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EXCEL - IDEA: XBRL DOCUMENT - Tarsier Ltd. | Financial_Report.xls |
EX-32 - RULE 13A-14(B) CERTIFICATION - Tarsier Ltd. | ex32.htm |
EX-31.2 - RULE 13A-14(A) CERTIFICATION - CFO - Tarsier Ltd. | ex31-2.htm |
EX-31.1 - RULE 13A-14(A) CERTIFICATION - CEO - Tarsier Ltd. | ex31-1.htm |
U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended November 30, 2011
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _____ to _____
Commission File No. 0-54205
HUAYUE ELECTRONICS, INC.
(Name of Registrant in its Charter)
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Delaware
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20-2188353
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(State of Other Jurisdiction of
incorporation or organization)
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(I.R.S.) Employer I.D. No.)
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51 Huilingxi Road, Zhouhuizheng, Wujin District
Changzhou, Jiangsu Province, P.R. China 213022
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(Address of Principal Executive Offices)
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Issuer's Telephone Number: 86-519-83630688
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company [X]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:
January 10, 2012
Common Voting Stock: 30,067,741
HUAYUE ELECTRONICS, INC.
QUARTERLY REPORT ON FORM 10Q
FOR THE FISCAL QUARTER ENDED NOVEMBER 30, 2011
TABLE OF CONTENTS
Page No
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Part I
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Financial Information
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Item 1.
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Financial Statements (unaudited):
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Consolidated Balance Sheet – November 30, 2011 and May 31, 2011
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2
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Consolidated Income Statement - for the Three and Six Month Periods Ended November 30, 2011 and 2010
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3 | |
Consolidated Statement of Stockholder Equity - for the Six Months Ended November 30, 2011
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4 | |
Consolidated Statement of Cash Flows – for the Six Months Ended November 30, 2011 and 2010
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5 | |
Notes to Consolidated Financial Statements
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6
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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19 |
Item 3
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Quantitative and Qualitative Disclosures about Market Risk
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22
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Item 4.
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Controls and Procedures
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22
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Part II
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Other Information
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Item 1.
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Legal Proceedings
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23
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Items 1A.
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Risk Factors
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23
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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23
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Item 3.
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Defaults upon Senior Securities
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23
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Item 4.
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Reserved
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23
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Item 5.
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Other Information
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23
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Item 6.
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Exhibits
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24
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HUAYUE ELECTRONICS, INC.
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CONSOLIDATED BALANCE SHEET
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November 30, 2011
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May 31, 2011
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unaudited
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Audited
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Assets
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Current assets:
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Cash and cash equivalent
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$ | 2,392,516 | $ | 2,701,516 | ||||
Accounts receivables, net
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2,722,117 | 2,198,669 | ||||||
Advance to suppliers
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1,805,699 | 3,560,503 | ||||||
Due from related parties
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2,949,105 | 977,573 | ||||||
Other receivables
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965,812 | 290,668 | ||||||
Inventory
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2,491,887 | 2,259,197 | ||||||
Total current assets
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13,327,135 | 11,988,126 | ||||||
Property, plant, and equipment, net
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323,334 | 356,231 | ||||||
Marketable securities - available for sale
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39,271 | 38,445 | ||||||
Total assets
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13,689,740 | 12,382,803 | ||||||
Liabilities and Stockholders’ Equity
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Liabilities:
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Current liabilities:
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Accounts payable
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703,899 | 299,810 | ||||||
Tax payable
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215,458 | 175,575 | ||||||
Short-term debt
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5,875,681 | 6,523,248 | ||||||
Notes payable
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3,150,499 | 2,930,064 | ||||||
Customer deposit
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671,261 | 504,401 | ||||||
Due to related parties
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695,691 | 234,527 | ||||||
Other payable
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1,237,096 | 635,013 | ||||||
Total current liabilities
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12,549,585 | 11,302,638 | ||||||
Total liabilities
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12,549,585 | 11,302,638 | ||||||
Stockholders’ equity
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Common stock, par value $0.001 per share; 60,000,000 shares authorized and 30,067,741 shares, and 29,401,500 shares issued and outstanding, respectively at November 30, 2011, and May 31, 2011
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30,068 | 29,402 | ||||||
Additional Paid In Capital
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669,932 | 670,598 | ||||||
Statutory reserve
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31,263 | 31,263 | ||||||
Retained earnings
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317,148 | 281,363 | ||||||
Accumulated other comprehensive income
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91,744 | 67,539 | ||||||
Total stockholders’ equity
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1,140,155 | 1,080,165 | ||||||
Total liabilities and stockholders’ equity
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$ | 13,689,740 | $ | 12,382,803 | ||||
See Notes to Consolidated Financial Statements
2
HUAYUE ELECTRONICS, INC.
