China Hefeng Rescue Equipment, Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - China Hefeng Rescue Equipment, Inc.	Financial_Report.xls
EX-32 - RULE 13A-14(B) CERTIFICATION - China Hefeng Rescue Equipment, Inc.	f10q0313ex32_chinahefeng.htm
EX-31.1 - RULE 13A-14(A) CERTIFICATION - CEO - China Hefeng Rescue Equipment, Inc.	f10q0313ex31i_chinahefeng.htm
EX-31.2 - RULE 13A-14(A) CERTIFICATION - CFO - China Hefeng Rescue Equipment, Inc.	f10q0313ex31ii_chinahefeng.htm

U. S. Securities and Exchange Commission

Washington, D. C. 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File No. 0-54224

CHINA HEFENG RESCUE EQUIPMENT, INC.
(Name of Registrant in its Charter)

Delaware	80-0654192
(State of Other Jurisdiction of incorporation or organization)	(I.R.S.) Employer I.D. No.)

No. 88, Taishan Street, Beigang Industrial Zone, Longgang District, Huludao, Liaoning Province, P.R. China 125000
(Address of Principal Executive Offices)

Issuer's Telephone Number: 86-0429-3181998

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 o

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 o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o 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 o Accelerated filer o Non-accelerated filer o 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:

May 14, 2013

Common Voting Stock: 33,600,000

CHINA HEFENG RESCUE EQUIPMENT, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED MARCH 31, 2013

TABLE OF CONTENTS

		Page No
Part I	Financial Information
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets (Unaudited) – March 31, 2013 and December 31, 2012	2
	Consolidated Statements of Income and Other Comprehensive Income (Unaudited) - for the Three Months Ended March 31, 2013 and 2012	3
	Consolidated Statements of Cash Flows (Unaudited) – for the Three Months Ended March 31, 2013 and 2012	4
	Notes to Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	31
Part II	Other Information
Item 1.	Legal Proceedings	32
Items 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32

	Signatures	33

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2013 AND DECEMBER 31, 2012 (IN U.S. $)

ASSETS	March 31, 2013			December 31, 2012
	(Unaudited)
Current assets:
Cash	$	9,905,779		$	8,075,837
Accounts receivable		164,772			330,056
Deferred income taxes		123,019			108,248
Prepaid expenses and other current assets		39,004			48,756

Total current assets		10,232,574			8,562,897

Fixed Assets		74,547			73,459
Less: accumulated depreciation		(59,933	)		(53,688	)

Fixed Assets, net		14,614			19,771

TOTAL ASSETS	$	10,247,188		$	8,582,668


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	321,584	$	501,811
Advances from customers		206,960		154,343
Deferred revenue		492,074		432,990
Loans from stockholders		90,076		75,715
Accrued wages		111,545		109,151
Taxes payable		688,807		595,293
Accrued expenses		28,164		29,823

Total current liabilities		1,939,210		1,899,126

Stockholders’ equity:
Common stock, $.0001 par; 300,000,000 shares authorized;
33,600,000 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively		3,360		3,360
Additional paid-in capital		146,175		146,175
Retained earnings		7,605,200		6,097,323
Statutory reserve fund		35,031		35,031
Other comprehensive income		116,742		77,840

Stockholders’ equity before noncontrolling interests		7,906,508		6,359,729
Noncontrolling interests		401,470		323,813

Total Stockholders’ equity		8,307,978		6,683,542

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	10,247,188	$	8,582,668

See accompanying notes to the consolidated financial statements.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (IN U.S. $)

	Three Months Ended March 31,
	2013			2012

Service revenue	$	1,365,595		$	671,783
Cost of services		(821,373	)		(477,558	)
Service revenue - net		544,222			194,225

Commissions - manufacturers		2,501,052			1,613,150
Rental commissions - related party		134,373			23,532
Cost of commissions		(893,027	)		(648,354	)
Commission income – net		1,742,398			988,328

Gross profit		2,286,620			1,182,553

Operating expenses:
Selling and marketing		51,015			44,196
General and administrative		121,533			90,250

Total operating expenses		172,548			134,446

Income before income taxes			2,114,072				1,048,107
Provision for income taxes			528,538				265,717

Net income		1,585,534			782,390
Noncontrolling interests		(77,657	)		(37,488	)

Net income attributable to common stockholders		1,507,877			744,902

Other comprehensive income:
Foreign currency translation adjustment		38,902			30,338

Total comprehensive income	$	1,546,779		$	775,240

Earnings per common share, basic and diluted	$	0.04		$	0.02

Weighted average shares outstanding, basic and diluted		33,600,000			31,920,000

See accompanying notes to the consolidated financial statements.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (IN U.S. $)

	Three Months Ended March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	1,585,534		$	782,390
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation		5,936			5,794
Deferred income taxes		(14,147	)		1,964
Change in operating assets and liabilities:
Decrease in accounts receivable		165,284			91,577
Decrease (increase) in prepaid expenses and other current assets		9,752			(16,919	)
(Decrease) increase in accounts payable		(180,227	)		219,488
Increase in advances from customers		52,617			90,693
Increase (decrease) in deferred revenue		59,084			(6,966	)
Increase in taxes payable		93,514			41,253
Increase (decrease) in accrued wages		2,394			(404	)
(Decrease) increase in accrued expenses		(1,659	)		12,827

Net cash provided by operating activities		1,778,082			1,221,697

Cash flows from investing activities:
Purchase of fixed assets		(670	)		(1,612	)

Cash flows from financing activities:
Proceeds from stockholder loans		14,000			1,734
Repayment of stockholder loans		-			(138,699	)

Net cash provided by (used in) financing activities		14,000			(136,965	)

Effect of exchange rate changes on cash		38,530			42,588

Net increase in cash		1,829,942			1,125,708
Cash, beginning		8,075,837			3,130,799

Cash, ending	$	9,905,779		$	4,256,507

Supplemental disclosure of cash flow information:

Cash paid for income taxes	$	454,975		$	219,561

Cash paid for interest	$	-		$	-

See accompanying notes to the consolidated financial statements.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

1. ORGANIZATION

China Hefeng Rescue Equipment, Inc. (formally known as Bridgeway Acquisition Corp., the “Company”) was incorporated in the State of Delaware on October 22, 2010. The Company had no business operations until June 15, 2012.

