Huayue Electronics (GREY:HUAY)

Tarsier Ltd.

Consolidated Statements of Operations and Comprehensive Income (Unaudited)

The information contained in Item 2.01, Item 2.03, and Item 3.02 is hereby incorporated by reference.

On December 31, 2015, Tarsier Systems, Ltd, a New York corporation (“Tarsier Systems”) and wholly-owned subsidiary of Tarsier Ltd., a Delaware corporation (the “Company,” “we,” “us” or “our”), completed an acquisition of certain of the assets of Demansys Energy Inc., including a patent-pending energy management software platform that was formerly marketed under the name “Grid Daemon.” The acquisition also included the assignment to us of an existing contract for the use of the software platform by a major N.Y.-based industrial client, which contract generated revenues for Demansys Energy Inc. in 2015 of over $1.3 million as a result of the platform’s performance. The acquisition was valued at $1.9 million and the purchase price consisted of (i) a promissory note in the principal amount of $450,000 that is payable over a six-month period, bears interest only upon a late payment at the rate of 6% per annum (plus an additional 15% per annum following an Event of Default, as defined) and, following a payment default by us under such note, is convertible, at the option of the holder, into shares of our common stock at a 30% discount to the 10-day average closing price of our common stock immediately preceding the date of conversion, subject to certain limitations, and (ii) 2,500,000 shares of our common stock, which shares are being held in escrow and will be released to the seller only if we generate at least $2.0 million of net revenues from the acquired software platform over the two-year period ending on December 31, 2017.

The foregoing description of such acquisition is qualified in its entirety by reference to the Asset Purchase Agreement, dated December 1, 2015, between Tarsier Systems and Demansys Energy, Inc., as amended by the Amendment to the Asset Purchase Agreement, dated December 30, 2015, between Tarsier Systems and Demansys Energy LLC, copies of which are filed as Exhibits 10.1 and 10.1(a), respectively, to this Report.

On January 29, 2016, we entered into a Senior Secured Revolving Credit Facility Agreement (the “Credit Agreement”) with TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership (“TCA”). Pursuant to the Credit Agreement, TCA agreed to lend us up to a maximum of $15 million for working capital purposes, and provided an initial credit line in the amount of $5,000,000, which is subject to funding in the discretion of TCA. In connection with the closing, an initial take down of $400,000 was funded by TCA. Any increase in the amount of the credit line from the initial amount up to the maximum amount is at the discretion of TCA.

The amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Note (the “Revolving Note”) that is secured by a first priority security interest in substantially all of our assets in favor of TCA pursuant to a Security Agreement dated (the “Security Agreement”). The loan also is secured by the pledge of the capital stock of our operating subsidiaries. The initial borrowing under the Revolving Note in the amount of $400,000 bears interest at the rate of 11% per annum and is due and payable on July 29, 2016. The maturity date may be extended in TCA’s sole discretion for an additional two six- months periods. TCA will collect in reserve an amount that is held in a lock box account equal to 20% of the revolving loan commitment on such date.

Upon an event of default under the Revolving Note, TCA may convert all or any portion of the outstanding principal and accrued and unpaid interest, and any other sums due and payable under the Revolving Note, into shares of our common stock at a conversion price equal to 85% of the lowest daily volume weighted average price of our common stock during the five trading days immediately prior to the applicable conversion date, in each case subject to TCA not being able to beneficially own more than 4.99% of our outstanding common stock upon any conversion.

We have the right to prepay the Revolving Note, in whole or in part. If we prepay the Revolving Note in excess of 80% of the principal then due within 90 days prior to the maturity date of the Revolving Note, we are obligated to pay TCA an amount for liquidated damages and for the costs of being prepared to make funds available under the Credit Agreement equal to 2.5% of the outstanding Revolving Note Commitment.

An event of default under the Credit Agreement includes (i) any non-payment of the obligations, (ii) a material misrepresentations by us in the Credit Agreement or any related document, (iii) a default by us of our obligations under the terms of the Credit Agreement or any other related agreement, (iv) a default by us under any other obligation, (v) a bankruptcy of our company or other assignment for the benefit of creditors, (vi) a judgment against us in excess of a specified amount, (vii) the occurrence of a “Material Adverse Effect” as described in the Credit Agreement, (vii) a change of control of our company, (viii) an impairment of any of the collateral we have pledged, (ix) a material adverse change in our financial condition or value of the collateral, or (x) a determination by TCA that the prospect for the repayment by us of the obligation is impaired. Upon the occurrence of an event of default under the Credit Agreement or the Revolving Note, all amounts become immediately due and payable.

