Attached files
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EX-32 - RULE 13A-14(B) CERTIFICATION - Tarsier Ltd. | ex32.htm |
EX-31.1 - RULE 13A-14(A) CERTIFICATION ? CEO - Tarsier Ltd. | ex31-1.htm |
EX-31.2 - RULE 13A-14(A) CERTIFICATION ? CFO - Tarsier Ltd. | ex31-2.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 August 31, 2012
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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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40 Wall Street, 28th Floor, New York, NY 10005
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||
(Address of Principal Executive Offices)
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Issuer's Telephone Number: 646-512-5778
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:
October 22, 2012
Common Voting Stock: 30,067,741
HUAYUE ELECTRONICS, INC.
QUARTERLY REPORT ON FORM 10Q
FOR THE FISCAL QUARTER ENDED AUGUST 31, 2012
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 Sheets – August 31, 2012 and May 31, 2012
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2
|
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Consolidated Income Statements - for the Three
|
||
Month Periods Ended August 31, 2012 and 2011
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3
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Consolidated Statements of Cash Flows – for the
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||
Three Months Ended August 31, 2012 and 2011
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4
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Notes to Consolidated Financial Statements
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5
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and
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Results of Operations
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13
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Item 3
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Quantitative and Qualitative Disclosures about Market Risk
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16
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Item 4.
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Controls and Procedures
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16
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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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17
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Items 1A.
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Risk Factors
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17
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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17
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Item 3.
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Defaults upon Senior Securities
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17
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Item 4.
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Mine Safety Disclosures
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17
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Item 5.
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Other Information
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17
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Item 6.
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Exhibits
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18
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CONSOLIDATED BALANCE SHEETS
|
||||||||
August 31, 2012
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May 31, 2012
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|||||||
Assets
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalent
|
$
|
1,049,343
|
$
|
1,085,784
|
||||
Accounts receivables, net
|
5,482,043
|
3,689,990
|
||||||
Prepaid account
|
3,808,174
|
2,389,547
|
||||||
Due from related parties
|
1,538,746
|
1,390,074
|
||||||
Other receivables
|
1,457,920
|
1,079,165
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||||||
Inventory
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1,326,367
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1,985,391
|
||||||
Deferred tax assets, current
|
39,226
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38,238
|
||||||
Total current assets
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14,701,818
|
11,658,189
|
||||||
Plant, property and equipment, net
|
520,850
|
549,322
|
||||||
Total assets
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15,222,668
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12,207,511
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||||||
Liabilities and Stockholders’ Equity
|
||||||||
Liabilities:
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
761,768
|
744,449
|
||||||
Tax payable
|
297,308
|
241,698
|
||||||
Short-term debt
|
6,461,883
|
6,787,152
|
||||||
Notes payable
|
1,576,069
|
1,578,407
|
||||||
Customer deposit
|
780,846
|
703,713
|
||||||
Due to related parties
|
79,946
|
194,312
|
||||||
Other payables
|
433,894
|
607,341
|
||||||
Total current liabilities
|
10,391,714
|
10,857,071
|
||||||
Total liabilities
|
10,391,714
|
10,857,071
|
||||||
Stockholders’ equity
|
||||||||
Common stock, par value $0.001 per share; 60,000,000 shares authorized;
|
||||||||
30,067,741 shares issued and outstanding at August 31, 2012 and May 31, 2012 |
30,068
|
30,068
|
||||||
Additional Paid In Capital
|
3,668,227
|
669,932
|
||||||
Statutory reserve
|
31,263
|
31,263
|
||||||
Retained earnings
|
942,847
|
529,803
|
||||||
Accumulated other comprehensive income
|
158,549
|
89,374
|
||||||
Total stockholders’ equity
|
4,830,954
|
1,350,440
|
||||||
Total liabilities and stockholders’ equity
|
$
|
15,222,668
|
$
|
12,207,511
|
See Notes to Consolidated Financial Statements
2
HUAYUE ELECTRONICS, INC.
