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 1934For the quarterly period ended June 30, 2011[  ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _____ to _____





Commission File No. 0-54259





CHINA SURE WATER (USA) INC.


(Name of Registrant in its Charter)




New York
11-3137508(State or Other Jurisdiction of
(I.R.S. Employer I.D. No.)incorporation or organization)


14 Wall Street, 20thFloor, New York, NY 10005


(Address of Principal Executive Offices)




Issuer's Telephone Number: 646-783-2638





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 subjected to such filing requirements for the past 90 days.




YesX                 NoX




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 ___  No ___




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)




Large accelerated filer ___   Accelerated filer ___   Non-accelerated filer ___   Smaller reporting company X




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes ___  No 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:




August 15, 2011


Common Voting Stock: 20,777,200














CHINA SURE WATER (USA) INC.


QUARTERLY REPORT ON FORM 10Q


FOR THE FISCAL QUARTER ENDED JUNE 30, 2011




TABLE OF CONTENTS












Page NoPart I
Financial InformationItem 1.
Financial Statements (unaudited):Consolidated Balance Sheets – June 30, 2011 (unaudited)and December 31, 2010
2Consolidated Statements of Operations and Other Comprehensive Income(Unaudited) - for the Three and Six Months Ended June 30, 2011 and 2010
3Consolidated Statements of Cash Flows (Unaudited) – for the Six MonthsEnded June 30, 2011 and 2010
4Notes to Consolidated Financial Statements (Unaudited)
5Item 2.
Management’s Discussion and Analysis of Financial Condition andResults of Operations
15Item 3
Quantitative and Qualitative Disclosures about Market Risk
18Item 4.
Controls and Procedures
18Part II
Other InformationItem 1.
Legal Proceedings
19Items 1A.
Risk Factors
19Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
19Item 3.
Defaults upon Senior Securities
19Item 4.
Reserved
19Item 5.
Other Information
19Item 6.
Exhibits
19











CHINA SURE WATER (USA) INC.CONSOLIDATED BALANCE SHEETSJune 30,


December 31,2011


2010(Unaudited)ASSETSCURRENT ASSETS:Cash

$
9,735,349


$
5,072,181Accounts receivable


-



809,168Inventories


471,908



524,477Prepaid rent - current portion


185,640



182,040Other prepaid expenses


220,884



-Investment deposit


928,200



910,200Deferred tax assets


157,004



143,468TOTAL CURRENT ASSETS


11,698,985



7,641,534Property and equipment, net of accumulated depreciation


1,076,710



1,101,286Prepaid rent


464,100



546,120TOTAL ASSETS

$
13,239,795


$
9,288,940LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Taxes payable

$
1,139,284


$
624,311Accrued expenses


249,101



313,576Due to related party


54,145



-Convertible notes


541,414



-TOTAL CURRENT LIABILITIES


1,983,944



937,887STOCKHOLDERS' EQUITYCommon stock, par value $0.001,400,000,000 shares authorized,20,777,200 and 20,127,200 shares issued and outstandingat June 30, 2011 and December 31, 2010


20,777



20,127Additional paid-in capital


629,321



440,530Retained earnings


10,041,140



7,487,498Other comprehensive income


564,613



402,898TOTAL STOCKHOLDERS' EQUITY


11,255,851



8,351,053TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
13,239,795


$
9,288,940





See Notes to the Financial Statements


2


CHINA SURE WATER (USA) INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME(Unaudited)For the three months ended June 30,


For the six months ended June 30,2011


2010


2011


2010Sales

$
4,713,360


$
2,689,322


$
6,196,551


$
3,468,460Cost of goods sold


1,761,568



1,416,785



2,370,747



1,923,231Gross Profit


2,951,792



1,272,537



3,825,804



1,545,229COSTS AND EXPENSES:Selling expenses


14,837



8,698



19,783



11,825General and administrative expenses


187,033



128,339



323,225



212,002Total cost and expenses


201,870



137,037



343,008



223,827INCOME FROM OPERATIONS


2,749,922



1,135,500



3,482,796



1,321,402Other income (expenses):Interest expense, net of interest income


(86,881
)