CONSOLIDATED INCOME STATEMENT
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UNIT: USD$
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FOR THE THREE MONTHS ENDED
NOVEMBER 30,
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FOR THE SIX MONTHS
ENDED NOVEMBER 30,
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2011
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2010
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2011
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2010
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Sales Revenue
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$ | 986,281 | $ | 2,140,754 | $ | 3,399,474 | $ | 3,195,265 | ||||||||
Cost of Goods Sold
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842,207 | 1,879,232 | 3,157,141 | 2,734,098 | ||||||||||||
Gross Profit
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144,074 | 261,522 | 242,333 | 461,167 | ||||||||||||
Selling Expense
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3,509 | 27,758 | 5,408 | 30,426 | ||||||||||||
G&A Expense
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57,347 | 50,163 | 90,103 | 127,266 | ||||||||||||
Total expense
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60,856 | 77,921 | 95,511 | 157,692 | ||||||||||||
Income from operation
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83,219 | 183,601 | 146,822 | 303,475 | ||||||||||||
Interest Income (Expense)
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(86,658 | ) | (83,933 | ) | (178,411 | ) | (148,244 | ) | ||||||||
Other income (Expense)
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50,141 | 74,962 | 79,302 | 74,794 | ||||||||||||
Profit before tax
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46,702 | 174,630 | 47,714 | 230,025 | ||||||||||||
Income tax
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11,675 | 46,032 | 11,928 | 59,877 | ||||||||||||
Net income
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35,026 | 128,598 | 35,785 | 170,148 | ||||||||||||
Other comprehensive income
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Foreign currency translation adjustment
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12,107 | 75,985 | 24,205 | 143,524 | ||||||||||||
Comprehensive income
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$ | 47,133 | $ | 204,583 | $ | 59,990 | $ | 313,672 | ||||||||
Income (Loss) Per Share, Basic and Diluted
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$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.01 | ||||||||
Weighted Average Number of Common Shares, Basic and Diluted
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30,067,741 | 29,401,500 | 30,067,741 | 29,401,500 | ||||||||||||
See Notes to Consolidated Financial Statements
3
HUAYUE ELECTRONICS, INC.
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CONSOLIDATED STATEMENT OF STOCKHOLDER EQUITY
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UNIT: USD$
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Common Stock
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Shares
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Amount
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Additional Paid
In Capital
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Statutory
Reserve
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Accumulated
OCI
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Retained
Earnings |
Total
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Balance - May 31, 2011
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29,401,500 | $ | 29,402 | $ | 670,598 | $ | 31,263 | $ | 67,539 | $ | 281,363 | $ | 1,080,165 | |||||||||||||||
Acquisition of net asset of HXT Holdings, Inc
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666,241 | 666 | (666 | ) | - | |||||||||||||||||||||||
Net income for the year
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35,785 | 35,785 | ||||||||||||||||||||||||||
Foreign currency translation adjustment
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24,205 | 24,205 | ||||||||||||||||||||||||||
Balance - November 30, 2011
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30,067,741 | $ | 30,068 | $ | 669,932 | $ | 31,263 | $ | 91,744 | $ | 317,148 | $ | 1,140,155 | |||||||||||||||
See Notes to Consolidated Financial Statements
4
HUAYUE ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
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UNIT: USD$
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FOR THE SIX MONTHS ENDED NOVEMBER 30,
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2011
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2010
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Cash Flows From Operating Activities:
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Net income
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$ | 35,785 | $ | 170,148 | ||||
Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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17,059 | 58,197 | ||||||
Changes in operating assets and liabilities:
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Accounts receivable
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(523,448 | ) | (149,288 | ) | ||||
Inventory
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(232,690 | ) | 38,971 | |||||
Advance to suppliers
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1,754,804 | 986,930 | ||||||
Other receivable
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(675,144 | ) | (291,980 | ) | ||||
Due from related parties
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(1,971,532 | ) | (1,794,492 | ) | ||||
Accounts payable
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404,089 | 996,108 | ||||||
Customer deposit
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166,860 | 268,179 | ||||||
Due to related parties
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461,164 | 686,274 | ||||||
Taxes payable
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39,883 | (59,877 | ) | |||||
Accrued expenses and other payables
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602,083 | 474,876 | ||||||
Net cash provided by (used in) operating activities
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78,913 | 1,384,046 | ||||||
Cash flows from investing activities:
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Addition to plant and equipment
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- | - | ||||||
Long-term Investment
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825 | 29,127 | ||||||
Net cash provided by (used in) investing activities
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825 | 29,127 | ||||||
Cash flows from financing activities:
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Short term debt
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(647,566 | ) | (1,150,293 | ) | ||||
Notes payable
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220,435 | (140,150 | ) | |||||
Net cash provided by (used in) financing activities
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(427,131 | ) | (1,290,443 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents
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38,393 | (616,122 | ) | |||||
Net increase (decrease) in cash and cash equivalents
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(309,000 | ) | (493,392 | ) | ||||
Cash and cash equivalents at beginning of period
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2,701,516 | 2,565,610 | ||||||
Cash and cash equivalents at ending of period
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$ | 2,392,516 | $ | 2,072,218 | ||||
Supplemental disclosures of cash flow information:
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Cash paid during the periods for:
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Interest
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$ | 90,401 | $ | 70,248 | ||||
Income taxes
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$ | - | $ | 4,072 | ||||
See Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Huayue Electronics, Inc. (“Huayue Electronics” or the “Company”) is the new name for HXT Holdings, Inc., effectively on November 2, 2011. Huayue Electronics, Inc. was incorporated under the laws of the State of Delaware on January 13, 2005.
On September 2, 2011, Huayue Electronics acquired all of the outstanding capital stock of China Metal Holding, Inc. (“China Metal”), a privately owned corporation formed in the State of Delaware, United States of America, through HXT Acquisition Corp., a newly formed Delaware corporation that is wholly owned by the Company. China Metal is a holding company whose only asset, held through a subsidiary, is 100% of the registered capital of Changzhou Huayue Electronics Company, Limited (“Changzhou Huayue”), a limited liability company organized under the laws of the People’s Republic of China (“China” or “PRC”). Changzhou Huayue is engaged in the
developing, manufacturing and selling of high frequency induction lights and electrolytic capacitors. Changzhou Huayue’s offices and manufacturing facilities are located in China.