CONSOLIDATED INCOME STATEMENTS
|
||||||||||||
UNIT: USD$
|
FOR THE THREE MONTHS ENDED AUGUST 31,
|
||||||||
2012
|
2011
|
|||||||
Sales Revenue
|
$
|
2,076,672
|
$
|
2,413,193
|
||||
Cost of Goods Sold
|
1,390,299
|
2,314,934
|
||||||
Gross Profit
|
686,372
|
98,259
|
||||||
Selling Expenses
|
8,813
|
1,899
|
||||||
G&A Expenses
|
87,472
|
32,756
|
||||||
Total expenses
|
96,285
|
34,655
|
||||||
Income from operations
|
590,087
|
63,604
|
||||||
Interest Income (Expense)
|
(104,153
|
)
|
(91,753
|
)
|
||||
Other income (Expense)
|
0
|
29,161
|
||||||
Profit before tax
|
485,934
|
1,012
|
||||||
Income tax
|
72,890
|
253
|
||||||
Net income
|
413,044
|
759
|
||||||
Other comprehensive income
|
||||||||
Foreign currency translation adjustment
|
69,175
|
79,637
|
||||||
Comprehensive income
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$
|
482,219
|
$
|
80,396
|
||||
Income (Loss) Per Share, Basic and Diluted
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$
|
0.01
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$
|
0.00
|
||||
Weighted Average Number of Common Shares, Basic and Diluted
|
30,067,741
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30,067,741
|
||||||
See Notes to Consolidated Financial Statements
3
HUAYUE ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
UNIT: USD$
|
||||||||
FOR THE THREE MONTHS ENDED AUGUST 31,
|
||||||||
2012
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2011
|
|||||||
Cash Flows From Operating Activities:
|
||||||||
Net income
|
$
|
413,044
|
$
|
759
|
||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
Depreciation and amortization
|
28,472
|
17,059
|
||||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
(1,792,053
|
)
|
(332,428
|
) | ||||
Inventory
|
659,024
|
(255,713
|
)
|
|||||
Prepaid account
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(1,418,627)
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1,729,228
|
||||||
Other receivable
|
(378,755)
|
(351,393
|
)
|
|||||
Due from related parties
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(148,672
|
)
|
(1,881,245
|
) | ||||
Accounts payable
|
17,319
|
651,162
|
|
|||||
Customer deposit
|
77,133
|
289,099
|
|
|||||
Due to related parties
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(114,366
|
)
|
(234,527
|
)
|
||||
Taxes payable
|
55,610
|
13,037
|
||||||
Deferred tax assets
|
(988
|
)
|
-
|
|||||
Other payables
|
(173,447
|
)
|
366,520
|
|||||
Net cash provided by (used in) operating activities
|
(2,776,304
|
)
|
11,558
|
|
||||
Cash flows from investing activities:
|
||||||||
Addition to plant and equipment
|
-
|
-
|
|
|||||
Long-term Investment
|
-
|
589
|
||||||
Net cash provided by (used in) investing activities
|
-
|
589
|
||||||
Cash flows from financing activities:
|
||||||||
Short term debt
|
(325,269
|
) |
(682,986)
|
|||||
Notes payable
|
(2,338
|
) |
--
|
|||||
Capital contribution
|
2,998,295
|
(111,707
|
) | |||||
Net cash provided by (used in) financing activities
|
2,670,688
|
(794,693)
|
||||||
Effect of exchange rate changes on cash and cash equivalents
|
69,175
|
10,923
|
||||||
Net increase (decrease) in cash and cash equivalents
|
(36,441
|
)
|
(771,623
|
) | ||||
Cash and cash equivalents at beginning of period
|
1,085,784
|
2,701,516
|
||||||
Cash and cash equivalents at end of period
|
$
|
1,049,343
|
$
|
1,929,893
|
||||
Supplemental disclosures of cash flow information:
|
||||||||
Cash paid during the periods for:
|
||||||||
Interest
|
$
|
-
|
$
|
90,401
|
||||
Income taxes
|
$
|
-
|
$
|
-
|
||||
See Notes to Consolidated Financial Statements
4
NOTE 1 – ORGANIZATION AND OPERATIONS
Huayue Electronics, Inc. (“Huayue Electronics” or the “Company”) was incorporated under the laws of the State of Delaware on January 13, 2005. The Company was initially named “HXT Holdings, Inc.,” but changed its name to Huayue Electronics, Inc. on November 2, 2011.