We also agreed to pay TCA various fees during the term of the Credit Agreement, including (i) a commitment fee in the amount of 2% of the amount drawn, (ii) an advisory fee of $5,000,000 (the “Advisory Fee”), which is payable in 24 monthly installments of $125,000 starting in August 2016, at our election, in cash or through the sale by TCA of shares of our common stock issued to TCA upon conversion of a portion of the 9,500,000 shares of our Series A Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”), we issued to TCA under the Credit Agreement, with a balloon balance due at the end of such 24-month period, and (iii) collection fees, asset monitoring and due diligence fees. We paid TCA an aggregate of $51,700 in cash fees, expenses and closing costs in connection with the initial closing under the Credit Agreement and netted $348,300 in connection with such closing. We also provided TCA with certain make-whole rights with regard to our common stock used as fees or issued upon conversion of the Revolving Note.

The foregoing descriptions of the Credit Agreement, Revolving Note, Security Agreement and the pledge agreement are qualified in their entirety by reference to these agreements, copies of which are filed as Exhibits 10.4, 10.5, 10.6 and 10.7, respectively, to this Report.

See the disclosure under Item 2.03 of this Report. Under the terms of the Credit Agreement and in connection with the Advisory Fee, we agreed to issue to TCA 9,500,000 shares of the Series A Preferred Stock in accordance with the terms and conditions set forth in the Credit Agreement. The issuance of the shares of Series A Preferred Stock was made in reliance on the exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), set forth in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder.

The Series A Preferred Stock ranks senior to all classes or series of our capital stock except for those classes or series, if any, which specifically provide that such class or series will rank senior in preference or priority to the Series A Preferred Stock. Holders of shares of the Series A Preferred Stock are not entitled to vote on any matter unless and until the Series A Preferred Stock has been converted into shares of our common stock. Each share of the Series A Preferred Stock may be converted into our common stock at a conversion rate equal to one divided by the average of the volume weighted average price of our common stock for the five business days immediately prior to the date that a conversion notice is provided to our company. Any fractional shares of our common stock that result from a conversion of the Series A Preferred Stock shall be rounded up to the next whole share.

The foregoing description of the Series A Preferred Stock is qualified in its entirety by reference to the Certificate of Designation (the “Series A Preferred Certificate of Designation”) filed with the Secretary of State of the State of Delaware, a copy of which is filed as Exhibit 4.1 to this Report.

See the disclosure under Item 2.03 of this Report. We filed the Series A Preferred Certificate of Designation with the Secretary of State of the State of Delaware on February 29, 2016, which, among other things, established the designation, powers, rights, privileges, preferences and restrictions of the Series A Preferred Stock.

Effective February 1, 2016, Dr. YunZhong Wu resigned his position as a director of our company due to personal reasons. Dr. Wu’s resignation was not due to any disagreement with our company on any matter related to our operations, policies or practices. Our board of directors has appointed Mrs. Yan Sun as Dr. Wu’s replacement on our board of directors, effective as of February 1, 2016. Mrs. Sun, 46, is the Chief Financial Officer of Dalian Tongfa Material Co Ltd., a Chinese manufacturing company, at which company she has been employed for more than the past ten years.

Mrs. Sun was appointed to our board of directors pursuant to the terms of the Shareholders Agreement dated as of June 12, 2015 (the “Shareholders’ Agreement”) among Shudang Pan, Xinmei Li, Kuanlian Peng, Hao Wang, Jianxin Li, Shurong Li and Sutton Global Associates Inc., a company that is controlled by Mr. Isaac Sutton, our President and Chief Executive Officer and a member of our board of directors, all of which are stockholders of our company, pursuant to which such stockholders agreed, among other matters, to elect two persons to our board as representatives of such stockholders during the two-year period ending on June 11, 2017, which persons were initially Dr. YunZhong Wu and Ms. Yile Lisa Pan. Other than the requirements of the Shareholder’s Agreement, as described above, there are no arrangements or understandings between either of Mrs. Yan Sun and any other person or persons pursuant to which Mrs. Yan Sun was selected as a director of our company.

Tarsier Ltd.

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

Management Discussion and Analysis

Net loss from continuing operations for the three and six months ended November 30, 2015 was $706,051 and $1,030,851, respectively. There was no net income for continuing operations for the three and six months ended November 30, 2014. We anticipate that, depending on market conditions and our current state of operations, we may incur additional operating losses in the future. Therefore, our auditors have raised substantial doubt about our ability to continue as a going concern.

Item 5.03.  Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.

On December 4, 2015, Huayue Electronics, Inc. (the “Company”) filed a Certificate of Amendment (the “Amendment”) to its Certificate of Incorporation with the Secretary of State of the State of Delaware to (i) change the Company’s name from “Huayue Electronics, Inc.” to “Tarsier Ltd.” (the “Name Change”), (ii) increase the number of authorized shares of the Company’s common stock from 60,000,000 shares to 150,000,000 shares, and (iii) increased the number of authorized shares of the Company’s preferred stock from 1,000,000 shares to 10,000,000 shares. The Amendment became effective immediately upon filing on December 4, 2015.