On June 15, 2012, the Company completed a reverse acquisition transaction through a share exchange with the stockholders of Dragons Soaring Limited (“Dragons Soaring”), whereby the Company acquired 100% of the issued and outstanding capital stock of Dragons Soaring in exchange for 31,920,000 shares of the Company’s Common Stock, which constituted 95% of the Company’s issued and outstanding capital stock as of and immediately after the consummation of the reverse acquisition. As a result of the reverse acquisition, Dragons Soaring became the Company’s wholly-owned subsidiary and the former stockholders of Dragons Soaring became the controlling stockholders of the Company. The share exchange transaction with Dragons Soaring and its stockholders was treated as a reverse acquisition, with Dragons Soaring as the acquirer and the Company as the acquired party. Unless the context suggests otherwise, when it refers in this report to business and financial information for periods prior to the consummation of the reverse acquisition, it is referring to the business and financial information of Dragons Soaring and its consolidated subsidiaries and variable interest entities (“VIE’s”).

Dragons Soaring was incorporated in the Territory of the British Virgin Islands (“BVI”) on December 2, 2011. On January 5, 2012, Dragons Soaring acquired 10,000 shares, 100% of the issued and outstanding shares, at $1.00 per share of Huashi International Holding Group Limited (“Huashi International”), a company incorporated in Hong Kong on August 10, 2010.

The Company, through Dragons Soaring, owns all of the issued and outstanding capital stock of Huashi International, which in turn owns all of the issued and outstanding capital stock of Huashida Information Consulting (Shenzhen) Co. Ltd. (“Huashida Consulting” or “WFOE”).

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

1. ORGANIZATION (continued)

On January 3, 2012, Huashida Consulting entered into a series of contractual arrangements (“VIE agreements”) with Huludao Hefeng Rescue Equipment Co., Ltd. (“Huludao Rescue”). Huludao Rescue is an entity in the Peoples’ Republic of China (“PRC”) formed on May 11, 2010 with registered capital of $73,200. Huludao Rescue specializes in designing rescue equipment and security monitoring systems, which are used for workers in underground mines until rescued when there is a mining accident. Huludao Rescue also provides product maintenance, and personnel training for product users. Huludao Rescue also introduces customers to rescue equipment manufacturers for rescue equipment purchases and rentals.

The VIE agreements include (i) an Exclusive Technical Service and Business Consulting Agreement; (ii) a Proxy Agreement, (iii) Share Pledge Agreement and, (iv) Call Option Agreement with stockholders of Huludao Rescue.

Exclusive Technical Service and Business Consulting Agreement: Pursuant to the Exclusive Technical Service and Business Consulting Agreement, the WFOE will provide technical support, consulting, training, marketing and operation consulting services to Huludao Rescue. In consideration for such services, Huludao Rescue has agreed to pay an annual service fee to the WFOE of 95% of Huludao Rescue’s annual net income with an additional payment of approximately US$15,800 (RMB 100,000) each month. The Agreement has an unlimited term and only can be terminated upon written agreement of both parties.

Proxy Agreement: Pursuant to the Proxy Agreement, the stockholders of Huludao Rescue agreed to irrevocably entrust the WFOE to designate a qualified person acceptable under PRC law and foreign investment policies to vote the equity interests in Huludao Rescue held by the stockholders of Huludao Rescue. The Agreement has an unlimited term and only can be terminated upon written agreement of both parties.

Share Pledge Agreement: Pursuant to the Share Pledge Agreement, each of the stockholders of Huludao Rescue pledged his shares in Huludao Rescue to the WFOE, to secure its obligations under the Exclusive Technical Service and Business Consulting Agreement. In addition, the stockholders of Huludao Rescue agreed not to transfer, sell, pledge, dispose of or create any encumbrance on their interests in Huludao Rescue that would affect the WFOE’s interests. This Agreement remains effective until the obligations under the Exclusive Technical Service and Business Consulting Agreement, Call Option Agreement and Proxy Agreement have been fulfilled or terminated.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

1.	ORGANIZATION (continued)

Call Option Agreement: Pursuant to the Call Option Agreement, the WFOE has an exclusive option to purchase, or to designate a purchaser, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in Huludao Rescue held by each of the stockholders. To the extent permitted by PRC laws, the purchase price for the entire equity interest is approximately US$0.16 (RMB1.00) or the minimum amount required by PRC law or government practice. This Agreement remains effective until all the call options under the Agreement have been transferred to Huashida Consulting or its designated entities or natural persons.

As a result of the entry into the foregoing agreements, the Company has a corporate structure which is set forth below:

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting and Presentation

The accompanying consolidated financial statements have been prepared on the accrual basis in accordance with accounting principles generally accepted in the United States of America. The unaudited financial statements for the three months ended March 31, 2013 and 2012 include China Hefeng Rescue Equipment, Inc., Dragons Soaring, Huashi International and its wholly owned subsidiary, Huashida Consulting and its VIE, Huludao Rescue. All significant intercompany accounts and transactions have been eliminated in consolidation when applicable.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Basis of Accounting and Presentation (continued)

All consolidated financial statements and notes to the consolidated financial statements are presented in United States dollars (“US Dollar” or “US$” or “$”).

The unaudited interim consolidated financial statements of the Company as of March 31, 2013 and for the three months ended March 31, 2013 and 2012, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC which apply to interim financial statements. Accordingly, they do not include all of the information and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial statements. The interim consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K for the fiscal year ended December 31, 2012, previously filed with the SEC. In the opinion of management, the interim information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2013.

Variable Interest Entity

Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Variable Interest Entity (continued)

Under ASC 810, an enterprise has a controlling financial interest in a VIE, and must consolidate that VIE, if the enterprise has both of the following characteristics: (a) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and (b) The obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. The enterprise’s determination of whether it has this power is not affected by the existence of kick-out rights or participating rights, unless a single enterprise, including its related parties and de facto agents, has the unilateral ability to exercise those rights. Huludao Rescue’s actual stockholders do not hold any kick-out rights that will affect the consolidation determination.