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, by merging HXT Acquisition Corp., a newly formed Delaware corporation that was wholly owned by the Company, into China Metal. 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 developing, manufacturing and selling high frequency induction lights and electrolytic capacitors. Changzhou Huayue’s offices and manufacturing facilities are located in China.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
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 financial statements reflect the financial position of the Company and its subsidiary, Changzhou Huayue Electronic Co., Ltd., as of August 31, 2012 and May 31, 2012 and the results of operations and cash flows of the Company and its subsidiary, Changzhou Huayue Electronic Co., Ltd., for the three months ended August 31, 2012 and 2011.
Principles of consolidation
The consolidated financial statements include the financial statements of China Metal Holding, Inc. and Changzhou Huayue Electronics Co., Ltd. All inter-company transactions and balances are eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include: the allowance for bad debt, the valuation of inventory, and estimated useful lives and impairment of property and equipment.
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.
Accounts Receivable and Allowance for Bad Debt
Accounts receivable are stated at net realizable value. An allowance for doubtful accounts is established based on the management’s assessment of the recoverability of accounts and other receivables. 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.
5
Inventory
Inventory is primarily composed of raw materials and packing materials for manufacturing, work in process, and finished goods. Inventories are valued at the lower of cost or market with cost determined on a weighted average basis. Management 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.
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
|
Expenditures for maintenance and repairs are charged to expense as incurred. Additions, renewals and betterments are capitalized.
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.
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.
Prepaid account
Prepaid account represents 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 prepaid account was $3,808,174 as of August 31, 2012 and $2,389,547 as of May 31, 2012.
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.
6
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. The deferred tax asset at August 31, 2012 and May 31, 2012 were $39,226 and $38,238, respectively.
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 $147,095 and $134,962 VAT payable net of payments in the financial statements as of August 31, 2012 and May 31, 2012, respectively.
Advertising costs
Advertising costs for newspaper and television are expensed as incurred. The Company incurred advertising costs of $184 and $1,899 for the three months ended August 31, 2012 and 2011, respectively.
Mailing and handling costs
The Company accounts for mailing and handling fees in accordance with the FASB ASC 605-45 (Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs). T he 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 August 31, 2012 and 2011, the Company incurred $1,922 and $831 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.
Fair value of financial instruments
For certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.
As of August 31, 2012, 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.
7
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 $69,175 and $79,637 as of August 31, 2012 and 2011, respectively.
The following exchange rates were adopted to translate the amounts from RMB into United States dollars (“USD$”) for the respective years:
August 31,
|
August 31,
|
||||||
2012
|
2011
|
||||||
Year End RMB Exchange Rate (RMB/USD$)
|
6.3449
|
6.3864
|
|||||
Average Yearly RMB Exchange Rate (RMB/USD$)
|
6.3277
|
6.4482
|
Statutory Reserve
Subsidiaries incorporated in China are required to make appropriations to reserve funds, based on after-tax net income determined in accordance with generally accepted accounting principles of the People’s Republic of China (“PRC GAAP”). Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10% of net income after tax per annum, and any contributions are not to exceed 50% of the respective companies’ registered capital.
As of August 31, 2012, the Company has appropriated USD $31,263 to the statutory reserve.