On December 3, 2015, the Company filed notification of the Name Change (the “Notification”) with the Financial Industry Regulatory Authority (“FINRA”). In the Notification, the Company requested FINRA to authorize a new trading symbol for the Company’s common stock. On December 9, 2015, the Company received notice from FINRA that the Company’s name change application has been approved, and that the Company’s common stock will trade under its new name and under the new trading symbol “TAER” effective December 11, 2015.

Huayue Electronics Inc.

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

Management Discussion and Analysis

In June 2015, we disposed of our wholly-owned subsidiary, China Metal Holdings, Inc. The results of China Metal are presented as Net income from discontinued operations in our unaudited consolidated statements of income for the periods ended August 31, 2015 and 2014. Refer to Note 4 in the notes to the unaudited consolidated financial statements for a breakdown of major income and expense items of the discontinued entity.

Net loss from continuing operations for the periods ended August 31, 2015 and 2014 was $324,800 and $0, respectively. We anticipate that depending on market conditions and our current state of operations, we may incur additional operating losses in the future. Therefore, our auditors have raised substantial doubt about our ability to continue as a going concern.

Item 4.01 Change in Registrant’s Certifying Accountant

 
On October 14, 2015 the Board of Directors of Huayue Electronics, Inc. dismissed Canuswa Accounting & Tax Service Inc. as its independent public accounting firm. There is no audit committee of the Board of Directors.

The audit report of Canuswa Accounting & Tax Service Inc. on Huayue Electronics, Inc.’s financial statements for the year ended May 31, 2015 did not contain any adverse opinion or disclaimer of opinion or qualification. Canuswa Accounting & Tax Service Inc. did not, during the applicable periods, advise Huayue Electronics, Inc. of any of the enumerated items described in Item 304(a)(1)(iv) of Regulation S-K.

During the most recent fiscal year, there was no (i) disagreement between Huayue Electronics, Inc. and Canuswa Accounting & Tax Service Inc. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to its satisfaction, would have caused Canuswa Accounting & Tax Service Inc. to make reference to the subject matter of such disagreement in connection with its report, or (ii) “reportable event,” as described in Item 304(a)(1)(v) of Regulation S-K.

Huayue Electronics, Inc. has requested Canuswa Accounting & Tax Service Inc. to furnish a letter addressed to the Securities Exchange Commission stating whether or not Canuswa Accounting & Tax Service Inc. agrees with the statements in this 8-K. A copy of the letter will be filed with an amendment to this 8-K when received.

On the same day, Huayue Electronics, Inc. retained the firm of D’Arelli Pruzansky, P.A. to serve as its new independent public accounting firm. At no time during the past two fiscal years or any subsequent period prior to October 14, 2015 did Huayue Electronics, Inc. consult D’Arelli Pruzansky, P.A. regarding any matter of the sort described above with reference Canuswa Accounting & Tax Service Inc., any issue relating to the financial statements of Huayue Electronics, Inc., or the type of audit opinion that might be rendered for Huayue Electronics, Inc.

Huayue Electronics Inc.

Consolidated Statements of Income and Comprehensive Income

(In US Dollars)

Management Discussion and Analysis

In May 2015, we approved plans to dispose of our wholly-owned subsidiary, China Metal Holdings, Inc. The results of China Metal are presented as Net income from discontinued operations in our consolidated statements of income for the years ended May 31, 2015 and 2014. Refer to Note 2 in the notes to the consolidated financial statements for a breakdown of major income and expense items of the discontinued entity.

We did not have any sales for the years ended May 31, 2015 and May 31, 2014. During the year ended May 31, 2015 and 2014, the continuing entity incurred $48,750 and $0, respectively, in operating expenses. The increase in fiscal year 2015 pertains to professional fees and the salary of our newly appointed chief executive officer.

Net loss from continuing operations for the years ended May 31, 2015 and 2014 was $48,750 and $0, respectively.

Item 1.01 Entry into a Material Definitive Agreement.