Through the VIE agreements as disclosed in Note 1, the Company is deemed the primary beneficiary of Huludao Rescue. Accordingly, the results of Huludao Rescue have been included in the accompanying consolidated financial statements. The following financial statement amounts and balances of Huludao Rescue have been included in the accompanying consolidated financial statements. Huludao Rescue has no assets that are collateral for or restricted solely to settle its obligations. The creditors of Huludao Rescue do not have recourse to the Company’s general credit.

ASSETS	March 31, 2012			December 31, 2012
	(Unaudited, In U.S. $)			(In U.S. $)
Current assets:
Cash	$	9,649,465		$	7,866,556
Accounts receivable		164,772			330,056
Deferred income taxes		123,019			108,248
Prepaid expenses and other current assets		39,004			48,756

Total current assets		9,976,260			8,353,616

Fixed assets		74,547			73,459
Less: accumulated depreciation		(59,933	)		(53,688	)

Fixed assets, net		14,614			19,771

TOTAL ASSETS	$	9,990,874		$	8,373,387

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Variable Interest Entity (continued)

LIABILITIES	March 31, 2012		December 31, 2012
	(Unaudited, In U.S. $)		(In U.S. $)
Current liabilities:
Accounts payable	$	321,584	$	501,811
Payable to WFOE(1)		5,555,433		4,079,947
Advances from customers		206,960		154,343
Deferred revenue		492,074		432,990
Loan from stockholders		58,418		44,079
Accrued wages		110,908		108,518
Taxes payable		624,772		544,975
Accrued expenses		72,514		74,173

Total current liabilities		7,442,663		5,940,836

TOTAL LIABILITIES	$	7,442,663	$	5,940,836

(1)

Payable to WFOE represents outstanding amounts due to Huashida Information Consulting (Shenzhen) Co. Ltd. under the Exclusive Technical Service and Business Consulting Agreement for consulting services provided to Huludao Rescue in exchange for 95% of Huludao Rescue’s net income. Monthly payment of RMB 100,000 (approximately US$15,910) was paid in full as of March 31, 2013 and December 31, 2012.

	Three Month Ended March 31,
	2013		2012
	(Unaudited)		(Unaudited)

Gross profit and net commission income	$	2,289,245	$	1,182,553
Net income(2)		1,553,143		795,128

(2)	Under the Exclusive Technical Service and Business Consulting Agreement, 95% of the net income is to be remitted to WFOE.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Variable Interest Entity (continued)

	Three Month Ended March 31,
	2013			2012
	(Unaudited)			(Unaudited)

Net cash provided by operating activities	$	1,731,971		$	1,234,432
Net cash (used in) investing activities		(670	)		(1,612	)
Net cash provided by financing activities		14,000			-
Effect of exchange rate changes on cash		37,608			31,755

Net increase in cash	$	1,782,909		$	1,264,575

The Company believes that Huashida Consulting’s contractual agreements with Huludao Rescue are in compliance with PRC law and are legally enforceable. The stockholders of Huludao Rescue are also the senior management of the Company and therefore the Company believes that they have no current interest in seeking to act contrary to the contractual arrangements. However, Huludao Rescue and its stockholders may fail to take certain actions required for the Company’s business or to follow the Company’s instructions despite their contractual obligations to do so. Furthermore, if Huludao Rescue or its stockholders do not act in the best interests of the Company under the contractual arrangements and any dispute relating to these contractual arrangements remains unresolved, the Company will have to enforce its rights under these contractual arraignments through the operations of PRC law and courts and therefore will be subject to uncertainties in the PRC legal system. All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. As a result, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements, which may make it difficult to exert effective control over Huludao Rescue, and its ability to conduct the Company’s business may be adversely affected.

Change of Fiscal Year End Date

On June 15, 2012, in connection with the Share Exchange, the Company changed its fiscal year end date from October 31 to December 31.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Foreign Currency Translation

Almost all of the Company’s assets are located in the PRC. The functional currency for the majority of the operations is the Renminbi (“RMB”). For Huashi International, the functional currency for the majority of its operations is the Hong Kong Dollar (“HKD”). The Company uses the US Dollar for financial reporting purposes. The consolidated financial statements of the Company have been translated into US dollars in accordance with FASB ASC 830, “Foreign Currency Matters.”

All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. The consolidated statements of income and other comprehensive income amounts have been translated using the average exchange rate for the periods presented. Adjustments resulting from translation of the Company’s consolidated financial statements are recorded as other comprehensive income.

The exchange rates used to translate amounts in RMB and HKD into US dollars for the purposes of preparing the consolidated financial statements are as follows:

March 31, 2013

December 31, 2012

March 31, 2012

RMB

HKD

RMB

HKD

RMB

HKD

Balance sheet items, except for stockholders’ equity, as of period end

0.1592

0.1288

0.1583

0.1290

N/A

Amounts included in the statements of income and statements of cash flows for the period ended

0.1591

0.1289

N/A

0.1582

0.1288

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign Currency Translation (continued)

Foreign currency translation adjustments of $38,902 and $30,338 for the three months ended March 31, 2013 and 2012, respectively, have been reported as other comprehensive income in the consolidated statements of income and other comprehensive income.

Although government regulations now allow convertibility of the RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that the RMB could be converted into US dollars at that rate or any other rate.

The value of the RMB against the US dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s financial condition in terms of US dollar reporting.

Revenues and Cost Recognition

The Company’s primary sources of revenues are derived from (a) design of security monitoring systems and rescue equipment, including rescue capsules for coal mine companies, (b) commissions from introducing customers to manufacturers for the purchase of rescue equipment that will be used in the mining industry, (c) rental commissions from introducing customers to companies for the rental of rescue capsules, and (d) revenues from providing maintenance and personnel training services to product users. The Company’s revenue recognition policies comply with FASB ASC 605-35, “Construction-Type and Production-Type Contracts” (“ASC 605-35”). In general, the Company recognizes revenue when there is persuasive evidence of an arrangement, the fee is fixed or determinable, the products or service have been delivered and collectability of the resulting receivable is reasonably assured.