On September 29, 2011, the Company’s Board of Directors and majority shareholders adopted a resolution to amend the Certificate of Incorporation so as to change the name of HXT Holdings, Inc. to “Huayue Electronics, Inc.” or the “Company”), and the new name “Huayue Electronics, Inc.” became effective on November 2, 2011.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated financial statements of the Company include the accounts of the Company, China Metal Holding, Inc., and Changzhou Huayue. All significant inter-company balances and transactions are eliminated in consolidation.
Use of estimates
In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the allowance for bad debt, the valuation of inventory, and the useful lives and impairment of long-lived assets. Actual results could differ from those estimates.
Cash and cash equivalents
For purposes of the statement of cash flow, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
6
HUAYUE ELECTRONICS, INC.
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts receivable
Accounts receivables consist primarily of receivables resulting from sales of products, and are stated at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts. An allowance for doubtful accounts is calculated based on the management’s assessment of the recoverability of the accounts. A considerable amount of judgment is required in assessing the realization of these receivables, including the current credit worthiness of each customer and the related aging analysis.
Inventory
Inventory is composed of raw materials, packing materials, work in process and finished goods. Inventory is valued at the lower of cost or market with cost determined by the weighted average method.
Management periodically compares the cost of inventory with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost. No allowance for inventory is considered necessary for the three months and six months ended November 30, 2011 and 2010.
Machinery and equipment
Machinery and equipment are stated at cost. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and locations for its intended use. Depreciation is calculated using the straight-line method over the following useful lives:
Machinery, equipment, and automobiles 7 – 15 years
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Expenditures for maintenance and repairs are charged to expense as incurred. Additions, renewals and betterments are capitalized.
Advance to suppliers
Advance to suppliers represent the payments made and recorded in advance for goods and services received. The Company makes advances for raw materials purchased from certain domestic vendors. In order to maintain a long-term relationship with the vendors, the Company frequently needs to make advances from one and one-half months to three months ahead. The advances to suppliers were $1,805,699 as of November 31, 2011 and $3,560,503 as of May 31, 2011.
Impairment of long-lived assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. An impairment loss, measured based on the fair value of the asset, is recognized if expected future undiscounted cash flows are less than the carrying amount of the assets. No impairment loss is recorded for the three months and six months ended November 30, 2011 and 2010.
7
HUAYUE ELECTRONICS, INC.
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Customer deposit
Revenue from the sale of goods or services is recognized at the time that goods are delivered or services are rendered. Receipts in advance for goods to be delivered or services to be rendered in a subsequent period are carried forward as customer deposit. The customer deposits were $ 671,261 as of November 30, 2011 and $ 504,401 as of May 31, 2011.
Revenue recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104, included in the Codification as ASC 605, Revenue Recognition. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.
Income taxes
The Company accounts for income tax under the asset and liability method as stipulated by Accounting Standards Codification (“ASC”) 740 formerly Statement of Financial Accounting Standards (”SFAS”) No. 109, “Accounting for Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred income taxes will be recognized if significant temporary differences between tax and financial statements occur. Valuation allowances are established against net deferred tax assets when it is more likely than
not that some portion or all of the deferred tax asset will not be realized. There was no deferred tax amounts recognized for the three months and six months ended at November 30, 2011 and November 30, 2010, respectively.
The Company computes earnings per share (“EPS’) in accordance with ASC 260, “Earnings per Share”, which requires a dual presentation of basic and diluted earnings per share (“EPS”). Basic EPS net income (loss) divided by the weighted average common shares outstanding during a reporting period. Diluted EPS represents the potential dilution that could occur if securities or other contracts to issue common stock, including warrants, stock options, restricted stock units. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts receivable and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its clients’ financial condition and customer payment practices to minimize collection risk on accounts receivable.
8
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair value of financial instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued expenses, taxes payable, notes payable and other loans payable approximate fair value due to the short-term nature of these items. The carrying amounts of short-term loans from bank approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
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Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
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· |
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
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· |
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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At November 30, 2011, the securities that the Company held were level 1 type of securities. The prices of these securities were quoted in the active capital marketplace in China.
Unrealized holding gains or losses for available-for-sale securities, if any, are recognized in Other Comprehensive Income (OCI), not in earnings. If a decline in fair value for Available-for-sales securities is determined “other than temporary”, impairment losses are recognized in earnings.
As of November 30, 2011, the Company did not identify any financial instruments that are required to be presented on the balance sheet at fair value other than those whose carrying amounts approximate fair value due to their short maturities.
Value-added tax
Sales revenue represents the invoiced value of goods, net of a Value-Added Tax (“VAT”). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.
The Company recorded $162,576 and $123,805 VAT payable net of payments in the financial statements as of November 30, 2011 and May 31, 2011, respectively.
9
HUAYUE ELECTRONICS, INC.
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising costs
Advertising costs for newspaper and television are expensed as incurred. The Company incurred advertising costs of $6,610 and $814 for the three months ended November 30, 2011 and 2010, respectively.
The Company incurred advertising costs of $8,509 and $3,482 for the six months ended November 30, 2011 and 2010, respectively.
Mailing and handling costs
The Company accounts for mailing and handling fees in accordance with the FASB ASC 605-45. The Company includes shipping and handling fees billed to customers in net revenues. Amounts incurred by the Company for freight are included in cost of goods sold. For the three months ended November 30, 2011 and 2010, the Company incurred $5,663 and $4,103 mailing and handling costs, respectively. For the six months ended November 30, 2011 and 2010, the Company incurred $6,494 and $6,210 mailing and handling costs, respectively.