 
On June 12, 2015, Huayue Electronics, Inc., a Delaware corporation (the “Company”), entered into and consummated a Stock Purchase Agreement dated as of June 12, 2015 (the “Purchase Agreement”) between the Company and Mr. Shudang Pan, the Chairman of the Board of the Company and the Chief Executive Officer of the Company’s principal operating subsidiary, Changzhou Huayue Electronic Co., Ltd., a company organized under the laws of, and located in, The Peoples Republic of China (“Changzhou Huayue”), pursuant to which the Company sold to Mr. Pan 100% of the capital stock of its wholly-owned subsidiary, China Metal Holding Inc., a Delaware corporation and the owner of 100% of the capital stock of Changzhou Huayue, in consideration of the sale and transfer by Mr. Pan to the Company of 10,000,000 shares of the Company’s common stock. At the time of the sale, the business and assets of Changzhou Huayue constituted substantially all of the business and assets of the Company, other than the recently-formed business the Company is developing in Kazakhstan to manufacture and distribute LED lighting products in Kazakhstan and other Central Asian countires. The Purchase Agreement contained customary representations and warranties by the parties.

On June 12, 2015, the Company entered into a Shareholders Agreement dated as of June 12, 2015 (the “Shareholders’ Agreement”) with Shudang Pan, Xinmei Li, Kuanlian Peng, Hao Wang, Jianxin Li, Shurong Li and Sutton Global Associates Inc., a company that is controlled by Mr. Isaac Sutton, the President and Chief Executive Officer of the Company and a member of the Company's Board of Directors, pursuant to which such stockholders of the Company agreed (i) not to sell, transfer, pledge or otherwise dispose of any shares of common stock of the Company, except under certain limited circumstances primarily involving transfers for estate planning purposes, prior to June 1, 2016, (ii) during the two-year period ending on June 11, 2017, to elect two persons to the Board as representatives of such stockholders, which persons were initially Dr. YunZhong Wu and Ms. Yile Lisa Pan, the daughter of Shudang Pan, (iii) that the Company shall not cause a reverse or forward split of its common stock, or enter into any kind of other similar arrangement with respect to its common stock, without the unanimous consent of the full Board, and (iv) that the Company shall not issue any equity securities of the Company or enter into any management agreement, consulting agreement, employment agreement or other agreement for the provision of services with a senior executive or any senior management of the Company without the approval of a majority of the directors then serving on the full Board.

In addition, in the Shareholder’s Agreement, the stockholders party thereto, which constituted the holders of 17,614,186 shares, or approximately 51%, of the Company’s outstanding shares of common stock, consented to (i) the transactions contemplated by the Purchase Agreement, (ii) a proposed transaction in which the Company may acquire from SavWatt USA, Inc., another company controlled by Mr. Sutton, the “SavWatt” name and brand and all trademarks and related intellectual property owned by SavWatt USA in consideration of the issuance by the Company to SavWatt USA of 1,000,000 shares of its common stock, and (iii) proposed amendments to the certificate of incorporation of the Company pursuant to which the name of the Company may be changed to such name as the Board shall approve, the authorized shares of common stock of the Company may be increased from 60,000,000 shares to 150,000,000 shares and the authorized shares of preferred stock of the Company may be increased from 1,000,000 shares to 10,000,000 shares . On June 12, 2015, the Board approved the proposed amendments to the Company’s certificate of incorporation to increase the Company’s authorized common stock and preferred stock, which amendments are expected to be effected upon the Company’s compliance with the applicable requirements for notice to the Company's stockholders required by Section 14 of the Securities Exchange Act of 1934, as amended. Any proposed transaction with SavWatt USA remains subject to approval by the Board.

The foregoing descriptions of the Purchase Agreement and the Shareholders’ Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of the Purchase Agreement and the Shareholders’ Agreement, copies of which are filed as Exhibit 2.1 and 10.1, respectively, to this Report and are incorporated herein by reference.

Item 1.01 Entry into a Material Definitive Agreement.

On April 27, 2015, Huayue Electronics, Inc., a Delaware corporation (the “Company”), entered into and consummated a Partnership Interest Purchase Agreement between the Company and Sutton Global Associates, Inc., a Nevada corporation controlled by Isaac H. Sutton (“Sutton Global”), pursuant to which the Company acquired from Sutton Global partnership interests in SavWatt Kazakhstan Ltd., a limited liability partnership organized under the laws of Kazakhstan (“SavWatt Kazakhstan”), representing 51% of the outstanding partnership interests of SavWatt Kazakhstan in consideration of the issuance to Sutton Global of 3,000,000 shares of the Company’s common stock. SavWatt Kazakhstan was formed by Sutton Global on April 8, 2015 to engage in the business of manufacturing and distributing energy efficient products in Kazakhstan and other Eastern European countries. The Purchase Agreement contained customary representations and warranties by the parties.

The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Purchase Agreement, a copy of which is attached as Exhibit 2.1 and is incorporated herein by reference.

 
Item 2.01 Completion of Acquisition or Disposition of Assets.

The information required by this Item is included in Item 1.01 and is incorporated by reference hereto.

Item 3.02 Unregistered Sales of Equity Securities.

