’s Series A Preferred Stock. The shares were issued to eight
accredited investors. This issuance was pursuant to the exemption from
registration under Section 4(2) of the Securities Act for issuances not
involving any public offering.
On
August29, 2005, 9,500,000 shares of common stock were issued the Company’s President
in exchange for all outstanding membership units of Pinewood Imports, LLC,
in
effect converting the Company from a limited liability company to a C
corporation. On December 2, 2005, an additional 700,000 common shares were
issued to 39 additional shareholders at $.001 per share for $700 in cash. These
stockholders had an opportunity to ask questions of and receive answers from
executive officers of Registrant and were provided with access to Registrant’s
documents and records in order to verify the information provided. Each of
these
39 shareholders who was not an accredited investor either alone or with his
purchaser representative(s), if any, represented that he had such knowledge
and
experience in financial and business matters that he was capable of evaluating
the merits and risks of the investment, and the Issuer had grounds to reasonably
believe immediately prior to making any sale that such purchaser comes within
this description. All transactions were negotiated in face-to-face or telephone
discussions between executives of Registrant and the individual purchaser,
each
of whom, or their respective representative, indicated that they met the
definition of “sophisticated” investor as defined in Regulation D, and Pinewood
has made a determination that each of such investors are “sophisticated
investors.” Because of sophistication of each investor as well as, education,
business acumen, financial resources and position, each such investor had an
equal or superior bargaining position in its dealings with Pinewood. In addition
to providing proof that each shareholder paid for their shares as indicated
in
their respective investment letters, such letters also verify that each
shareholder was told prior to and at the time of his or her investment, that
he
or she would be required to act independently with regard to the disposition
of
shares owned by them and each shareholder agreed to act independently. No
underwriter participated in the foregoing transactions, and no underwriting
discounts or commissions were paid, nor was any general solicitation or general
advertising conducted. The securities bear a restrictive legend, and stop
transfer instructions are noted on the stock transfer records of the
Registrant.
The
foregoing issuances of securities were effected in reliance upon the exemption
from registration provided by section 4(2) under the Securities Act of
1933.
1.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will
be governed by the final adjudication of such issue.
The
Registrant is registering securities under Rule 415 of the Securities Act and
hereby undertakes:
2.
To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i)
Include
any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii)
Reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement; and notwithstanding the forgoing, any increase or decrease
in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
From
the low or high end of the estimated maximum offering range may be
reflected in the form of prospects filed with the Commission pursuant
to
Rule 424(b) if, in the aggregate, the changes in the volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the
effective registration statement.
(iii)
Include
any additional or changed material information on the plan of
distribution.
3.
That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be
new registration statement relating to the securities offered therein, and
the
offering of such securities at that time shall be deemed to be the initial
bona
fide offering thereof.
4.
To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of
the offering.
The
undersigned Registrant hereby undertakes that:
5.
For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned small business issuer undertakes that in a primary
offering of securities of the undersigned small business issuer pursuant to
this
registration statement, regardless of the underwriting method used to sell
the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned
small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i)
Any
preliminary prospectus or prospectus of the undersigned small business
issuer relating to the offering required to be filed pursuant to
Rule
424;
(ii)
Any
free writing prospectus relating to the offering prepared by or on
behalf
of the undersigned small business issuer or used or referred to by
the
undersigned small business issuer;
(iii)
The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned
small
business issuer; and
(iv)
Any
other communication that is an offer in the offering made by the
undersigned small business issuer to the
purchaser.
That
for the purpose of determining liability under the Securities Act
to any
purchaser:
6.
Since the small business issuer is subject to Rule
430C
Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule
430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed
to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first
use,
supersede or modify any statement that was made in the registration statement
or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
“Insofar
as indemnification for liabilities arising under the Securities Act of 1933
(the
“Act”) may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities
and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.”
In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter
has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this amendment to the
Registration Statement to be signed on its behalf by the undersigned,
in Shenzhen, China on January 31, 2008.
Huiheng
Medical, Inc.
/s/
Hui Xiaobing
By:
Hui Xiaobing, Chairman and CEO
POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Hui Xiaobing and Richard Shen and each of them acting
individually, as his or her attorney-in-fact, each with full power of
substitution, for him or her in any and all capacities, to sign any and all
amendments to this Registration Statement, including post-effective amendments,
and any and all new registration statements filed pursuant to Rule 462
under the Securities Act of 1933 in connection with or related to documents
in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all said Registration Statements and amendments
thereto.
In
accordance with the requirements of the Securities Act of 1933, this amendment
to the Registration Statement was signed by the following persons in the
capacities and on the dates stated.