Risks and uncertainties
The Company’s operations are carried out 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, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws
and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Foreign currency translation
The accounts of the Company’s Chinese subsidiary are maintained in the RMB and the accounts of the U.S. parent company are maintained in the USD. The accounts of the Chinese subsidiary were translated into USD in accordance with Accounting Standards Codification (“ASC”) Topic 830 “Foreign Currency Matters,” with the RMB as the functional currency for the Chinese subsidiary. According to Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical rates and statement of income items are translated at the weighted average exchange rate for the period. The resulting
translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, “Comprehensive Income.” Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statements of income.
Translation adjustments resulting from this process amounted to $91,744 and $67,539 as of November 30, 2011 and May 31, 2011, respectively.
10
HUAYUE ELECTRONICS, INC.
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign currency translation (continued)
The following exchange rates were adopted to translate the amounts from RMB into United States dollars (“USD$”) for the respective years:
November 30,
|
May 31,
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November 30,
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||||||||||
2011
|
2011
|
2010
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||||||||||
Quarter End RMB Exchange Rate (RMB/USD$)
|
6.3482 | 6.4845 | 6.6762 | |||||||||
Average Year-to-date RMB Exchange Rate (RMB/USD$)
|
6.4063 | 6.7096 | 6.5241 |
Recent accounting pronouncements or amendments
In June 2011, FASB issued an amendment to the FASB Codification Topic 220 – Presentation of Comprehensive Income. The objective of this Update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity, among
other amendments in this Update. The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted,
and the amendments do not require any transition disclosures. The Company decided to adopt the amendment for the year starting with June 1, 2012. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations.
In May 2011, FASB issued an amendment to FASB codification Topic 805 - Business Combinations: Fair Value Measurement. The objective of this Update is to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity's shareholders' equity in the financial statements. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many
of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the Board's intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not
permitted. The Company does not expect the adoption of this amendment to have a significant impact on its financial condition or results of operations.
11
HUAYUE ELECTRONICS, INC.
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
In April 2011, FASB issued an amendment to FASB Codification Topic 310 – Receivables: A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendment requires that, in evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both exist: (1) the restructuring constitutes a concession. (2) The debtor is experiencing financial difficulties. The amendments to Topic 310 clarify the guidance on a creditor's evaluation of whether it has granted a concession as well as on a creditor's evaluation of whether a debtor is experiencing financial difficulties. In addition, the amendments to Topic 310
clarify that a creditor is precluded from using the effective interest rate test in the debtor's guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are
newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies–Loss Contingencies. An entity should disclose the information required by paragraphs 310-10-50-33 through 50-34, which was deferred by Accounting Standards Update No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. For nonpublic entities, the amendments in this Update are effective for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. Early adoption is permitted for public and nonpublic entities. A nonpublic entity may early adopt the amendments for any interim period of the fiscal year of adoption. A nonpublic entity that
elects early adoption should apply the provisions of this Update etrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The Company decides to adopt the amendment for the year starting from June 1, 2012, and the Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations.
In December, 2010, FASB issued an amendment to FASB codification Topic 805 - Business Combinations: Disclosure of Supplementary Pro Forma Information for Business Combinations. The objective of this Update is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The
amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update clarify the acquisition date that should be used for reporting the pro forma financial information disclosures in Topic 805 when comparative financial statements are presented. The amendments also improve the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination(s). The amendments in this Update are effective
prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations.
12
HUAYUE ELECTRONICS, INC.
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivables consist of trade receivables resulting from sales of products during the normal course of business. Account receivables at November 30, 2011 and May 31, 2011 amounted to $2,890,216 and $2,363,235, respectively.
The allowance for bad debt amounts as of November 30, 2011 and May 31, 2011 was $168,099 and $164,566, respectively.
NOTE 4 – INVENTORY
The inventory consists of the following:
November 30, 2011
|
May 31, 2011
|
|||||||
Raw materials
|
$ | 545,518 | $ | 354,099 | ||||
Packaging
|
61,300 | 57,228 | ||||||
Work-in-progress
|
1,159,354 | 1,206,163 | ||||||
Finished goods
|
725,714 | 641,706 | ||||||
Total Inventories
|
$ | 2,491,887 | $ | 2,259,197 |
No allowance for inventory was made for the three months and six months ended November 30, 2011.
The detail of property, plant and equipment is as follows:
November 30, 2011
|
May 31, 2011
|
|||||||
Machinery Equipment
|
$ | 1,117,528 | $ | 1,077,740 | ||||
Electronic Equipment
|
28,788 | 175,572 | ||||||
Transportation Equipment
|
169,526 | 28,182 | ||||||
Subtotal
|
1,315,842 | 1,281,495 | ||||||
Less: Accumulated Depreciation
|
992,509 | 925,264 | ||||||
Total property, plant and equipment, net
|
$ | 323,333 | $ | 356,231 |
Depreciation expense for the three months ended November 30, 2011 and 2010 was $29,425 and $29,116, respectively. Depreciation expense for the six months ended November 30, 2011 and 2010 was $67,245 and $58,197, respectively.
13
HUAYUE ELECTRONICS, INC.
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
NOTE 6 - MARKETABLE SECURITIES
Marketable securities primarily consist of available-for-sale marketable equity securities. Available-for-sale marketable securities are classified as long-term, based on their holding period. Marketable securities are carried at fair market value with unrealized appreciation (or depreciation). The unrealized gains (losses) from trading securities are reported as earnings; and the unrealized gains (losses) from Available-for-sale securities are reported as a component of accumulated other comprehensive income (or loss) in shareholders’ equity. The specific identification method is used to determine the cost of disposed marketable securities.