(113,097
)INCOME BEFORE INCOME TAXES


2,663,041



1,135,500



3,369,699



1,321,402Income tax expense


657,633



265,457



816,057



293,647NET INCOME


2,005,408



870,043



2,553,642



1,027,755OTHER COMPREHENSIVE INCOME:Foreign currency translation adjustment


104,873



17,349



161,715



17,400COMPREHENSIVE INCOME

$
2,110,281


$
887,392


$
2,715,357


$
1,045,155Net income per share:Basic and diluted

$
0.10


$
0.09


$
0.12


$
0.10Weighted average shares outstanding:Basic and diluted


20,777,200



10,000,000



20,565,322



10,000,000





See Notes to the Financial Statements


3





CHINA SURE WATER (USA) INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)For the six months ended June 30,2011


2010OPERATING ACTIVITIES:Net Income

$
2,553,642


$
1,027,755Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation


45,756



24,405Deferred tax assets


(13,536
)


23,417Amortization of prepaid rent


91,620



-Amortization of discount on convertible notes


86,869



-Amortization of deferred financing costs


12,230



-Changes in operating assets and liabilitiesAccounts receivable


814,502



(940,562
)Inventories


62,127



438,517Prepaid expenses


(220,884
)


(795,420
)Taxes payable


496,129



32,722Accrued expenses


(69,917
)


(192,813
)NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES


3,858,538



(381,979
)FINANCING ACTIVITIES:Loan from related party


53,445



377,571Proceeds from issuance of common stock andconvertible notes, net of deferred financing costs


630,000



-NET CASH PROVIDED BY FINANCING ACTIVITIES


683,445



377,571EFFECT OF EXCHANGE RATES ON CASH


121,185



19,319INCREASE IN CASH


4,663,168



14,911CASH - BEGINNING OF PERIODS


5,072,181



2,431,373CASH - END OF PERIODS

$
9,735,349


$
2,446,284SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for income taxes

$
617,692


$
488,781





See Notes to the Financial Statements


4
 CHINA SURE WATER (USA) INC.
 NOTES TO FINANCIAL STATEMENTS
 JUNE 30, 2011
 (Unaudited)





1              BASIS OF PRESENTATION





The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position and the results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The balance sheet as of December 31, 2010 was derived from the audited financial statements included in the Company’s registration statement on Form 10. These interim financial statements should be read in conjunction with that report. For further information, refer to the financial statements and footnotes thereto included in the Company’s registration statement on Form 10.





The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and are presented in U.S. Dollars.





The financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.








2              BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





China Sure Water (USA) Inc. (the “Company”) is a U.S. holding company incorporated in New York. The Company, through its wholly owned subsidiary in China, is engaged in the production and marketing of water softeners for residential use in the People’s Republic of China (“PRC” or “China”)





China Sure Water (USA) Inc. (“Sure Delaware”) was incorporated in the State of Delaware on February 25, 2008. Sure Delaware had no operations since its inception. Sure Delaware owned 60% of Sure (China) Water Science and Technology Co., Ltd. (“Sure China”), and Sure Delaware’s wholly-owned subsidiary, Sure Water Quality Control Technology (China) Inc. Limited, owns the remaining 40% of Sure China.





Sure China was incorporated under the laws of the Peoples Republic of China (“PRC”) as a limited liability company on March 23, 2007. In July 2008, through a recapitalization transaction which was accomplished as an exchange of shares between Sure China and Sure Delaware, Sure China became a subsidiary of Sure Delaware. Retroactive effect to the capitalization has been given in the accompanying financial statements.








5
 CHINA SURE WATER (USA) INC.
 NOTES TO FINANCIAL STATEMENTS
 JUNE 30, 2011
 (Unaudited)


After its previous business of developing biometric security devices failed in 2005, the Company (then known as “Biometrics 2000 Corporation”) entered into bankruptcy proceedings.  In 2010 the bankruptcy court approved a plan to reorganize the company in connection with a merger with Sure Delaware.