New accounting pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
The Company provides an allowance for doubtful accounts related to its receivables. The receivables and allowance balances at August 31, 2012 and May 31, 2012 are as follows:
August 31, 2012
|
May 31, 2012
|
|||||||
Accounts Receivable
|
$
|
5,743,548
|
$
|
3,951,883
|
||||
Less: Allowance for Doubtful Accounts
|
(261,505)
|
(261,893)
|
||||||
Accounts Receivable, Net
|
$
|
5,482,043
|
$
|
3,689,990
|
8
The prepaid account consisted of the follows:
|
||||||||
August 31, 2012
|
May 31, 2012
|
|||||||
Prepayment for purchase of raw materials
|
$
|
3,776,711
|
$
|
2,319,805
|
||||
Prepayment for advertisement, exhibitions, utilities, consulting fees, etc.
|
31,463
|
69,742
|
||||||
Total prepaid account
|
$
|
3,808,174
|
$
|
2,389,547
|
NOTE 5 – OTHER RECEIVABLE
The other receivable consisted of the follows:
August 31, 2012
|
May 31, 2012
|
|||||||
Other Receivable
|
||||||||
Receivables from Entities
|
$
|
246,480
|
$
|
431,503
|
||||
Receivables from Individuals
|
1,211,440
|
647,662
|
||||||
Total
|
$
|
1,457,920
|
$
|
1,079,165
|
Inventory consists of finished goods, work-in-process, and raw materials. No allowance for inventory was reserved as of August 31, 2012 and May 31, 2012.
The components of inventories as of August 31, 2012 and May 31, 2012 were as follows:
August 31, 2012
|
May 31, 2012
|
|||||||
Raw materials
|
$
|
187,017
|
$
|
410,729
|
||||
Packaging
|
59,807
|
59,896
|
||||||
Work-in-progress
|
707,770
|
720,229
|
||||||
Finished goods
|
371,772
|
794,466
|
||||||
Total Inventories
|
$
|
1,326,367
|
$
|
1,985,391
|
The components of plant, property and equipment as of August 31, 2012 and May 31, 2012 were as follows:
August 31, 2012
|
May 31, 2012
|
|||||||
Machinery
|
$
|
1,247,204
|
$
|
1,106,702
|
||||
Electronic Equipment
|
69,324
|
182,934
|
||||||
Transportation Equipment
|
254,649
|
283,872
|
||||||
Subtotal
|
1,571,176
|
1,573,507
|
||||||
Less: Accumulated Depreciation
|
(1,050,326)
|
(1,024,186)
|
||||||
Total plant, property and equipment, net
|
$
|
520,850
|
$
|
549,322
|
The depreciation expense for the three months ended August 31, 2012 and 2011 was $28,472 and $37,820, respectively.
9
NOTE 8 - 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.
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 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
|
Controlling person of China Metal Holding, Inc.
|
Ms. Li Xinmei
|
Mr. Pan Shudong’s Wife and Director of Changzhou Huayue Electronic Co.,Ltd
|
Pan Yile
|
Mr. Pan Shudong’s Daughter and Employee of Changzhou Huayue Electronic Co.,Ltd
|
(i) Due from Related Party:
Due from Related Parties, at August 31, 2012 and May 31, 2012, consisted of the following balances:
Transaction
|
August 31, 2012
|
May 31, 2012
|
|||||||
Changzhou Hengchuan Plastics Co, Ltd
|
Other Receivable
|
$
|
384,866
|
375,334
|
|||||
Changzhou Jinyue Electronics Co., Ltd
|
Accounts receivable
|
-
|
49,278
|
||||||
Changzhou Shiji Jinyue Packaging Co.,Ltd
|
Accounts receivable
|
827,652
|
371,873
|
||||||
Changzhou Shiji Jinyue Packaging Co.,Ltd
|
Advance to Suppliers
|
-
|
61,427
|
||||||
Pan Yile
|
Other Receivable
|
127,911
|
312,630
|
||||||
Mr. Pan Shudong
|
Due from Mr. Pan
|
165,989
|
187,156
|
||||||
Ms. Xinmei Li
|
Due from Mr. Pan
|
32,328
|
32,376
|
||||||
Total due from related parties
|
$
|
1,538,746
|
$
|
1,390,074
|
(ii) Due to Related Parties
Due to Related Parties at August 31, 2012 and May 31, 2012 consisted of the follows:
August 31, 2012
|
May 31, 2012
|
||||||||
Changzhou Leyuan International Trade Co.,Ltd
|
Accounts payable
|
$
|
67,338