Revenues from design of security monitoring systems and rescue equipment with major customization, modification and development are recorded primarily under the percentage-of-completion method, in accordance with ASC 605-35, when the contract meets the following criteria:

1.	Contract performance extends over long periods of time;

2.	The design involves significant customization, modification or development;

3.	Reasonably dependable estimates can be made on the progress towards completion, contract revenues and contract costs; and

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenues and Cost Recognition (continued)

4.	Each element is essential to the functionality of the other elements of the contract.

Profits recognized on contracts in process are based upon estimated contract revenue and related total cost of the project at completion. The extent of progress toward completion is generally measured based on the ratio of actual cost incurred to total estimated cost at completion. Contract costs include all direct material, direct labor, subcontractor costs and those indirect costs related to contract performance. If the contract provides services that are considered essential to the functionality of the rescue equipment and the security monitoring system, both the design revenue and services are recognized under contract accounting in accordance with the provisions of ASC 605-35. Losses on contracts are immediately recognized when they are known.

“Costs and estimated earnings in excess of billings on uncompleted contracts” are recorded as an asset when revenues are recognized in excess of amounts billed. “Billings in excess of costs and estimated earnings on uncompleted contracts” are recorded as a liability when billings are in excess of revenues recognized. At March 31, 2013 and December 31, 2012, amounts over billed or under billed on uncompleted contracts were not material.

The Company earns commissions by contracting with third party equipment manufacturers to secure customers for rescue equipment purchases and for rental of rescue capsules from a related party. In each case, the Company commits to provide after-purchase training and inspection to the customer, the parameters of its obligation being determined by the Company and the manufacturer/lessor depending on the circumstances of the customer. For rescue equipment that is purchased by the customer, the Company generally earns a pre-negotiated non-refundable commission from the third party manufacturers once the contract for the rescue equipment is signed by the customers and the manufacturer receives the initial deposit. The commissions for purchased equipment range from 10% to 20% of the purchase price. Commissions for equipment to be purchased are generally due when the initial deposit is received by the third party manufacturer from the customer, and are recognized as revenue when due. The pre-negotiated non-refundable commissions for leased equipment equal 20% of the total annual rent amount. Rental commissions are due annually in advance and recognized as revenue monthly over the term of the lease agreements between third party manufacturers and customers. The portion of commission revenue generated from after-purchase leasing training and inspection services are recognized over the term of the training and inspection services provided. The related cost of commissions primarily consists of the costs of safety inspection and training.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue and Cost Recognition (continued)

The Company also enters into system maintenance service contracts with its customers. Maintenance service fees, included in service revenue in the accompanying consolidated statements of income and other comprehensive income, are received in advance and recognized monthly over the term of the maintenance service contracts.

Advertising Cost

Advertising costs are charged to operations when incurred. Advertising costs were $10,660 and $17,798 for the three months ended March 31, 2013 and 2012, respectively.

Fair Value of Financial Instruments

FASB ASC 820, “Fair Value Measurement,” defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

Cash and Cash Equivalents

The Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable are stated at cost, net of an allowance for doubtful accounts. Receivables outstanding longer than the payment terms are considered past due. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectability of the outstanding balance. In evaluating the collectability of an individual receivable balance, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends. The Company considers all accounts receivable at March 31, 2013 and December 31, 2012 to be fully collectible and, therefore, did not provide for an allowance for doubtful accounts. For the periods presented, the Company did not write off any accounts receivable as bad debts.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fixed Assets

Fixed assets are recorded at cost, less accumulated depreciation. Cost includes the prices paid to acquire the assets, and any expenditures that substantially increase the asset’s value or extends the useful life of an existing asset. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the periods benefited. Maintenance and repairs are generally expensed as incurred.

The estimated useful lives for fixed assets categories are as follows:

Machinery and equipment	3 years
Furniture and fixtures	5 years

Advances from Customers

Advances from customers primarily consist of payments received in advance from customers for the design of the rescue equipment and monitoring systems.

Deferred Revenue

Deferred revenue includes a) rental commissions received from the related party for introducing customers who rent mining rescue capsules; b) maintenance service fees received in advance from customers for maintenance services of rescue equipment and security monitoring systems. These payments received, but not yet earned, are recognized as deferred revenue on the consolidated balance sheets.

Loans from Stockholders

Loans from stockholders are non-interest bearing and are due on demand.

Impairment of Long-lived Assets

The Company applies FASB ASC 360, “Property, Plant and Equipment,” which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company may recognize the impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to these assets. No impairment of long-lived assets was recognized for the periods presented.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income Taxes

The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes” (“ASC 740”), which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax reporting purposes. The differences relate primarily to the deferred revenue. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of March 31, 2013 and December 31, 2012, the Company had deferred tax assets of $123,019 and $108,248, respectively.

ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefits 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 would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. As of March 31, 2013 and December 31, 2012, the Company does not have a liability for any unrecognized tax benefits.

Statutory Reserve Fund

Pursuant to corporate law of the PRC, the Company’s VIE is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory reserve fund until such reserve balance reaches 50% of the VIE’s registered capital. The statutory reserve fund is non-distributable other than during liquidation and can be used to fund prior years’ losses, if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining reserve balance after such use is not less than 25% of the registered capital. The VIE has fully funded the statutory reserve fund.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Noncontrolling interests

The Company evaluated and determined that under the VIE agreements, as disclosed in Note 1, it is deemed to be the primary beneficiary of Huludao Rescue. The noncontrolling interest, representing the 5% of net assets in Huludao Rescue not attributable, directly or indirectly, to the Company is measured at its carrying value in the equity section of the consolidated balance sheets.

3. RECENTLY ISSUED ACCOUNTING STANDARDS

On March 5, 2013, the FASB issued ASU 2013-05 to provide guidance for whether to release cumulative translation adjustments (“CTA”) upon certain derecognition events. The update was issued to resolve the diversity in practice about whether Subtopic ASC 810-10, “Consolidation-Overall,” or ASC 830-30, “Foreign Currency Matters-Translation of Financial Statements,” applies to such transactions. ASU 2013-05 is effective prospectively for all entities with derecognition events after the effective date. For public entities, the guidance is effective for fiscal years, and interim periods within those years, beginning after December 31, 2013. ASC 830-30 applies when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Consequently, the CTA is released into net income only if the transaction results in complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets resided. Otherwise, no portion of the CTA is released. The adoption of this pronouncement is not expected to have a significant impact on the Company’s consolidated financial condition or results of operations.