On October 5, 2010, to complete the reorganization, Sure Delaware merged into the Company and shares representing 85% of the issued and outstanding shares of the Company were issued to the shareholders of Sure Delaware. The Company accounts for this transaction as a reverse merger pursuant to which the New York corporation will be the surviving corporation for legal purposes and Sure Delaware will be the surviving corporation for financial reporting purposes. After the merger, the name of the Company was changed to China Sure Water (USA) Inc.





On June 3, 2011, The company formed SURE (Shihezi) Water Co., Ltd.. (“Shihezi”) in Shihezi, Xinjiang Province, China, as wholly owned foreign entiyt (WOFE). Shihezi is engaged in the distribution and marketing of water softeners, water filtration and purification equipment for both commercial and residential use in Xinjiang Province,China. The company invested in USD 310,000 (about 2,000,000 RMB) in cash as initial registered capital. The life of the WOFE is 50 years.








Use of estimates in the preparation of financial statements





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period.  Actual results could differ from those estimates.





Revenue recognition





Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured.  Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.





The Company’s sales agreements contain clauses that grant customers the right to return or exchange products within a year. The Company accounts for sales under the guidance of FASB ASC 605-15-25, “Revenue Recognition When Right of Return Exists”.  There have been no returns from customers since inception.





Shipping and handling costs





In accordance with ASC 605-45-45 “Accounting for Shipping and Handling Fees and Costs”, all amounts billed to customers in a sales transaction for shipping and handling are classified as revenue.





6
 CHINA SURE WATER (USA) INC.
 NOTES TO FINANCIAL STATEMENTS
 JUNE 30, 2011
 (Unaudited)





Cash





The Company maintains cash with financial institutions in the People’s Republic of China (“PRC”) which are not insured or otherwise protected.  Should any of these institutions holding the Company’s cash become insolvent, or if the Company is unable to withdraw funds for any reason, the Company could lose the cash on deposit with the institution.





Accounts Receivable





Accounts receivables represent customer accounts receivables. The allowance for doubtful accounts is based on a combination of current sales, historical charge-offs and specific accounts identified as high risk. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when all reasonable efforts to collect the amounts due have been exhausted. Such allowances, if any, would be recorded in the period the impairment is identified. There was no allowance for doubtful accounts as of June 30, 2011 or December 31, 2010.





Inventories





Inventories consist of raw materials and finished goods and are stated at the lower of cost, determined using the weighted average cost method, and net realizable value.





Property and equipment





Property and equipment are recorded at cost.  Depreciation is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight-line method for financial reporting purposes.





Maintenance, repairs and minor renewals are charged to expense when incurred.  Replacements and major renewals are capitalized.





Warranty





The Company offers a limited three-year warranty to customers and accounts for warranty reserves according to  ASC 450-20-25 which states that, because of the uncertainty surrounding claims that may be made under warranties, warranty obligations fall within the definition of a contingency. Losses from warranty obligations shall be accrued when the conditions in paragraph 450-20-25-2 are met. The Company has not historically had any warranty claims nor has been informed of any problems from its customers, and therefore has no reasonable basis to estimate any potential liability and there has been no information available prior to the financial statements being issued that a liability had been incurred at the date of the financial statements. Accordingly, no reserve for warranty claims has been recorded as of June 30, 2011 or December 31, 2010.





7
 CHINA SURE WATER (USA) INC.
 NOTES TO FINANCIAL STATEMENTS
 JUNE 30, 2011
 (Unaudited)





Impairment of long-lived assets





The Company accounts for the impairment of long-lived assets in accordance with the guidance of FASB ASC 360-10-20.  Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable.  For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value.  If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.  Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable.  Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.  Based on its review, the Company believes that, as of June 30, 2011 and December 31, 2010, there was no impairment of its long-lived assets.





Deferred income taxes





The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes”, which requires that deferred tax assets and liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  In addition, ASC 740 requires recognition of future tax benefits, such as carry forwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax asset will not be realized.  Management reviews this valuation allowance periodically and makes adjustments as warranted.