During the quarter and six months ended November 30, 2011, the Company did not recognize any unrealized gains or losses from the Marketable securities. The increase of $826 in the book value of the marketable security resulted from the foreign exchange gain due to currency exchange rate fluctuation.
The Company evaluates the investments periodically for possible other-than-temporary impairment and reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in market value. If appropriate, the Company records impairment charges equal to the amount that the carrying value of its available-for-sale securities exceeds the estimated fair market value of the securities as of the evaluation date. No impairment losses were identified for the quarter and six months ended at
November 30, 2011.
As of November 30, 2011, the Company’s financial assets are reported as marketable securities, at fair value, in the accompanying balance sheets. The following table summarizes the marketable securities measured at fair value as of November 30, 2011, at each hierarchical level:
Quoted Prices in
Active Markets for
Identical Assets
|
Significant Other
Observable Inputs
|
Balance at
|
||||||||||
Class of Financial assets:
|
(Level 1)
|
(Level 2)
|
November 30, 2011
|
|||||||||
Available-for-sale securities (Non-Current Assets)
|
$
|
39,271
|
$
|
-
|
$
|
39,271
|
||||||
Total financial assets
|
$
|
39,271
|
$
|
-
|
$
|
39,271
|
NOTE 7 - RELATED PARTY TRANSACTIONS AND BALANCES
An individual or entity is considered to be a related party if the person or the entity has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. An individual or entity is also considered to be related if the person or the entity is subject to common control or common significant influence.
14
HUAYUE ELECTRONICS, INC.
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
NOTE 7 - RELATED PARTY TRANSACTIONS AND BALANCES (Continued)
The related parties of the company are comprised as follows:
Relationship with the Company
|
|
Changzhou Hengchuan Plastics Co, Ltd
|
Entity controlled by Mr. Pan Shudong and his wife
|
Changzhou Teweile Energy Saving Lighting Technology Co., Ltd
|
Entity controlled by Mr. Pan Shudong’s wife
|
Changzhou Shiji Jinyue Packaging Co., Ltd
|
Entity controlled by Mr. Pan Shudong’s sister
|
Changzhou Jinyue Electronic Co., Ltd
|
Entity controlled by Mr. Pan Shudong’s sister
|
Changzhou Leyuan International Trade Co., Ltd
|
Entity controlled by Mr. Pan Shudong’s sister
|
Mr. Pan Shudong
|
CEO and Director of Huayue Electronics, Inc.
|
Ms. Li Xinmei
|
Mr. Pan Shudong’s wife and Director of Huayue Electronics, Inc.
|
Due from Related Parties:
Due from Related Parties, at November 30, 2011 and May 31 2011, consisted of the following balances:
Related party
|
Transaction
|
November
30, 2011
|
May 31, 2011
|
||||||
Changzhou Hengchuan Plastics Co, Ltd
|
Accounts receivable
|
$ | 355,602 | $ | 237,489 | ||||
Changzhou Hengchuan Plastics Co, Ltd
|
Other Receivable
|
1,575 | |||||||
Changzhou Teweile Energy Saving Lighting Technology Co.,Ltd
|
Accounts receivable
|
1,775,628 | 620,535 | ||||||
Changzhou Jinyue Electronics Co., Ltd
|
Accounts receivable
|
22,238 | |||||||
Changzhou Shiji Jinyue Packaging Co.,Ltd
|
Accounts receivable
|
429,693 | 48,146 | ||||||
Changzhou Shiji Jinyue Packaging Co.,Ltd
|
Other Receivable
|
49,179 | |||||||
Changzhou Leyuan International Trade Co.,Ltd
|
Other Receivable
|
157,664 | - | ||||||
Mr. Pan Shudong
|
Due from Mr. Pan
|
- | 71,403 | ||||||
Ms. Xinmei Li
|
Due from Mr. Pan
|
157,525 | - | ||||||
Total due from related parties
|
$ | 2,949,105 | $ | 977,573 |
15
HUAYUE ELECTRONICS, INC.
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
NOTE 7 - RELATED PARTY TRANSACTIONS AND BALANCES (Continued)
Due to Related Parties
Due to Related Parties at November 30, 2011 and May 31 2011, consisted of the follows:
Related party
|
November 30, 2011
|
May 31, 2011
|
|||||||
Changzhou Leyuan International Trade Co., Ltd
|
Accounts payable
|
$
|
117,671
|
$
|
61,686
|
||||
Changzhou Hengchuan Plastics Co, Ltd
|
Accounts payable
|
-
|
7,711
|
||||||
Changzhou Hengchuan Plastics Co, Ltd
|
Rent payable
|
9,366
|
-
|
||||||
Changzhou Teweile Energy Saving Lighting Technology Co., Ltd
|
Other payable
|
66,199
|
-
|
||||||
Changzhou Leyuan International Trade Co., Ltd
|
Customer Deposit
|
-
|
10,917
|
||||||
Payable to Mr. Pan Shudong
|
Other payable
|
502,455
|
154,214
|
||||||
Total due to related parties
|
$
|
695,691
|
$
|
234,527
|
During the six months ended November 30, 2011, the Company sold $1.5M high frequency induction lights to its customers through a related party - Changzhou Teweile Energy Saving Lighting Technology Co., Ltd.
Changzhou Huayue is currently using the buildings of Changzhou Hengchuan Plastics Co, Ltd. On May 18, 2011, Changzhou Huayue and Changzhou Hengchuan signed a lease agreement, under which Changzhou Huayue pays RMB ¥120,000 annually for using Changzhou Hengchuan’s buildings. The term of the lease is 10 years and the rent payment is due annually. For the six months ended November 30, 2011, Changzhou Huayue accrued $9,366 rent expense which was due to Changzhou Hengchuan.