4. FIXED ASSETS

Fixed assets as of March 31, 2013 and December 31, 2012 are summarized as follows:

	March 31, 2013			December 31, 2012
Machinery and equipment	$	68,052		$	67,000
Fixtures and furniture		6,495			6,459

		74,547			73,459
Less: Accumulated depreciation		(59,933	)		(53,688	)

Fixed assets, net	$	14,614		$	19,771

Depreciation expense charged to operations for the three months ended March 31, 2013 and 2012 was $5,936 and $5,794, respectively.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

5. LEASE OBLIGATIONS

The Company leases one of its offices under an operating lease which expires on April 30, 2014. The monthly rental was $2,100 through April 30, 2012 and is $2,200 for the remainder of the term. The Company leases another office at a monthly rental of approximately $1,100, under an operating lease expiring on December 31, 2014. The minimum future rentals under these leases as of March 31, 2013 are as follows:

Year Ending December 31,	Amount

2013	$	30,070
2014		22,274

	$	52,344

Rent expense charged to operations for the three months ended March 31, 2013 and 2012 was $10,023 and $9,967, respectively.

6. RELATED PARTY TRANSACTION

Rental commissions are generated from Heilongjiang Hefeng Rescue Equipment Co., Ltd (“Heilongjiang Hefeng”), for introducing customers who rent mining rescue capsules. The Company’s majority stockholder, Mr. Baoyuan Zhu, is also the owner of Heilongjiang Hefeng. The Company recognizes rental commission revenue monthly when earned, which is based on a percentage of the annual prepaid rent over the lease period. For the three months ended March 31, 2013 and 2012, rental commissions recognized were $134,373 and $23,532, respectively.

Future rental lease commissions to be earned are as follows:

Year Ended December 31,	Amount

2013	$	439,182
2014		573,556
2015		573,556
2016		573,556
2017		573,556
Thereafter		1,942,677

	$	4,676,083

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

7. FAIR VALUE MEASUREMENTS

FASB ASC 820 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs). In accordance with ASC 820, the following summarizes the fair value hierarchy:

Level 1 Inputs –

Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.

Level 2 Inputs –

Inputs other than the quoted prices in active markets that are observable either directly or indirectly.

Level 3 Inputs –

Inputs based on prices or valuation techniques that are both unobservable and significant to the overall fair value measurements.

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. As of March 31, 2013 and December 31, 2012, none of the Company’s assets and liabilities were required to be reported at fair value on a recurring basis. Carrying values of non-derivative financial instruments, including cash, receivables and various payables, approximate their fair values due to the short term nature of these financial instruments. There are no changes in methods or assumptions during the periods presented.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

8. INCOME TAXES

The provision for income taxes consisted of the following for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
	2013			2012

Current	$	542,685		$	263,753
Deferred		(14,147	)		1,964

	$	528,538		$	265,717

The Company’s effective tax rate was the same as the statutory rate of 25% for the three months ended March 31, 2013 and 2012. The Company’s tax filings for the years ended December 31, 2011 and 2010 were examined by the PRC tax authorities in April 2012 and 2011. The tax filings were accepted and no adjustments were proposed by the tax authorities.

9. CONTINGENCIES

Concentration of Credit Risk

Substantially all of the Company’s cash accounts are in banks located in The People’s Republic of China and are not covered by protection similar to that provided by the FDIC to funds held in United States banks.

Vulnerability Due to Operations in PRC

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

CHINA HEFENG RESCUE EQUIPMENT, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

10. SIGNIFICANT CUSTOMERS

The customers that represented 10% and more of total accounts receivable are as follows:

	March 31, 2013					December 31, 2012
Customer Name	Amount		%			Amount		%
Quanjiao Zhangwashi Coal Mine	$	*		*		$	64,903		20	%
Fengjie Huichun Coal Mine Co., Ltd., Huichun Coal Mine		*		*			107,644		33	%
Anyang Yongan Wanghaidi Coal Mine Co., Ltd.		*		*			58,571		18	%
Weiyuan Shunli Coal Mine Co., Ltd.		*		*			53,822		16	%
Enshi Laireng Shaping Coal Mine Co., Ltd		41,392		25	%		*		*
Daye Fenghe Trading Co., Ltd, Niutoushan Coal Mine		55,720		34	%		*		*
Changyang Hupingjing Coal Mine Co., Ltd		54,924		33	%		*		*

*Less than 10% of total accounts receivable

The customers that represented 10% and more of the total revenues for the three months ended March 31, 2013 and 2012 are as follows:

	For the Three Months Ended
	March 31, 2013					March 31, 2012
Customer Name	Amount		%			Amount		%
Shanxi Taizhong Coal Mining Machinery Equipment Co., Ltd.	$	1,670,550		42	%	$	1,384,962		60	%
Tangshan Guanneng Machinery Equipment Co., Ltd		481,118		12	%		*		*

*Less than 10% of total revenues

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We conduct our operations through our consolidated affiliated Huludao Hefeng Rescue Equipment Co., Ltd. (“Huludao Rescue”). Huludao Rescue, founded in May 2010, specializes in marketing mining equipment and also designs mining equipment and mine safety systems. Huludao Rescue is located in the Beigang Industrial Park in Huludao City, People’s Republic of China (“PRC”).

Although we have always been involved with mine safety equipment, since late in 2011 the focus of our business has shifted from exclusively providing hardware design and software development services to a primary focus on serving as a sales and leasing agent for other manufacturers. In the course of providing hardware design services for mining hardware manufacturers and mining security software development for middle and smaller private mines, we have developed a number of channels into the mining market. Our new marketing business takes advantage of these connections, as we introduce the mining hardware manufacturers to the middle and small private mines, and receive a sales commission on the resulting transactions.