Currency translation





Since the Company operates primarily in the PRC, the Company’s functional currency is the Chinese Yuan (”RMB”).  Revenue and expense accounts are translated at the average rates during the period, and balance sheet items are translated at year-end rates.  Translation adjustments arising from the use of differing exchange rates from period to period are included as a separate component of shareholders’ equity.  Gains and losses from foreign currency transactions are recognized in current operations.





The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.





Other comprehensive income





Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.  Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements.  Comprehensive income includes net income and the foreign currency translation gain, net of tax.





8
 CHINA SURE WATER (USA) INC.
 NOTES TO FINANCIAL STATEMENTS
 JUNE 30, 2011
 (Unaudited)





Fair value of financial instruments





FASB ASC 825, “Financial Instruments”, requires that the Company disclose estimated fair values of financial instruments.





The Company’s financial instruments primarily consist of cash, accounts receivables, accounts payable and accrued expenses.





As of the balance sheet dates, the estimated fair values of financial instruments were not materially different from their carrying values as presented on the balance sheet.  This is attributed to the short maturities of the instruments.The estimation of fair value is generally measured by discounting expected future cash flows as the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available, judgments and projections are considered necessary. There was no impairment of long-lived assets as of June 30, 2011 and December 31, 2010.








4              INVENTORIES





Inventories consist of the following:





June 30,


December 31,2011


2010(Unaudited)Raw materials

$
254,536


$
416,038Finished goods


217,372



108,439$
471,908


$
524,477








5              PREPAID RENT





In January 2010, the Company entered into a five year lease agreement with an unrelated third party providing for annual rent of RMB1,200,000 (approximately $176,000). The Company paid RMB6,000,000(approximately $880,000) representing five years rent in advance in April, 2010. Prepaid rent is being amortized on the straight line basis over the life of the lease. As of June 30, 2011 and December 31, 2010, the prepaid rent – current portion were $185,640 and $182,040.








6              OTHER PREPAID EXPENSES





As of June 30, 2011 and December 31, 2010, the prepaid expenses were $220,884 which include miscellaneous prepaid expenses of $213,114 and unamortized deferred financing costs of $7,770.  and $nil respectively.





7              INVESTMENT DEPOSIT





In October 2010, the Company signed a letter of intent for a potential acquisition and made a refundable deposit to the seller of RMB6,000,000 (approximately $900,000).


9
 CHINA SURE WATER (USA) INC.
 NOTES TO FINANCIAL STATEMENTS
 JUNE 30, 2011
 (Unaudited)







8              PROPERTY AND EQUIPMENT





A summary of property and equipment and the estimated lives used in the computation of depreciation and amortization is as follows:





June 30,


December 31,2011


2010

Life(Unaudited)Machinery and equipment

$
1,330,420


$
1,304,620

15 yearsVehicle


23,205



22,755

10 yearsOffice equipment


8,478



8,313

5 years1,362,103



1,335,688Less: accumulated depreciation


(285,393
)


(234,402
)$
1,076,710


$
1,101,286





9              RELATED PARTY TRANSACTIONS AND BALANCES





Transactions





Six months ended June 30,2011


2010(Unaudited)


(Unaudited)Rent (1)

$
54,145


$
51,342Social insurance (2)


-



3,433Purchases (3)


-



324,666Total

$
54,145


$
379,441




(1)
The Company rented its administrative office from its majority shareholder and officer.(2)
A company owned by the majority shareholder of the Company paid expenses on behalf of the Company.(3)
The Company purchased raw materials and finished goods from a company which through August, 2010 was owned by the majority shareholder of the Company.




Balances





Due to related parties consist of the following:





June 30,


December 31,2011


2010(Unaudited)Due to the majority shareholder of the Company

$
54,145


$
-





These amounts are non-interest bearing and due on demand.