As described in Item 1.01, which information is incorporated by reference in this Item, the Company issued 3,000,000 shares of common stock to Sutton Global pursuant to the Purchase Agreement.

The Company claims an exemption from registration for the issuance of the common stock described above pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), as the foregoing issuance did not involve a public offering and the recipient acquired the shares of common stock for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The shares of common stock were offered without any general solicitation by the Company or its representatives. No underwriters or agents were involved in the foregoing issuance and the Company paid no underwriting discounts or commissions. The certificate evidencing the shares of common stock contains an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. The shares of common stock were not registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.

Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

On April 27, 2015, in connection with the transactions contemplated by the Purchase Agreement, the Company appointed Isaac. H. Sutton, an officer and director of Sutton Global, to the Board of Directors (the “Board”) of the Company, to fill a vacancy on the Board. In addition, the Board appointed Mr. Sutton the Chief Executive Officer and Secretary of the Company, to serve in such capacities at the pleasure of the Board. Immediately prior to such appointments, Shudong Pan, Han Zhou and Qing Biao resigned as Chief Executive Officer, Chief Financial Officer and Secretary, respectively, of the Company. Mr. Pan and Mr. Zhou will continue as Chief Executive Officer and Chief Financial Officer, respectively, of the Company’s wholly-owned subsidiary, Changzhou Huayue Electronic Co., Ltd., a company organized under the laws of, and located in, The Peoples Republic of China.

Since 2012, Mr. Sutton has been Chief Executive Officer of GoCOM Corporation, a provider of energy supply to commercial and residential customers in the State of New York (“GoCOM”). Mr. Sutton will continue to serve as Chief Executive Officer of GoCOM, and pursuant to his employment agreement with the Company described in more detail below, will be able to devote up to 30% of his business time working in such capacity. In connection with Mr. Sutton’s appointment to the Board and as Chief Executive Officer of the Company, the Company also entered into a non-binding letter agreement with GoCOM pursuant to which the parties set forth their intentions to negotiate a proposed business combination transaction pursuant to which GoCOM and the Company would merge, with the Company being the surviving corporation. Any such transaction would be subject to the negotiation of definitive agreements between the parties, which would be subject to standard conditions precedent and other closing conditions, and there can be no assurance that any such agreements will be negotiated, executed and delivered by the parties or that any such transaction will be consummated. Except as described herein, there are no understandings or arrangements between Mr. Sutton and any other person pursuant to which he was appointed as a director and officer of the Company.

Mr. Sutton has been an international entrepreneur for over 40 years focusing on emerging markets and technologies. During such period, Mr. Sutton has conducted business in many countries, including Taiwan, Korea, the Philippines, Poland and Uzbekistan. Mr. Sutton has extensive experience in a variety of industries, including marketing, import and export, electronics, telecommunications, information technology and capital markets. He has served as a founding member and executive officer of numerous ventures over such period, in addition to GoCOM, which he founded in June 2011 and has since served as its chief executive officer, including SavWatt USA Inc., a supplier of LED bulbs, for which he was the chief executive officer from March 2010 to December 2012, GoIP Global Inc., a provider of a text messaging platform, for which he was the chief executive officer from 2006 to 2010 and Starinvest Group, Inc., a business development company, for which he was the chief executive officer from 1997 to 2006. Mr. Sutton holds a Bachelor's Degree in Business Administration from Pace University. Mr. Sutton was born and raised in New York City and is 61 years old.

In connection with the appointment of Mr. Sutton as Chief Executive Officer, Mr. Sutton and the Company entered into an employment agreement that provides for an initial term that commenced on April 27, 2015 and will terminate on April 27, 2018. The employment agreement will be extended automatically for successive one-year periods thereafter unless the Company or Mr. Sutton gives written notice to the other to allow the employment agreement to expire. Mr. Sutton will be paid an initial annual base salary of $120,000. In addition, Mr. Sutton will be eligible to receive each year an incentive bonus in an amount up to 100% of his base salary and a revenue bonus in an amount equal to 0.75% of the amount by which the Company’s net revenues in such year exceed $25 million. Subject to the approval of the Board, the Company will also grant to Mr. Sutton a stock option to purchase 3,000,000 shares of the Company’s common stock at a price per share not less than the per-share fair market value of the common stock on the date of grant. The option will vest with respect to one-third of the shares on the first anniversary of the date of grant and as to the remaining two-thirds of the shares in 24 equal monthly installments thereafter.

The employment agreement also provides that Mr. Sutton will be entitled to participate in any short-term and long-term incentive plans generally available to executive officers of the Company, to participate with other executive officers in any of the Company’s employee fringe benefit plans, and to be reimbursed for certain business-related expenses. In addition, the employment agreement provides for certain benefits upon termination of Mr. Sutton's employment under certain circumstances, including a change of control of the Company, as defined in the employment agreement, and to certain death benefits.