Corporate Structure

China Hefeng Rescue Equipment, Inc. is a Delaware corporation that prior to June 2012 had no business operations. On June 15, 2012 we acquired ownership of Dragons Soaring Limited (BVI), a corporation organized in the British Virgin Islands in December 2011. Dragons Soaring, through a Hong Kong intermediary, owns all of the equity of Huashida Information Consulting (Shenzhen) Co., Ltd. (“Huashida Consulting”). Huashida Consulting was organized in the Peoples Republic of China (“PRC”) in 2010. The only business carried on by Huashida Consulting is to provide management services to Huludao Rescue pursuant to the VIE Agreements described below.

The following chart shows our organizational structure:

Contractual Arrangements with our Controlled Consolidated Affiliate and its Stockholders

On January 3, 2012, Huashida Consulting and Huludao Rescue and its stockholders, Baoyuan Zhu and JianjunGao, entered into a series of agreements known as variable interest agreements (the “VIE Agreements”) pursuant to which Huludao Rescue became Huashida Consulting’s contractually controlled affiliate. The use of VIE agreements is a common structure used to acquire a beneficial interest in a PRC corporation, particularly in certain industries in which foreign investment is restricted or forbidden by the PRC government. Although Huludao Rescue operates in an industry that is not restricted or forbidden to foreign investment, PRC regulations do impose significant restrictions on foreign acquisition of PRC corporations. Share exchanges, for example, are not a permissible method of gaining foreign ownership of a PRC operating company. As a result, the Company utilized the VIE Agreements in order to properly gain control or, and the economic benefits from, Huludao Rescue.

The VIE Agreements include:

(1)

Exclusive Technical Service and Business Consulting Agreement between Huashida Consulting and Huludao Rescue pursuant to which Huashida Consulting agreed to provide technical support and consulting services to Huludao Rescue in exchange for (i) 95% of the total annual net profit of Huludao Rescue and (ii) RMB100,000 per month ($15,170). To date, in order to make funds available to funds the growth of Huludao Rescue, Huludao Rescue has not made any payment to Huashida Consulting. Accordingly, $5,555,433 has been accrued on the balance sheet of Huludao Rescue as due to Huashida Consulting pursuant to the Exclusive Technical Service and Consulting Agreement.

(2)	Call Option Agreement among Baoyuan Zhu, Jianjun Gao, and Huashida Consulting under which the stockholders of Huludao Rescue have granted to Huashida Consulting the irrevocable right and option to acquire all of the equity interests in Huludao Rescue to the extent permitted by PRC law. If PRC law limits the percentage of Huludao Rescue that Huashida Consulting may purchase at any time, then Huashida Consulting may repeatedly exercise its option in such increments as may be allowed by PRC law. The exercise price of the option is RMB1.00 ($0.16) or the minimum amount required by PRC law. Huludao Rescue’s stockholders agreed to refrain from taking certain actions which might harm the value of Huludao Rescue or Huashida Consulting’s option.

(3)	Proxy Agreement by Baoyuan Zhu and Jianjun Gao pursuant to which they each authorize Huashida Consulting to designate someone to exercise all of their stockholder decision rights with respect to Huludao Rescue.

(4)	Share Pledge Agreement among Baoyuan Zhu, Jianjun Gao, Huludao Rescue, and Huashida Consulting under which the stockholders of Huludao Rescue have pledged all of their equity in Huludao Rescue to Huashida Consulting to guarantee Huludao Rescue’s and Huludao Rescue’s stockholders’ performance of their obligations under the Exclusive Technical Service and Business Consulting Agreement, the Call Option Agreement and the Proxy Agreement.

The accounting effect of the VIE Agreements between Huashida Consulting and Huludao Rescue is to cause the balance sheets and financial results of Huludao Rescue to be consolidated with those of Huashida Consulting, with respect to which Huludao Rescue is now a variable interest entity. Since the entities that are parties to the VIE Agreements were under common control at the time when the VIE Agreements were executed, the financial statements included in this report reflect the consolidation of the results of operations and cash flows of Huludao Rescue since its inception.

The Company believes that Huashida Consulting’s contractual agreements with Huludao Rescue are in compliance with PRC law and are legally enforceable. The Huludao Rescue Shareholders are also the senior management of the Company and therefore the Company believes that they have no current interest in seeking to act contrary to the contractual arrangements. However, Huludao Rescue and its stockholders may fail to take certain actions required for the Company’s business or to follow the Company’s instructions despite their contractual obligations to do so. Furthermore, if Huludao Rescue or its stockholders do not act in the best interests of the Company under the contractual arrangements and any dispute relating to these contractual arrangements remains unresolved, the Company will have to enforce its rights under these contractual arrangements through the operations of PRC law and courts and therefore will be subject to uncertainties in the PRC legal system.

Under the terms of the VIE Agreements, Huludao Rescue and its stockholders are contractually required to operate Huludao Rescue prudently and effectively in a manner intended to maximize the benefit to Huashida Consulting. Without the consent of Huashida Consulting, Huludao Rescue’s stockholders may not cause Huludao Rescue to: dispose of or mortgage its assets or income (except in the ordinary course of business); increase or decrease its registered capital (including issuing any equity securities); enter into any material agreements with its equity-owners outside of the ordinary course of business; appoint or remove any of Huludao Rescue’s directors or management; make any distribution of profits or dividends; or be liquidated or dissolved.

However, Huludao Rescue is not specifically prohibited from acting in certain ways which could reduce its value to the Company. For example, Huludao Rescue can pay its officers and directors compensation without Huashida Consulting’s consent, and such compensation could reduce the net profits payable by Huludao Rescue to Huashida Consulting under the terms of the Exclusive Technical Service and Business Consulting Agreement.

Results of Operations

The following table sets forth key components of the Company’s results of operations during the three months periods ended March 31, 2013 and 2012 and the percentage change between the first quarter of 2013 and the first quarter of 2012.