NOTE 8 - SHORT TERM LOANS
The Company’s short term debt consisted of the follows:
November 30, 2011
|
May 31, 2011
|
|||||||
Loan from China Communication Bank (6% annual interest rate due on 2/28/2012 )
|
$
|
3,150,499
|
$
|
3,084,278
|
||||
Loan from China Commercial Bank (6% annual interest rate, due on 1/31/2012)
|
945,150
|
925,283
|
||||||
Loan from Chinese Bank (6% annual interest rate, due on 1/31/2012)
|
1,780,032
|
1,742,617
|
||||||
Loan from Changzhou Wujinyintong Agriculture Credit Union (6% annual interest rate, due on 3/18/2012)
|
-
|
771,069
|
||||||
Total short term debt
|
$
|
5,875,681
|
$
|
6,523,248
|
16
HUAYUE ELECTRONICS, INC.
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
NOTE 8 - SHORT TERM LOANS (Continued)
Interest expense for the above short term loans totaled $95,036 and $82,311 for the three months ended November 30, 2011 and 2010, respectively. Interest expense for the above short term loans totaled $185,437 and $152,408 for the six months ended November 30, 2011 and 2010, respectively.
NOTE 9 - TAX PAYABLE
Tax payable at November 30, 2011 and 2010 are as follows:
November 30, 2011
|
May 31, 2011
|
|||||||
Corporate Income Tax
|
$
|
52,512
|
$
|
51,409
|
||||
Value-Added Tax
|
162,576
|
123,805
|
||||||
Other Tax & Fees
|
369
|
361
|
||||||
Total Tax Payable
|
$
|
215,458
|
$
|
175,575
|
NOTE 10 - NOTES PAYABLE
As of November 30, 2011, the Company has bank acceptance notes payable in the amount of $3,150,499. The notes are guaranteed to be paid by the banks and usually for a short-term period of 3 to 6 months with 6% annual interest rate on the maturity date.
NOTE 11 - INCOME TAXES
Corporation income tax (“CIT”
The Company’s operating subsidiary, Changzhou Huayue, is subject to the corporate income tax at a statutory rate of 25%.
For the quarter ended November 30, 2011, Changzhou Huayue recorded $11,675 income tax provision; for the quarter ended November 30, 2010, Changzhou Huayue recorded $46,032 income tax provision.
For the six months ended November 30, 2011, Changzhou Huayue recorded $11,928 income tax provision; for the six months ended November 30, 2010, Changzhou Huayue recorded $59,877 income tax provision.
Although the Company had a negative income for the fiscal year ended May 31, 2009, the tax losses was immaterial and the Company did not expect such tax losses could be "carry forward" to reduce taxable income in future years. Therefore, the Company did not recognize any deferred tax assets.
Value added tax (“VAT”)
Enterprises or individuals who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with the PRC laws. The value added tax standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished products.
17
HUAYUE ELECTRONICS, INC.
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
NOTE 12 - STOCKHOLDERS’ EQUITY
As of November 30, 2011, and May 31, 2011, for financial reporting purposes, there were 30,067,741 shares and 29,401,500 shares of common stock issued and outstanding, respectively.
NOTE 13 - MAJOR CUSTOMERS AND SUPPLIERS
Two major customers accounted for approximately 29% of the net revenue for the three months ended November 30, 2011, with each customer individually accounting for from 11% to 18% of the net revenue.
Two major customers accounted for approximately 14% of the net revenue for the six months ended November 30, 2011, with each customer individually accounting for from 6% to 8% of the net revenue.
At November 30, 2011, the total receivable balance due from one major customer was $329,802, representing 12% of total accounts receivable.
One major vendor provided approximately 74% of the Company’s purchases of raw materials for the six months ended November 30, 2011.
18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
Forward-Looking Statements: No Assurances Intended
In addition to historical information, this Quarterly Report contains forward-looking statements, which are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or similar expressions. These forward-looking statements represent Management’s belief as to the future of Huayue Electronics, Inc. Whether those beliefs become reality will depend on many factors that are not under Management’s control. Many risks and uncertainties exist that could cause actual results to differ materially from
those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section titled “Risk Factors” in the Company’s Current Report on Form 8-K filed on September 2, 2011. Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.
Outline of Our Business
Huayue Electronics, Inc. is a Delaware corporation that functions as a holding company. Through a wholly-owned subsidiary, we own all of the registered capital of Changzhou Huayue Electronic Co., Ltd. (“Changzhou Huayue”), a corporation organized and located in The People’s Republic of China (“PRC”). Since 1999 Changzhou Huayue has been engaged in the production and sale of electrolytic capacitors. Since 2008, however, the growing portion of our business has been the production and sale of high frequency induction lights. While recent revenues have been split approximately
equally between these two business lines, we anticipate that our future growth will be derived primarily from the sale of induction lights.
In contrast to traditional lamps, induction lights do not involve either filaments or electrodes, and no electrical connection goes on inside the glass tube. Instead, energy is transferred through the glass tube solely by electromagnetic induction. Power to create the light is transferred from outside the glass tube by means of a magnetic field. As with a conventional fluorescent lamp, the power excites mercury or a mercury alloy, producing ultraviolet light which hits the phosphors resulting in visible light.