Management Discussion and Analysis

Sales
 
As noted above, the quarter completed on February 28, 2015 marked our new business model:  a full commitment to EMC marketing. We terminated our capacitor business, and focused lighting marketing almost exclusively on developing EMC relationships. The disruption caused by this re-focusing, combined with the occasion of the two-week Spring Festival in February, when little work is performed throughout China, resulted in markedly low sales volume during the quarter.

Our decision to reduce conventional sales of lighting products in favor of developing EMC relationships was caused by our perception of the lighting market in China.  Recently we have been finding our standard lighting sales to be increasingly difficult due to competition. More and more competitors are entering into this market and lighting products are innovating rapidly.  New lighting products, such as WIFI, mobile phone and internet controlled lightings, are becoming the new trend in the market. To gain competitive traction in these circumstances, we now focus the greater part of our sales effort on our program to generate lighting sales in connection with an energy management contract (“EMC”). The EMC extends the payment term for the sale over the period when energy savings will allow the customer to recoup the cost of the lighting. Because the EMC promises our customer new lighting with no impact on the customer's cash flow, we are better able to attract customers away from our larger competitors.
 
We entered into a number of EMC contracts during fiscal 2014 and during the nine months ended February 28, 2015. As a result, $3,483,462 revenue from those contracts (50% of our lighting revenue) was recognized during the nine months ended February 28, 2015. However, unlike sales with conventional net-90 terms, the revenue from EMC sales is recorded over an extended period of time. For example, during the nine months ended February 28, 2015, in addition to the $3,483,462 revenue that we recorded, EMC sales caused the investment in sales-type lease item on our balance sheet to increase by $3,089,237. So changing our marketing focus to the EMC program, while slowing the growth of our lighting products revenue in the near term, will help us build a foundation for future profitability.
 
We are committed to continue our innovations and to becoming the market leader for the new generation of energy efficient lighting products. We expect the sales from our new lighting products will continue to grow in the remainder of fiscal 2015 and beyond. The principal factors that will contribute to the future growth of lighting sales will be:
 
Our domestic distribution network continues to grow, particularly for the sale of LED lights, a massive market that we have only recently begun to penetrate.

We are in the final stages of securing an international distribution network and the governmental approvals necessary for international sales. We expect international sales to yield a significant portion of our revenue in fiscal 2016.
   
The EMC program, although it delays our revenue recognition, allows us to demand very high margins on EMC sales. We have entered into a number of EMC contracts during fiscal 2014 and for the nine months ended February 28, 2015, and we expect more EMC contracts will be signed in future periods.
   
Our engineers continue to enhance our existing products and develop new lighting products, each of which opens a new submarket for us.

Item 4.01 Change in Registrant’s Certifying Accountant

On January 16, 2015 the Board of Directors of Huayue Electronics, Inc. dismissed KCCW Accountancy Corp. as its independent public accounting firm There is no audit committee of the Board of Directors.

The audit report of KCCW Accountancy Corp. on Huayue Electronics, Inc.’s financial statements for the year ended May 31, 2014 did not contain any adverse opinion or disclaimer of opinion or qualification. KCCW Accountancy Corp. did not, during the applicable periods, advise Huayue Electronics, Inc. of any of the enumerated items described in Item 304(a)(1)(iv) of Regulation S-K.

During the two most recent fiscal years and the subsequent interim period through August 14, 2014, there was no (i) disagreement between Huayue Electronics, Inc. and KCCW Accountancy Corp. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to its satisfaction, would have caused KCCW Accountancy Corp. to make reference to the subject matter of such disagreement in connection with its report, or (ii) “reportable event,” as described in Item 304(a)(1)(v) of Regulation S-K.

Huayue Electronics, Inc. has requested KCCW Accountancy Corp. to furnish a letter addressed to the Securities Exchange Commission stating whether or not KCCW Accountancy Corp. agrees with the statements in this 8-K. A copy of the letter will be filed with an amendment to this 8-K when received.

On the same day, Huayue Electronics, Inc. retained the firm of Canuswa Accounting & Tax Service Inc. to serve as its new independent public accounting firm. At no time during the past two fiscal years or any subsequent period prior to January 16, 2015 did Huayue Electronics, Inc. consult with Canuswa Accounting & Tax Service Inc. regarding any matter of the sort described above with reference to KCCW Accountancy Corp., any issue relating to the financial statements of Huayue Electronics, Inc., or the type of audit opinion that might be rendered for Huayue Electronics, Inc.