	Three Months Ended March 31						Percentage
	2012			2011			Change
Net Service Revenue	$	544,222		$	194,225			180	%
Net Commission Income		1,742,398			988,328			76	%
Gross Profit		2,286,620			1,182,553			93	%
Operating Expenses		172,542			134,446			28	%
Pre-Tax Income		2,114,072			1,048,107			102	%
Provision for Income Taxes		528,538			265,717			99	%
Net Income		1,585,534			782,390			103	%
Noncontrolling Interests		(77,657	)		(37,488	)		107	%
Net income attributable to stockholders	$	1,507,877		$	744,902			102	%
Earnings per share	$	0.04		$	0.02			92	%

Revenue, Commission Income, and Gross Profit. Both of our business segments - development services and marketing agency services - contributed significantly to the growth of our company from the first quarter of 2012 to the first quarter of 2013. The principal distinction between the first quarter of 2012 and the first quarter of 2013, besides the significant growth in our revenues and profits, was the streamlining of our service business. Whereas in the first quarter of 2012 we continued to offer hardware design services, in 2013 that portion of our business has been eliminated, as shown in the following table of the components of service revenue:

	Three Months Ended March 31				Change
	2013		2012		Amount			%
Hardware design	$	--	$	197,354	$	(197,354	)		(100	%)
Software development		1,232,230		430,779		801,451			186	%
Training		55,605		--		55,605			--
System maintenance		77,760		43,650		34,110			78	%
Total	$	1,365,595	$	671,783	$	693,812			103	%

In both quarters revenue and income are dominated by our marketing agency business. The reason for our strategic decision in 2011 to reorient our focus to agency sales is evident in comparing the margin rates of our two segments. In the first quarter of 2013, our $1,365,595 in service revenue produced $544,222 in gross profit, for a margin of 39.9%, a marked improvement from the 28.9% margin that we achieved on service revenue in the first quarter of 2012, when a much larger portion of the work was subcontracted to other developers. By way of comparison, the $2,635,425 in commissions that we earned in the first quarter of 2013 on sales and leasing transactions in which we served an agency function yielded a gross profit of $1,742,398, representing a margin of 66.1%.

The significantly better margins achieved from agency sales than from design and development services is a function of the nature of direct expenses incurred in each segment. Design and development services are labor-intensive. We perform approximately two-thirds of the labor in-house and subcontract the remainder. In both situations, we are forced to deal with the continual growth in labor costs in China.

The costs of commission revenue, by comparison, primarily include the costs of safety inspection and customer training, which we outsource, as well as a Chinese selling tax equal to 5% of total commission revenue. In addition, we allocate the direct costs of our marketing staff to costs of commissions; but have found that marketing equipment for independent manufacturers is a much less labor-intensive business than design and development, due to the market advantages that our management’s network of contacts provides.

Our strategic decision to focus our energies on expanding our agency business, then, resulted in a 93% increase in our overall gross profits, all but 32% of which was attributable to the growth of our agency sales and leasing business.

Operating Expenses. Most of our expenses are direct expenses, which expand relative to our sales volume. Our research and development activities, in particular, are carried on almost entirely pursuant to contract, and are, therefore, recorded as cost of service. As a result, our operating expenses are modest: In the first quarter of 2013 operating expenses totaling $172,548 represented only 4% of our revenue and 7.5% of our gross profit. While the costs attendant to our new status as a U.S. reporting company will cause some increase in operating expenses in the future, we expect that the nature of our operations will allow us to maintain a relatively low ratio of operating expenses to revenue.

Our decision to expand our sales agency business necessitated an increase in the administrative personnel in our marketing department. As a result, our selling and marketing expenses increased to $51,015 in the first quarter of 2013 from $44,196 in the first quarter of 2012, an increase of 15%. Our selling and marketing expenses are primarily comprised of manager salaries, insurance, travelling expenses and entertainment expenses incurred for our sales staff.

General and administrative (“G&A”) expenses increased to $121,533 in the first quarter of 2013 from $90,250 in the first quarter of 2012, an increase of 35%. The primary cause of the increase was the substantial expansion of our overall operations, as G&A expenses primarily consist of administrative salaries and insurance. In addition, as we prepare for our common stock to be traded in the United States, expenses were incurred for attorneys, auditors and financial advisors.

Provision for Income Taxes; Net Income. After deducting operating expenses from our gross profit, we realized pre-tax income of $2,114,072 in the three months ended March 31, 2013, compared to $1,048,107 in the three months ended March 31, 2012. The corporate income tax rate in China is 25%, and our operating entity, Huludao Rescue, had an effective tax rate of 25%. After making provision for income taxes of $528,538 in the first quarter of 2013, our net income for the quarter totaled $1,585,534, an increase of 103% from the first quarter of 2013. However, the VIE Agreements assign to Huashida Consulting only 95% of the net profit generated from Huludao Hefeng. For that reason, we deducted a “non-controlling interest” of $77,657 before recognizing net income attributable to common shareholders on our Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2013. After that deduction and taking into account the income and expenses incurred by the parent corporation, our net income attributable to the common shareholders for the recent quarter was $1,507,877 ($.04 per share), compared to net income attributable to common shareholders of $744,902 ($.02 per share) realized in the first quarter of 2012, which represented an increase of 102%.

Foreign Currency Translation Adjustment. Our reporting currency is the U.S. dollar. Our local currency, the Renminbi (RMB), is our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the three months ended March 31, 2013 and 2012, foreign currency translation adjustments of $38,902 and $30,338 have been reported as other comprehensive income in the consolidated statements of income and other comprehensive income.

Liquidity and Capital Resources

As of March 31, 2013, our working capital totaled $8,293,364, an increase of $1,629,593 since December 31, 2012. The increase is approximately equal to our net income for the three months ended March 31, 2013, due to the fact that we have very little in fixed or intangible assets on our balance sheet and so record very little depreciation or amortization expense. Cash and cash equivalents represented almost 97% of our current assets at March 31, 2013. Since our operations provided $1.78 million in cash during the three months ended March 31, 2013 and have been cash flow positive since inception, we believe that our liquid assets are adequate to finance our operations for the foreseeable future.