Our participation in the market for induction lighting benefits from our intellectual property. From 2008 to 2010, we obtained 60 patents from the PRC government, of which 33 are currently in use. All of these patents relate to the induction lighting business. Our induction lighting products also benefit from representing high quality at a low cost. The incorporation of smart cards into our lamps provides constant power control and the ability to automatically adjust brightness. We have the facilities to mass produce 300 watt induction lamps with long lives that do not require frequent
maintenance, as backed up by our warranties.
We recently changed our domestic distribution strategy, moving from direct sales to the development of regional sales agents. We have identified 20 agents and plan to increase this number to between 40 and 50 by the end of the year. Changzhou Huayue believes that this strategic decision will enable us to expand our market throughout China in the coming year.
Results of Operations
As indicated in Note 7 to our financial statements, Changzhou Huayue has functioned as one of several entities owned and managed by Pan Shudong and his family. With the acquisition of Changzhou Huayue by a U.S. public company on September 2, 2011, the close relationship of Changzhou Huayue to these other entities will be severed, and Changzhou Huayue will operate for the benefit of its own shareholders only. However, during the quarter ended August 31, 2011 a transaction arranged prior to that acquisition had the effect of minimizing the profitability of Changzhou Huayue’s
business. It is management’s plan that such related party transactions will not be replicated in the future, except in circumstances where the benefit to Changzhou Huayue equals or exceeds the benefit it would receive from an arms-length transaction.
19
Changzhou Huayue’s sales revenue for the six months ended November 30, 2011 increased to $3,399,474, an increase of 6% over sales revenue in the six months ended November 30, 2010. However, $1,493,830 of the sales revenue in the quarter ended August 31, 2011 - i.e. 44% of the six months revenue - was attributable to a sale to a related party (Changzhou Teweile Energy Saving Lighting Technology Co., Ltd.) in which Changzhou Huayue sold goods to Changzhou Teweile at a loss of $109,193, permitting Changzhou Teweile to resell the goods to the ultimate customer at a profit. As a result of the loss incurred on that sale, Changzhou Huayue’s gross profit for the quarter ended August
31, 2011 was only $98,259, representing a gross margin ratio of 4.1%.
More indicative of our current level of operations that the six month results are our results for the quarter ended November 30, 2011. Our sales fell by 54% from the quarter ended November 30, 2010 to the quarter ended November 30, 2011, primarily because our transition from direct sales to sales through agents is still in its start-up phase. In addition, the margins on our induction lighting sales remain lower than we anticipate for the long term, due to the cost of introducing new induction lighting products. Because we are trying to rapidly grasp a solid position in the induction lighting market, we have been introducing products while they are still in the
final development stages. We sell the new products on a small scale basis, while our technicians continue to improve the failure rate and develop efficiencies in the use of materials. This process allows us to market aggressively, but results in a high cost of goods sold. Our gross margin for the three months ended November 30, 2011, then, was 15%, compared to 12% in the three months ended November 30, 2010. We anticipate that as our market position matures, we will be able to fully develop new products before taking them to market, which will improve our margins.
Even though our gross income for the quarter and six months ended November 30, 2011 was negligible, we remained profitable due to the low level of our operating expenses. Contributing to this efficiency, selling expenses declined to $3,509 in the quarter ended November 30, 2011 from $27,758 in the second quarter of the prior fiscal year, a decrease that reflected our decision to reduce direct sales and replace them with a network of independent agents. General and administrative expenses increased by 14% from the quarter ended November 30, 2010 to the quarter ended November 30, 2011, but decreased by 29% from the six months
ended November 30, 2010 to the six months ended November 30, 2011. General and administrative expenses will increase in the coming year, however, as we assume the obligations attendant to being a U.S. public company, including legal and accounting expenses and other expenses related to the nurturing of our new shareholder base.
Due to increased reliance on short-term bank debt, our current interest expense is higher than it was a year ago. As a result, despite high cash balances that bear interest (albeit at the very low rate currently offered in China’s banks), our net interest expense for the quarter ended November 30, 2011 increased to $86,658 from net interest expense of $83,933 in the comparable prior quarter, and to $178,411 for the half from $148,244 for the first half of fiscal 2011. As discussed below, we hope to access the U.S. capital markets to obtain equity funding to pay off the debt and reduce this cost and our exposure to increasing interest rates.
20
Our net profit before tax for the recent quarter was $46,702, on which we accrued income tax at the Chinese national rate of 25%, yielding a net income for the quarter ended November 30, 2011 of $35,026. Our net income for the quarter ended November 30, 2010 was $128,598. Net income for the six months ended November 30, 2011 was $35,785, compared to $170,148 in the six months ended November 30, 2010.
Our business operates primarily in Chinese Renminbi (“RMB”), but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars will result in translation adjustments. While our net income will be added to the retained earnings on our balance sheet, the translation adjustments will be added to a line item labeled “accumulated other comprehensive income,” since they will be more reflective of changes in the relative values of U.S. and PRC currencies than the success of our business. The amount added to “accumulated other comprehensive income” was $59,990 during the six months ended
November 30, 2011. During the six months ended November 30, 2010, when the exchange rate was more volatile, our accumulated other comprehensive income increased by $313,672.
Liquidity and Capital Resources
Until recently the operations of the Company had been funded by contributions and short-term loans from our founder, Mr. Shudong Pan, his family, and entities related to them. In recent periods, however, we have developed bank lending relationships, which are now our primary source of liquidity. Today, our current liabilities are in large part made up of short term debt and notes payable to Chinese banks. Most of these debts have been guaranteed by related entities or secured by property owned by related parties. The proceeds of these loans have been utilized primarily to finance the development of our induction lighting business and the expanded sales effort for
new induction lighting products.