|
$
|
114,290
|
||||
Changzhou Hengchuan Plastics Co, Ltd
|
Accounts payable
|
12,609
|
80,222
|
||||||
Total due to related parties
|
$
|
79,946
|
$
|
194,312
|
10
The Company’s short term debt consisted of the follows:
|
August 31, 2012
|
May 31, 2012
|
||||||
USD
|
USD
|
|||||||
Loan from China Communication Bank ($0.79 million is due on 10/17/2012 with 8.528% annual interest rate , $0.95 million is due on 12/22/2012 with 8.528% annual interest rate, $0.63 million is due on 12/12/2012 with 8.528% annual interest rate)
|
$
|
3,152,138
|
$
|
3,156,815
|
||||
Loan from China Industrial and Commercial Bank ($0.48 million is due on 9/10/2013 with 5.810% annual interest rate and $0.47 million is due on 6/10/2013 with 6.560% annual interest rate)
|
945,641
|
947,044
|
||||||
Loan from Chinese Bank (6.893% annual interest rate, due on 8/8/2013)
|
1,103,248
|
1,420,567
|
||||||
Loan from Changzhou Wujinyintong Agriculture Credit Union (6% annual interest rate, due on 3/18/2013)
|
472,821
|
473,522
|
||||||
Loan from Changzhou Wujinyinfeng Agriculture Credit Union (6% annual interest rate, due on 3/18/2013)
|
788,034
|
789,204
|
||||||
Total short term debt
|
6,461,883
|
6,787,152
|
NOTE 11 – NOTES PAYABLE
August 31, 2012
|
May 31, 2012
|
|||||||
Notes payable to Huaxian Bank
|
1,576,069
|
1,578,407
|
||||||
Total notes payable
|
$
|
1,576,069
|
$
|
1,578,407
|
All notes payable were due within one year and bear 6% annual interest rate on the maturity date.
Tax payable at August 31, 2012 and May 31, 2012 are as follows:
|
||||||||
August 31, 2012
|
May 31, 2012
|
|||||||
Corporate Income Tax
|
$
|
125,232
|
$
|
106,366
|
||||
Value-Added Tax
|
147,095
|
134,962
|
||||||
Other Tax & Fees
|
24,981
|
370
|
||||||
Total Tax Payable
|
$
|
297,308
|
$
|
241,968
|
The Company’s other payable, at August 31, 2012 and May 31, 2012, consisted of the follows:
Type of Other payable:
|
August 31, 2012
|
May 31, 2012
|
||||||
Maintenance, utilities, and insurance
|
$
|
298,331
|
$
|
518,795
|
||||
Payable to service fees
|
87,104
|
87,723
|
||||||
Others
|
48,459
|
824
|
||||||
Total other payable
|
$
|
433,894
|
$
|
607,341
|
11
OTE 14 - INCOME TAXES
For the three months ended August 31, 2012 and 2011, Changzhou Huayue Electronics Co., Ltd recorded income tax provisions of $72,890 and $283 respectively.
(i) The components of income (loss) before income tax expense are as follows:
For the three months ended August 31,
|
||||||||
2012
|
2011
|
|||||||
P.R.China
|
485,934
|
1,012
|
(ii) The components of the income tax benefit (expense) are as follows:
For the three months ended August 31,
|
||||||||
2012
|
2011
|
|||||||
Current
|
(112,116
|
)
|
(283
|
)
|
||||
Deferred:
|
39,226
|
-
|
||||||
Total Income tax benefit (expense)
|
(72,890
|
)
|
(283
|
)
|
(iii) The following table summarizes deferred taxes resulting from differences between financial accounting basis and tax basis of assets and liabilities:
|
||||||||
August 31, 2012
|
May 31, 2012
|
|||||||
Current assets and liabilities
|
||||||||
Accounts receivable allowances
|
39,226
|
-
|
||||||
Deferred tax assets, net, current
|
39,226
|
-
|
||||||
Changzhou Huayue Electronics Co., Ltd is subject to the Enterprise Income Tax (“EIT”) at a statutory rate of 25%. However, according to P.R. China tax law, the effective tax rate for the bad debt expense deduction is only 15%. The Company recognized $39,226 current deferred tax assets at enacted 15% tax deduction rate for the temporary differences between the financial reporting bases and the tax bases of its allowance for accounts receivable.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.