10
 CHINA SURE WATER (USA) INC.
 NOTES TO FINANCIAL STATEMENTS
 JUNE 30, 2011
 (Unaudited)





10           CONVERTIBLE NOTES





On March 1, 2011, the Company received gross proceeds of $650,000 from the sale of 650,000 shares of common stock and convertible notes (the “Note”) to various investors. The Notes bears interest at fifteen percent (15%) per annum payable quarterly.  Principal is payable on December 1, 2011. If the Company completes a debt or equity financing for gross proceeds of $5 million or more, each Note holder shall have the right, at his option, at any time on or before the satisfaction of the Notes, to convert the principal amount of the Notes and interest accrued through the date of conversion into the securities issued in the Financing at a twenty-five percent (25%) discount to the offering price.





Total financing costs directly associated with the issuance of the common stock and notes were $20,000, including $6,014 associated with the issuance of common stock and $13,986 associated with the issuance of the Notes.  Financing costs associated with the issuance of common stock are recorded as the offset against the additional paid in capital.  Financing costs associated with the issuance of the Note are recorded as deferred financing costs in the balance sheet at grant date. The Company is amortizing these financing costs over the life of the Notes.  The amortization for the six months ended June 30, 2011 was $6,216.





The Company allocated the total proceeds from the financing between the common stock and the Notes according to their estimated fair values as of the issuance date.  The initial value assigned to the Notes was $454,545.  The debt discount resulting from the allocation of the proceeds to the value of the common stock issued is being amortized over the life of the Notes as additional interest expense.  The amortization for the six months ended June 30, 2011 was $86,869.





Convertible notes outstanding as of June 30, 2011 are as follows:





Convertible notes issued

$
650,000Less: debt discount


(108,586
)Balance - June 30, 2011

$
541,414





Interest is accrued on the principal amount at 15% per annum.  For the six months ended June 30, 2011, the Company accrued interest of $32,500 on the convertible notes.





11           ACCRUED EXPENSES





Accrued expenses consist of the following:





June 30,


December 31,2011


2010(Unaudited)Professional fees

$
13,588


$
63,832Bonus


53,526



57,949Sales commission


149,487



191,795Interest


32,500



-$
249,101


$
313,576





11
 CHINA SURE WATER (USA) INC.
 NOTES TO FINANCIAL STATEMENTS
 JUNE 30, 2011
 (Unaudited)





12           TAXES





Corporation income tax





The Company is governed by the Income Tax Law of the People’s Republic of China concerning privately run and foreign invested enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.





The reconciliation of income tax expense at the U.S. statutory rate of 35% for the six months ended June 30, 2011 and 2010 to the Company’s effective tax rate is as follows:








For the six months ended June 30,2011


2010(Unaudited)


(Unaudited)U.S. statutory rate at 35%

$
1,179,395


$
462,491Tax rate difference between China and U.S.


(352,242
)


(132,140
)Permanent difference related to GAAP and Chinese tax law


(64,547
)


(61,610
)Change in valuation allowance


53,451



-Tax exempt income


-



24,906Effective tax rate

$
816,057


$
293,647





The provisions for income taxes are summarized as follows:





For the six months ended June 30,2011


2010(Unaudited)


(Unaudited)Current - foreign

$
829,593


$
270,230Deferred - foreign


(13,536
)


23,417Deferred - United States


(53,451
)


-Valuation allowance - United States


53,451



-$
816,057


$
293,647





Value added tax (“VAT”)





Enterprises or individuals who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with the PRC laws. The value added tax standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished products.


12
 CHINA SURE WATER (USA) INC.
 NOTES TO FINANCIAL STATEMENTS
 JUNE 30, 2011
 (Unaudited)







13           CONCENTRATIONS





(a)
Major customer





Sales to five major customers for the six months ended June 30, 2011 were 21%, 16%, 15%, 14% and 12%.  Sales to four major customers for the six months ended June 30, 2010 were 23%, 19%, 18%, and 10%.





Sales to four major customers for the three months ended June 30, 2011 were 24%, 21%, 20%, and 10%.  Sales to three major customers for the three months ended June 30, 2010 were 25%, 19%, and 17%.