Management Discussion and Analysis

Since 2009 the Company’s operations have gradually refocused from an exclusive involvement in the manufacture and sale of electrolytic capacitors to a primary focus on the sale of energy efficient lighting products. During the fiscal year ended May 31, 2014, 87% of our sales were lighting products. During the three months ended August 31, 2014, however, we experienced a surge in capacitor sales, resulting in a 40% increase in capacitor sales during the six months ended November 30, 2014 compared to the same period of fiscal year 2014.

The reduction in sales of lighting products was caused by a reorientation of our business model. Recently we have been finding our standard lighting sales to be increasingly difficult due to competition. More and more competitors are entering into this market and lighting products are innovating rapidly.  New lighting products, such as WIFI, mobile phone and internet controlled lightings, are becoming the new trend in the market. To gain competitive traction in these circumstances, we now focus the greater part of our sales effort on our program to generate lighting sales in connection with an energy management contract (“EMC”). The EMC extends the payment term for the sale over the period when energy savings will allow the customer to recoup the cost of the lighting.
 
We entered into a number of EMC contracts during fiscal 2014 and during the six months ended November 30, 2014, and $2,981,360 revenue from those contracts (57% of our lighting revenue) was recognized during the six months ended November 30, 2014. However, unlike sales with conventional net-90 terms, the revenue from EMC sales is recorded over an extended period of time. For example, during the six months ended November 30, 2014, in addition to the $2,981,360 revenue that we recorded, EMC sales caused the investment in sales-type lease item on our balance sheet to increase by $4,803,638. So changing our marketing focus to the EMC program, while slowing the growth of our lighting products revenue in the near term, will help us build a foundation for future profitability.
 
We are committed to continue our innovations and to becoming the market leader for the new generation of energy efficient lighting products. We expect the sales from our new lighting products will continue to grow in the remainder of fiscal 2015 and beyond. The principal factors that will contribute to the future growth of lighting sales will be:
 
 Our domestic distribution network continues to grow, particularly for the sale of LED lights, a massive market that we have only recently begun to penetrate.
     
 We are in the final stages of securing an international distribution network and the governmental approvals necessary for international sales. We expect international sales to yield a significant portion of our revenue in fiscal 2015.
     
 The EMC program, although it delays our revenue recognition, allows us to demand very high margins on EMC sales. We have entered into a number of EMC contracts during fiscal 2014 and for the six months ended November 30, 2014, and we expect more EMC will be signed in future periods.
     
 Our engineers continue to enhance our existing products and develop new lighting products, each of which opens a new submarket for us.

Management Discussion and Analysis

Since 2009 the Company’s operations have gradually refocused from an exclusive involvement in the manufacture and sale of electrolytic capacitors to a primary focus on the sale of energy efficient lighting products. During the fiscal year ended May 31, 2014, 87% of our sales were lighting products. In the first quarter of fiscal year 2015, however, we experienced a surge in sales of capacitors, resulting in a 179% quarter-to-quarter increase in capacitor sales, compared to the same period of fiscal year 2014.

The reduction in sales of lighting products was caused by a reorientation of our business model. Recently we have been finding our standard lighting sales to be increasingly difficult due to competition. More and more competitors are entering into this market and lighting products are innovating rapidly.  New lighting products, such as WIFI, mobile phone and internet controlled lightings, are becoming the new trend in the market. To gain competitive traction in these circumstances, we now focus the greater part of our sales effort on our program to generate lighting sales in connection with an energy management contract (“EMC”). The EMC extends the payment term for the sale over the period when energy savings will allow the customer to recoup the cost of the lighting.

We entered into a number of EMC contracts during fiscal 2014 and during the three months ended August 31, 2014, and $2,055,114 revenue from those contracts (79% of our lighting revenue) was recognized during the three months ended August 31, 2014. However, unlike sales with conventional net-90 terms, the revenue from EMC sales is recorded over an extended period of time. For example, during the three months ended August 31, 2014, in addition to the $2,055,114 revenue that we recorded, EMC sales caused the investment in sales-type lease item on our balance sheet to increase by $1,585,544. So changing our marketing focus to the EMC program, while slowing the growth of our lighting products revenue in the near term, will help us build a foundation for future profitability.

Management Discussion and Analysis

Revenue

Since 2009 the Company’s operations have gradually refocused from an exclusive involvement in the manufacture and sale of electrolytic capacitors to a primary focus on the sale of energy efficient lighting products.

Net Income

As a result of our significant increase of G&A expenses, our income from operations decreased from $4,786,808 in the fiscal year ended May 31, 2013 to $4,111,916 in the fiscal year ended May 31, 2014.