NOTE 15 – COMMON STOCK AND ADDITIONAL PAID IN CAPITAL
On July 26, 2012, the Company received $300,065 cash payment from its shareholders. The cash receipt was recorded as addition to the paid in capital.
On July 25, 2012, Ms. Li Xinmei contributed $2,698,230 to the Company. The contribution was recognized as additional paid in capital. Ms. Li is a member of the Board of Directors, spouse of the CEO, and a principal shareholder of the Company.
Both transactions mentioned above did not increase the outstanding shares of the common stock. Therefore, there were 30,067,741 shares of common stock issued and outstanding as of August 31, 2012 and May 31, 2012.
12
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 Section 1A titled “Risk Factors” in the Company’s Annual Report on Form 10-K filed on August 28, 2012. 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 60-40 between lighting and
capacitors, 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.
Early in the last fiscal year, we changed our domestic distribution strategy, moving from direct sales to the development of regional sales agents. We have identified 46 agents and plan to increase this number to 60 by December 31, 2012. Changzhou Huayue believes that this strategic decision will enable us to expand our market throughout China in the coming year.
Results of Operations
Our operations during the first quarter of fiscal 2013 continued our growth trend - although the growth is not evident on first view of our Income Statements. We recorded sales of $2,076,672 for the quarter ended August 31, 2012, which was 14% lower than our sales for the quarter ended August 31, 2011. However, sales in the prior quarter included a transaction arranged prior to the September 2011, when we became a public company. $1,493,830 of the sales revenue in that prior quarter 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. In the period since we became a public company, there have been no other sales at discount to market, and 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.
13
If the loss-sale to Changzhou Teweile is disregarded, then the growth in sales from the first quarter of fiscal 2012 to the first quarter of fiscal 2013 was marked. The primary reason for the improvement is the conversion of our marketing program from direct sales to sales through agents. In the first quarter of fiscal 2012, the agency program was still in its start-up phase. The marked improvement in sales in the first quarter of fiscal 2013 indicates that the new agents are gaining traction in their marketing efforts.
The margins on our sales improved significantly in the first quarter of fiscal 2013, both as compared to the first quarter of fiscal 2012 and as compared to the entirely of fiscal 2012. The improvement as compared to the first quarter of fiscal 2012 (33% vs. 4%) is primarily attributable to the loss-sale that accounted for 62% of revenue in that quarter. However, our gross margin for the year ended May 31, 2012 was itself only 13%, primarily due to our policy of seeking market position by introducing lighting products while they are still in the final development stages. The 33% gross margin achieved in the first quarter of fiscal 2013 is indicative of our maturing position in the lighting
market, which permits us to demand higher profits on our lighting sales.
Our selling expenses remain insignificant - $8,813 in the quarter ended August 31, 2012 - due to our reliance on a network of independent sales agents. General and administrative expenses increased by 167% from $32,756 in the first quarter of fiscal 2012 to $87,472 in the first quarter of fiscal 2013. The primary reasons for the increase in G&A expenses were our efforts to promote our new lighting products, as well as an increase in the required contribution to the national pension fund. General and administrative expenses will continue to increase in the coming year, 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.
As a result of our improved gross profit and the relatively small increase in our G&A expenses, our income from operations increased from $63,604 in the quarter ended August 31, 2011 to $590,087 in the quarter ended August 31, 2012.
We rely on short-term bank debt for our liquidity, with the result that interest expenses exceed our total operating expenses. Interest expense (net of interest income) of $104,153 in the first quarter of fiscal 2013 exceeded the $91,753 recorded in the first quarter of fiscal 2012 primarily due to increases in interest rates. As discussed below, we hope to access the international capital markets to obtain equity funding to pay off the debt and reduce this cost and our exposure to increasing interest rates.