The following table sets forth a summary of our cash flows for the periods indicated:

Cash Flow

(all amounts in U.S. dollars)

	Three Months Ended March 31, 2013		Three Months Ended March 31, 2012
Net cash provided by operating activities	$	1,778,082	$	1,221,697
Net cash (used in) investing activities		(670)		(1,612	)
Net cash provided by (used in) financing activities		14,000		(136,965)
Effects of exchange rate changes on cash		38,530		42,588
Net increase in cash and cash equivalents		1,829,942		1,125,708
Cash and cash equivalent at beginning of the period		8,075,837		3,130,799
Cash and cash equivalent at end of the period	$	9,905,779	$	4,256,507

Operating activities

Cash provided by operating activities was $1,778,082 for the three months ended March 31, 2013, as compared to $1,221,697 for the three months ended March 31, 2012. Our operations provided cash in excess of our net income for the period primarily as a result of the $165,284 decrease in our trade accounts receivable during the three months ended March 31, 2013. In addition, our tax payable increased by $93,514 during the three months ended March 31, 2013. As we focus on earning commission fees that are payable (and generally paid) immediate upon the completion of a sale, we expect that our accounts receivable will continue to be modest relative to our total assets.

Investing activities

Net cash used in investing activities was $670 for the three months ended March 31, 2013, as compared to $1,612 for the three months ended March 31, 2012. The net book value of our fixed assets at March 31, 2013 was only $14,614, reflecting the fact that our business activities are carried out in offices that we lease. Accordingly, unless we expand our business activities in the future, investing activities will involve similarly insignificant amounts of cash.

Financing activities

For the past two years we have financed our operations almost exclusively with cash generated by those operations. So cash flows from financing activities are not significant. Net cash provided by financing activities was $14,000 for the three months ended March 31, 2013, as compared to $136,965 net cash used for the three months ended March 31, 2012. From time to time we take modest loans from related parties, primarily to provide the dollars needed to pay expenses incurred by our parent company in the U.S. - at March 31, 2013 we owed $90,076 on account of such loans. Cash flows from financing activities reflect such loans and their repayment. Because of our ample cash reserves and the profitability of our operations, we do not anticipate incurring significant additional debt. Therefore, our liquidity should be adequate to sustain the full implementation of our business plan for the foreseeable future.

Transfer of Cash

All of our revenues are earned by Huludao Rescue in the PRC, and 95% of the net income is then assigned to Huashida Consulting. PRC regulations restrict the ability of our PRC subsidiary, Huashida Consulting, to make dividend and other payments to its offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiary only out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiary is also required under PRC laws and regulations to allocate at least 10% of its annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amount of said fund reaches 50% of its registered capital (i.e. $15,385). Allocations to this statutory reserve fund can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiary to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

The Chinese government strictly regulates conversion of RMB into foreign currencies. Currently, Huludao Rescue and Huashida Consulting may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”), by complying with certain procedural requirements. Pursuant to applicable Chinese laws and regulations, foreign invested enterprises incorporated in China, such as Huashida Consulting, are required to apply for “Foreign Exchange Registration Certificates.” Currently, conversion within the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends, trade and service-related foreign exchange transactions, etc.) can be effected without requiring the approval of SAFE, but must be effected through authorized Chinese banks in accordance with regulatory procedures. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE. Compliance with those procedural requirements can result in delays in obtaining foreign exchange, which could interfere with offshore activities by the Company, such as acquisitions, offshore investments, or the payment of dividends to the Company’s shareholders. Because of the effort involved in obtaining foreign currencies in exchange for RMB, the Company intends to pay most of the operating expenses of its U.S. parent from dollars loaned to the Company by related parties.

Chinese regulations also limit the ability of our parent company to transfer money into China, as needed to fund the operations of Huludao Rescue. If in the future, China Hefeng raises funds and wishes to utilize them in the operations of Huludao Rescue, one of the following methods will have to be employed:

●

Acquisition. China Hefeng could transfer capital to Huludao Rescue by causing its Hong Kong subsidiary, Huashi International, to apply to MOFCOM for approval of an acquisition of Huludao Rescue by Huashi International. MOFCOM would approve such an acquisition only after a lengthy review process, and only if it determined that the price paid by Huashi International for Huludao Rescue represented a commercially fair price.

●

Joint venture. If China Hefeng Rescue Equipment, Inc. obtained capital that was less than the purchase price for Huludao Rescue deemed acceptable by MOFCOM, Huashi International could still inject the funds into Huludao Rescue by complying with the provisions of the PRC Sino-Foreign Equity Joint Venture Law. To accomplish this capital transfer, we would be required to apply to the Chinese government for approval to convert Huludao Rescue into an equity joint venture, in which Huashi International would be its equity joint venturer. If approved, Huashi International would then own a portion of the equity in Huludao Rescue, and the VIE agreements between Huludao Rescues and Huashida Consulting would be modified accordingly to reduce the portion of net income payable by Huludao Rescue to Huashida Consulting. .

We have no current plans for China Hefeng Rescue Equipment, Inc. to fund Huludao Rescue, and expect the VIE structure to remain in place for the forseeable future.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

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 March 31, 2013. The evaluation revealed that there are material weaknesses in our disclosure controls, specifically:

●	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 March 31, 2013.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our 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 the Annual Report on Form 10-K for the year ended December 31, 2012.

Item 2	Unregistered Sale of Securities and Use of Proceeds

	(a) Unregistered sales of equity securities
	The Company did not effect any unregistered sale of equity securities during the first quarter of fiscal 2013.

	(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 first quarter of fiscal 2013.

Item 3.	Defaults Upon Senior Securities.
	None.

Item 4.	Mine Safety Disclosures.
	Not Applicable.

Item 5.	Other Information.
	None.

Item 6.	Exhibits

31.1	Rule 13a-14(a) Certification - CEO
31.2	Rule 13a-14(a) Certification - CFO
32	Rule 13a-14(b) Certification

101.INS	XBRL Instance
101.SCH	XBRL Schema
101.CAL	XBRL Calculation
101.DEF	XBRL Definition
101.LAB	XBRL Label
101.PRE	XBRL Presentation

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	CHINA HEFENG RESCUE EQUIPMENT, INC.

Date: May 14, 2013	By:	/s/ Zhengyuan Yan
		Zhengyuan Yan, Chief Executive Officer

	By:	/s/ Wenqi Yao
		Wenqi Yao, Chief Financial Officer, Chief Accounting Officer

* * * * *

China Hefeng Rescue Equipment, Inc. - FORM 10-Q - May 14, 2013

Attached files

China Hefeng Rescue Equipment, Inc. Reports