(b)
Major vendors





The Company purchased 100% and 95% of its raw materials from one supplier for the six months ended June 30, 2011 and 2010, respectively.





The Company purchased 100% of its raw materials from one supplier for the three months ended June 30, 2011 and 2010, respectively.








14           COMMITMENTS AND CONTINGENCIES





The Company is committed under operating leases with its principal shareholder which provide for rentals of approximately $53,445 Through December 31, 2011.  Rental expense charged to operations for the six months ended June 30, 2011 and 2010 aggregated approximately $145,065 and $227,370, respectively, including approximately $53,000 and $51,000, respectively, paid to the Company’s principal shareholder.





See note 5 relating to prepaid rent.








15           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 PRCs political, economic and social conditions.  There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.





Substantially all of the Company’s business is transacted in RMB, which is not freely convertible.  The People’s Bank of China or other banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China.  Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application together with suppliers’ invoices, shipping documents and signed contracts.


13
 CHINA SURE WATER (USA) INC.
 NOTES TO FINANCIAL STATEMENTS
 JUNE 30, 2011
 (Unaudited)


Since the Company has its primary operations in the PRC, its revenues will be settled in RMB, not U.S. Dollars. Due to certain restrictions on currency exchanges that exist in the PRC, the Company’s ability to use revenue generated in RMB to pay any dividend payments to its shareholders outside of China may be limited.





In September 2006, PRC changed the laws regarding transfer of equity in PRC companies in exchange for equity in non-PRC companies.  Approvals and registrations for such transfers are required and penalties may be imposed if the requirements are not met.








16           SUBSEQUENT EVENTS





The Company has evaluated events after the date of these financial statements through the date these financial statements were issued.  There were no other material subsequent events as of that date.








14


ITEM. 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Forward-Looking Statements: No Assurances Intended





In addition to historical information, this Quarterly Report contains forward-looking statements, which are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or similar expressions. These forward-looking statements represent Management’s belief as to the future of China Sure Water (USA) Inc. Whether those beliefs become reality will depend on many factors that are not under Management’s control. Many risks and uncertainties exist that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Section 1A of our Registration Statement on Form 10, entitled “Risk Factors.” Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.





China Sure Water (USA) Inc., a Delaware corporation, was merged into Biometrics 2000 Corporation, a New York corporation, on October 5, 2010, at which time the name of the New York corporation was changed to China Sure Water (USA) Inc.  The transaction was a reverse merger for accounting purposes.  As a result, when we file financial statements for periods ending after October 5, 2010, the historical financial statements of the Delaware corporation are submitted as the historical financial statements of the New York corporation.





In these historic financial statements, the financial results of Sure (China) Water Science and Technology Co., Ltd. (“Sure China”), its subsidiary, are consolidated with those of the New York corporation and those of Sure Water Quality Control Technology (China) Inc. Limited (“Sure Water’), a wholly owned Hong Kong subsidiary of the New York corporation that is the intermediate holder of 40% of Sure China’s stock.





Results of Operations





Our revenue is generated from sales of water softeners and parts. Revenue for the Company increased to $4,713,360 during the three months ended June 30, 2011, an increase of 75% over the $2,689,322 in sales recorded during the three months ended June 30, 2010.  Revenue increased by 79% during the six months ended June 30, 2011, from $3,468,460 recorded during the first half of 2010 to $6,196,551 during the first half of 2011.  77% of our sales in the first half of 2011 were made to five distributors, four of whom were the source of the majority of our 2010 revenue.  The increase in revenue in 2011 was primarily due to increased sales volume of new models that carry higher sales prices.


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Our cost of goods sold includes the direct costs of our raw materials as well as the cost of labor and overhead. Our cost of goods sold was $1,761,568 for the three months ended June 30, 2011, yielding a gross profit of $2,951,792 or 62.6% of sales. Our cost of goods sold for the six months ended June 30, 2011 was $2,370,747, yielding a gross profit of $3,825,804 or 61.7% of sales. During the three months and six months ended June 30, 2010 our gross margin was only 47.3% and 44.6%, respectively.  The improvement in gross margin in 2011 has been primarily attributable to two factors:





·
During 2011, we introduced a new, more compact machine, in which the machine body and the salt container are combined.  We are selling this product with a higher profit margin than the machines we sold in 2010.