Our net profit before tax for the quarter ended August 31, 2012 was $485,934, a significant improvement over the quarter ended August 31, 2011 when we barely broke even. China imposes a national corporate income tax rate of 25%. Currently, however, a portion of our net pre-tax income is deferred in accordance with Chinese tax regulations that favor technology companies in their growth stage. As a result, we accrued only $72,890 for income tax in the quarter ended August 31, 2012. As a result, our net income for the quarter was $413,044.
14
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 $69,175 during the quarter ended August
31, 2012. During the quarter ended August 31, 2011, when the exchange rate was more volatile, our accumulated other comprehensive income increased by $79,637.
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 $8,471,846 that we owed to lending institutions at August 31, 2012 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 August 31, 2012 we had only $4,310,104 in working capital, despite cash contributions to capital during the quarter that totaled $2,998,292.
The largest component of our current assets was our accounts receivable. Accounts receivable of $5,482,043 at August 31, 2012, are large relative to recent revenue. Some of the increase is attributable to sales made in connection with government lighting programs, payment for which is delayed pending completion of bureaucratic approval processes. In addition, 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.
The next largest component of our current assets was our 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 $3,808,174 prepaid account on our August 31, 2012 balance sheet.
The amount due from related parties increased during the quarter ended August 31, 2012 due to our increased sales and manufacturing activity. In order to optimize our cash resources, Changzhou Huayue buys some of its raw materials from related parties, and sells a large portion of its finished goods to related parties. As a result, at August 31, 2012 we owed $79,946 to entities controlled by our CEO and his family, and those or other such entities owed $1,538,746 to us. Our plan is that as our business expands and our cash flows become more stable, we will reduce or eliminate the incidence of related party sales.
15
Included in our current liabilities at August 31, 2012 was an “other payable” of $433,894. 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 August 31, 2012, to meet that obligation we borrowed on an overnight basis the funds recorded as “other payable.”
Cash used in operations during the quarter ended August 31, 2012 was $2,776,304, despite our net income of $413,044 for the quarter. The primary reason for the disparity was the increase of $1,792,053 in our accounts receivable. In addition, in anticipation of a large project, we increased our prepaid account by $1,418,627.
Despite the significant use of cash in operations during the quarter, our cash balance at August 31, 2012 was $1,049,343, only slightly less than at the May 31, 2012 end of our prior fiscal year. The presence of cash in our accounts was the result of a capital contribution of $2,698,230 by Li Xinmei, a member of our Board. In addition, the prior shareholders of our subsidiary, China Metal Holding, Inc., contributed $300,065, which was required to satisfy the Chinese government regulations applicable to the acquisition of Changzhou Huayue by China Metal Holding. The cash balance that resulted should provide us sufficient liquidity 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.
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 August 31, 2012. The evaluation revealed that there are material weaknesses in our disclosure controls, specifically:
16
● |
The relatively small number of employees who are responsible for accounting functions prevents us from segregating duties within our internal control system.
|
|
● | Our accounting personnel lack expertise in identifying and addressing complex accounting issued under U.S. Generally Accepted Accounting Principles. |
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 August 31, 2012.
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 first 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. | |
Item 1A | Risk Factors |
There have been no material changes from the risk factors included in Section 1A of our Annual Report on Form 10-K filed on August 28, 2012. | |
Item 2. | Unregistered Sale of Securities and Use of Proceeds |
(a) Unregistered sales of equity securities | |
None. | |
(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 1st quarter of fiscal 2013. | |
Item 3. | Defaults Upon Senior Securities |
None. | |
Item 4. | Mine Safety Disclosures |
None. | |
Item 5 | Other Information. |
None. |
17
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
|
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. | |
Date: October 22, 2012
|
By: /s/ Pan Shudong
|
Pan Shudong, Chief Executive Officer
|
|
By: /s/ Gan Liuzhi
|
|
Gan Liuzhi, Chief Financial Officer, Chief Accounting Officer
|
18