As is common in China, all of our bank borrowing is done on a short-term basis. As a result, the entire amount of $10,263,276 that we owed to lending institutions at November 30, 2011 has been classified as short-term debt, although we have every reason to believe that the institutions will replace the loans as they come due. Because our debts are all classified as short-term, at November 30, 2011 we had only $777,550 in working capital, an increase of $92,062 from May 31, 2011, the end of our 2011 fiscal year.
Also included in our current liabilities at November 30, 2011 was an “other payable” of $1,237,096. This represented an overnight loan that we secured to fund our bank deposit obligation. A significant portion of the bank loans that we have obtained require us, at the end of each month, to maintain deposits with lender equal to a percentage, typically 50%, of the amount loaned. At November 30, 2011, to meet that obligation we borrowed on an overnight basis the funds recorded as “other payable.”
The largest components of our current assets, other than cash, were amounts due from related parties, accounts receivable, inventory and prepaid expenses. In China, to secure a guaranteed supply of raw materials and components, it is common practice to make prepayments to your principal suppliers, often to the extent of several months’ requirements. That security is the purpose for the $1,805,699 advance to suppliers on our November 30, 2011 balance sheet.
The amount due from related parties swelled during the quarter ended August 31, 2011 because of the $1,493,830 sale to Changzhou Teweile discussed in Results of Operations above. The entire payment obligation arising from that sale remains unsatisfied, pending Changzhou Teweile’s receipt of payment from its customer. As noted above, we do not intend to engage in related party sales in this manner in the future.
21
Our accounts receivable, which were $2,722,117 at November 30, 2011, are large relative to recent revenue. In our efforts to achieve a substantial beachhead in the induction lighting market, we offer certain customers ninety days after delivery to make payment to us. In general, we do so only after we are assured that the customer has the capability and intent to make payment. This practice reduces our liquidity to some extent, but helps us develop long-term, repeat customers. As our induction lighting business matures, however, we will move toward more conventional payment terms.
Cash flow from operations during the six months ended November 30, 2011 was only $78,913, due primarily to our lack of profits, the $523,448 increase in our accounts receivable, and the $1,971,532 increase in debts due from related parties. Cash flow stayed positive, however, as we utilized $1,754,804 in advances to suppliers made in prior periods to pay for the supplies used in the recent six month period. Since we reduced our bank debts by $427,131 during the six months ended November 30, 2011, our cash on hand decreased to $2,392,516. This leaves us sufficient liquidity, however, to fund our operations for the coming year.
Our business plan is based on obtaining long term financing of $10 million during the next year. $6 million of this amount would be used to build a new production and distribution center for induction lighting, and $4 million would be used to provide additional liquidity. A further capital raise of $20 million is projected for the following year. We hope to raise the new funds through the sale of equity in the Company, although this may prove not to be feasible. If we are forced to finance our capital needs through the issuance of debt or long term borrowing, the interest rates we pay and our interest cost of financing would
increase. However, we believe that the incremental sales supported by the increased production capacity financed by the borrowing will more than offset these added expenses.
We believe growth of our production capacity is critical. If we are unable to raise additional funds through any means, we will be forced to postpone our expansion plans and the growth and profitability of the Company would be reduced.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.
ITEM 3 |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable.
|
|
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule13a-15(e) promulgated by the Securities and Exchange Commission) as of November 30, 2011. The evaluation revealed that there are material weaknesses in our disclosure controls, specifically:
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The relatively small number of employees who are responsible for accounting functions prevents us from segregating duties within our internal control system.
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·
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Our accounting personnel lack expertise in identifying and addressing complex accounting issued under U.S. Generally Accepted Accounting Principles.
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Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s system of disclosure controls and procedures was not effective as of November 30, 2011.
Changes in Internal Controls. There was no change in internal controls over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act or 1934) identified in connection with the evaluation described in the preceding paragraph that occurred during the Company’s second fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. | Legal Proceedings |
None.
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Item 1A. |
Risk Factors
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There have been no material changes from the risk factors included in our Current Report on Form 8-K filed on September 2, 2011.
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Item 2. | Unregistered Sale of Securities and Use of Proceeds |
(a) Unregistered sales of equity securities
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On September 2, 2011 Huayue Electronics, Inc. acquired the outstanding capital stock of China Metal Holding, Inc. (“China Metal”) in exchange for 9,200,000 shares of the Company’s common stock, and entered into an agreement with the two principal managers of the operating subsidiary of China Metal to serve on the Company’s board of directors in exchange for 20,201,500 shares of the Company’s common stock. The sale was exempt pursuant to Section 4(2) of the Securities Act since the sale was not made in a public offering and was made to individuals who had access to detailed information about the Company and who
were acquiring the shares for their own accounts. There was no underwriter.
(c) Purchases of equity securities
The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the 2nd quarter of fiscal 2012.
Item 3. | Defaults Upon Senior Securities. |
None. | |
Item 4. | Reserved. |
Item 5. | Other Information. |
None.
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Item 6 | Exhibits |
31.1 | Rule 13a-14(a) Certification – CEO |
31.2 | Rule 13a-14(a) Certification – CFO |
32 | Rule 13a-14(b) Certification |
101.INS | XBRL Instance |
101.SCH | XBRL Schema |
101.CAL | XBRL Calculation |
101.DEF | XBRL Definition |
101.LAB | XBRL Label |
101.PRE | XBRL Presentation |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
HUAYUE ELECTRONICS, INC.
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Date: January 10, 2012
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By: /s/ Pan Shudong
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Pan Shudong, Chief Executive Officer
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By: /s/ Gan Liuzhi
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Gan Liuzhi, Chief Financial Officer, Chief Accounting Officer
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