·
Direct sales at retail prices from our showrooms in Beijing are beginning to contribute to our revenue, providing a higher margin than the wholesale prices we charge to distributors.  If we are successful in expanding our industrial customer base, a market that we have targeted for focus in 2012, the portion of our revenues derived from direct sales should continue to grow.





Our costs and expenses remain low relative to revenue, equaling 4.3% of sales during three months and 5.5% of sales during the six months ended June 30, 2011.  In both periods, we achieved improved operational efficiency compared to 2010, when our costs and expenses equaled 5.1% and 6.5% of sales during the three and six months ended June 30, 2010.  We incur relatively low selling costs by utilizing a small number of large distributors as the principal component of our marketing network.  Moreover, even as we have expanded our direct marketing to consumers in Beijing, our marketing department carries only a modest staff.  Thus sales have increased faster than our selling expenses.





Due to the marked increase in sales and gross margin and the improvement in ratio of operating expenses to revenue, our income from operations increased by 142% from the second quarter of 2010 to the second quarter of 2011, and by 164% from the first half of 2010 to the first half of 2011.  The improvement was partially offset by the interest expense that we incurred in 2011:  $86,881 in the three months and $113,097 in the six months ended June 30, 2011.  The interest expense arose from a private placement that we completed on March 1, 2011, in which we sold a 15% $650,000 9-month note and 650,000 shares of common stock for gross proceeds of $650,000.  During the period from March 1, 2011 to June 30, 2011, we recorded interest of $32,500 that accrued on the note, but also recorded $6,216 in amortization of the financing costs we incurred in selling the notes, as well as $86,869 amortization of the debt discount we recorded as a result of selling the note for less than its principal amount.  The two amortizations were included in the category of interest expense on our Statements of Operations, bringing to $125,585 the expense recorded as a result of the private placement.  We will record increased expenses in each of the next two quarters, until the note is satisfied.





After accrual of the 25% Chinese corporate income tax, net income was $2,005,408 ($.10 per share) for the three months ended June 30, 2011, compared to $870,043 ($.09 per share) earned in the three months ended June 30, 2010.  Net income was $2,553,642 ($.12) for the six months ended June 30, 2011, compared to $1,027,755 ($.10) earned in the six months ended June 30, 2010.  Net income as a percentage of sales was 42.5% and 41.2% during the three and six months ended June 30, 2011 as compared to 32.4% and 29.6% duringthe three and six months ended June 30, 2010.  This increased profitability is a reflection of efficiencies discussed above.


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Our business operates entirely in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars.  The conversion of our accounts from RMB to Dollars results in translation adjustments.  While our net income is included in the retained earnings on our balance sheet; the translation adjustments are included in a line item on our balance sheet labeled “accumulated other comprehensive income,” since they are more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business.  During the three and six months ended June 30, 2011, the effect of converting our financial results from RMB to U.S. Dollars was to increase our accumulated other comprehensive income by $104,873 and $161,715, respectively.  During the three and six months ended June 30, 2010, when the Yuan-Dollar exchange rate was more stable, the effect of converting our financial results from RMB to U.S. Dollars was to increase our accumulated other comprehensive income by $17,349 and $17,400.





Liquidity and Capital Resources





To date the development of our company has been funded by the contributions that our founder made to the capital of the company, as well as working capital loans that he makes when needed.  During the past three years, growth has been funded by income from operations:  $322,752 in 2008, $2,525,076 in 2009, $3,706,509 in 2010, and $3,858,538 in the first six months of 2011.  As a result of this combination, at June 30, 2011 we had $9,715,041 in working capital, primarily consisting of cash on hand of $9,735,349.  At the same time, we had no long-term liabilities and a modest amount of debt.  We are confident, therefore, of our ability to fund future operations.