Until recently, the expansion of our business was funded primarily by short-term loans.  As discussed in “Liquidity and Capital Resources” below, our cash flow has in most years been slowed by the relatively lengthy period required to collect many of our receivables.  To fill the gaps in our cash flow, we required debt financing. Interest expense, therefore, has historically represented a significant reduction in our net income. As of May 31, 2014, however, we have short term loans of $2,960,474 comparing to the total of short term loans and bank notes of $4,687,626 as of May 31, 2013.  As a result, our interest expense for the fiscal year ended May 31, 2014 was $187,298 compared to interest expense of $258,392 in fiscal 2013.

Although the corporate income tax rate in China is 25%, through November 2014 our Chinese subsidiary will be the beneficiary of a 15% tax rate afforded to high-tech companies in their growth stage.  For that reason, our income tax burden for the fiscal year ended May 31, 2014 was $637,311, resulting in net income of $3,611,432 ($.12 per share), compared to net income of $3,757,284 ($.12 per share)  recorded in fiscal 2013.

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.  Due to the deprecation of U.S. Dollars against RMB, an “other comprehensive loss” of $183,993 was recorded during fiscal 2014 compared to an “other comprehensive income” of $209,066 during fiscal 2013.

CHANGZHOU, CHINA--(Marketwired - Sep 4, 2014) - Huayue Electronics, Inc. (OTCQB: HUAY), a manufacturer and international distributor of LED lighting products, today announced that the Company's application for participation in the Intellectual Property Protection and Strategic Expansion Program of the City of Changzhou Bureau of Technology has been approved. The record of the Bureau of Technology setting forth the approval can be reviewed on the Bureau's official website: http://www.changzhou.gov.cn/gi_class/kjj.

The Intellectual Property Protection and Strategic Expansion Program is open to high tech companies with patents located in the Changzhou metropolitan area. The operating subsidiary of Huayue Electronics was admitted into the Program after the Bureau of Technology certified our overall compliance with high standards for training and guidance regarding the development and protection of patents. During 2014, while the review was taking place, Huayue Electronics, Inc. initiated a number of projects in research and development of new lighting products. The Bureau witnessed the Company providing training and education to its researchers and engineers on matters of intellectual property, including patent creation, categorization and protection.

Huayue Electronics, Inc. is a leading energy efficient lighting products manufacturer and distributor, based in Changzhou, PRC. The Company offers products utilizing both LED and induction technology. Since its establishment in 1999, Huayue has obtained more than 110 industry-related patents to protect the Company's intellectual property. Admission to the Intellectual Property Protection and Strategic Expansion Program will make Huayue Electronics eligible for grants and research funding provided by the City of Changzhou. In addition, participation in the Program will give Huayue Electronics an advantage in bidding for lighting projects within Changzhou. 

Pan Shudong, CEO and Chairman of Huayue Electronics, commented: "Our research and development team has an impressive history of obtaining patents and protecting our intellectual property. Their efforts are the foundation for our Company's growth. We are thankful to the Bureau of Technology for its approval, another way of the government saying that we are doing things the right way. And with grants from the Technology Bureau, we will have more flexibility in establishing strategic relationships with other parties involved in the development of lighting-related intellectual property, both locally and globally."

Item 4.01 Change in Registrant’s Certifying Accountant

On August 14, 2014 the Board of Directors of Huayue Electronics, Inc. dismissed Friedman LLP as its independent public accounting firm. There is no audit committee of the Board of Directors.

The audit report of Friedman LLP on Huayue Electronics, Inc.’s financial statements for the year ended May 31, 2013 did not contain any adverse opinion or disclaimer of opinion or qualification. Friedman LLP did not, during the applicable periods, advise Huayue Electronics, Inc. of any of the enumerated items described in Item 304(a)(1)(iv) of Regulation S-K.

During the two most recent fiscal years and the subsequent interim period through August 14, 2014, there was no (i) disagreement between Huayue Electronics, Inc. and Friedman LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to its satisfaction, would have caused Friedman LLP to make reference to the subject matter of such disagreement in connection with its report, or (ii) “reportable event,” as described in Item 304(a)(1)(v) of Regulation S-K.

Huayue Electronics, Inc. has requested Friedman LLP to furnish a letter addressed to the Securities Exchange Commission stating whether or not Friedman LLP agrees with the statements in this 8-K. A copy of the letter is filed as an exhibit to this 8-K.

On the same day, Huayue Electronics, Inc. retained the firm of KCCW Accountancy Corp. to serve as its new independent public accounting firm. At no time during the past two fiscal years or any subsequent period prior to August 14, 2014 did Huayue Electronics, Inc. consult with KCCW Accountancy Corp. regarding any matter of the sort described above with reference to Friedman LLP, any issue relating to the financial statements of Huayue Electronics, Inc., or the type of audit opinion that might be rendered for Huayue Electronics, Inc.