Our cash resources increased by $4,663,168 during the six months ended June 30, 2011.  The increase was primarily due to the increased sales and the fact that our customers generally paid with cash - we ended the recent quarter with no accounts receivables.    In general, we carry a low level of accounts receivable relative to sales, as most of our sales are made for cash.  Although we do afford credit to some of our distributors, in 2010 we undertook to reduce the amount of extended credit that we afford to customers.  The result was the elimination of our accounts receivable as of June 30, 2011.





Our working capital increased by $3,011,394 during the six months ended June 30, 2011.  Among the significant elements of our Current Assets at June 30, 2011 were:





·
an investment deposit of $928,200.  The Company is currently negotiating a potential acquisition.  In keeping with common practice in China, the Company has deposited these funds to show good faith in the negotiations.  If the negotiations result in an acquisition, the deposit will be applied to the purchase price.  If the negotiations terminate without an acquisition, the funds will be returned to the Company.





·
$185,640, which is the current portion of $649,740 in prepaid rent.  During 2010 we prepaid RMB 6,000,000 ($895,000) in rent for the new premises that we leased in January of 2010.  Our ability to prepay the rent gained us very favorable terms.  The prepaid amount will be amortized over the five year term of the lease.





·
a $157,004 deferred tax asset.  Temporary differences in taxation values, primarily with respect to accrued expenses, gave rise to this asset.  We have recorded it as a current asset because we expect to use it to offset taxable income in 2011.





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Cash flows from operations totaled $3,858,538 during the six months ended June 30, 2011.  The increase exceeded net income primarily due to the fact that we collected all of our accounts receivable.  In addition, we increased our taxes payable account by $496,129.  The cash flow from collection of our accounts receivable was offset in part by (a) the $69,917 payment that we made toward accrued expenses, and (b) the $220,884 increase in our prepaid expenses, most of which represents advance payment of the expenses for our next round of equity financing.





We project a need for an additional$5 to$8 million in funding prior to year end 2011 in order to execute our growth strategy.  The large majority of these funds would be used for acquisitions or other means of expanding the business to cities outside of Beijing.  Additional uses would be to open a fourth showroom and additional community sales offices in Beijing, to finance other sales and marketing expenses, and to support additional research and development.  Our intention is to raise these funds through sales of equity. The March 1, 2011 private placement of a convertible note and common stock, which generated gross proceeds of $650,000, provided us available cash in the United States to pay the expenses of our new U.S. presence, and in particular expenses that will arise in preparation for financing.  To date, however, we have received no commitment for the funds that we require for growth.  In the event we are unable to raise additional funds, we will postpone some of the expenditures described above and invest our operating cash flow to continue the growth of the business.





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 DISCLOSURE ABOUT MARKET RISK





No applicable.




ITEM 4
CONTROLS AND PROCEDURES





(a)
Evaluation of disclosure controls and procedures.





The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (defined in SEC Rule 13a-15(e)) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective.





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(b)    Changes in internal controls.




The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting (defined in SEC Rule 13a-15(f)) that occurred during the period covered by this report.  They concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.




PART II - OTHER INFORMATION




Item 1.Legal Proceedings.




None.




Item 1A.Risk Factors.




Not applicable.




Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.




(a)
Unregistered Sale of Equity Securities




None.




(c)
Repurchase of Equity Securities





The Company did not repurchase any shares of its common stock during the 1st  quarter of 2011.





Item 3.     Defaults Upon Senior Securities.




None.




Item 4.     Reserved.




Item 5.     Other Information.




None.




Item 6.     Exhibits




31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





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SIGNATURES





In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





CHINA SURE WATER (USA) INC.Date:  August 15, 2011
By: /s/ Xinhong GuoName:  Xinhong GuoTitle: Chief Executive Officer





Date: August 15, 2011
By: /s/ Xiaojie GuoName:  Xiaojie GuoTitle: Chief Financial and Accounting Officer









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