UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _______________
Commission file number: 000-49852
___________________________________________
DAHUA INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 04-3616479
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
19th Floor, Building C, Tianchuangshiyuan, Huizhongbeili,
Chaoyang District, Beijing, China, 100012
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(Address of principal executive offices)
86-10-6480-1527
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(Issuer's telephone number)
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(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity: As of May 16, 2006: 25,000,000 shares of common stock, par value $.0001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DAHUA INC.
Table of Contents
Part I. Financial Information
Item1. Financial Statements
Consolidated Balance Sheet as of March 31, 2006 (unaudited)
Consolidated Statements of Operations and Comprehensive Loss (unaudited) for
the Three Months Ended March 31, 2006 and 2005
Consolidated Statements of Cash Flows (unaudited) for the Three Months
Ended March 31, 2006 and 2005
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures
Part II. Other Information
Item 1. Legal Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
DAHUA, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31
ASSETS 2006
-----------------
Current assets
Cash and cash equivalents $ 591,222
Inventory 15,552,648
----------------
Total current assets 16,143,870
Property, plant & equipment
Computer equipment 6,469
Office equipment 44,836
Telephones 1,058
Vehicles 23,087
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Total property, plant & equipment 75,450
Accumulated depreciation (30,568)
----------------
Net property, plant and equipment 44,882
Restricted cash 378,232
Due from related parties 46,082
----------------
Total assets $ 16,613,066
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 119,200
Customer deposits 7,135,530
Short-term loans-related parties 5,394,226
Accrued interest-short-term loans, related parties 511,199
Accrued sales and income taxes 245,094
Accrued others 33,634
---------------
Total current liabilities 13,438,883
Minority interest in subsidiary 650,483
Stockholders' equity
Preferred stock: par value $.0001; 20,000,000 shares
authorized; none issued and outstanding -
Common stock: par value $.0001; 80,000,000 shares
authorized; 25,000,000 issued and outstanding 2,500
Additional paid in capital 3,130,452
Accumulated deficit (701,166)
Accumulated other comprehensive income 91,914
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Total stockholders' equity 2,523,700
--------------
Total liabilities and stockholders' equity $ 16,613,066
===============
See accompanying notes to consolidated financial statements
DAHUA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
Three months ended
March 31,
---------------------------------------
2006 2005
Revenues
Sales revenues $ 329,152 $ -
Cost of goods sold 246,810 -
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Gross profit 82,342 -
Expenses
Advertising 127,023 14,902
Depreciation 1,485 1,708
Payroll expense 17,972 37,554
Other general and administrative 100,016 87,340
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Total expenses 246,496 141,504
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Net loss from operations (164,154) (141,504)
Other income (expense)
Interest income 367 962
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Total other income (expense) 367 962
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Net income (loss) before taxes and minority interest
(163,787) (140,542)
Provision for income taxes - -
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Net income (loss) before minority interest (163,787) (140,542)
Minority interest in subsidiary loss (32,757) (28,108)
Net loss $ (131,030) $ (112,434)
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Foreign currency translation adjustment 21,231 -
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Comprehensive loss $ (109,799) $ (112,434)
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Basic and diluted loss per share $ (0.01) $ (0.01)
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Weighted average common shares outstanding 25,000,000 20,000,000
============== ==============
See accompany notes to consolidated financial statements
DAHUA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended
March 31,
-----------------------------------
2006 2005
Cash flows from operating activities:
Net income (loss) $ (131,030) $ (112,434)
Adjustments to reconcile net loss to
net cash (used in )operations:
Depreciation 1,485 1,708
Minority interest (32,757) (28,108)
Changes in operating assets and liabilities:
Inventory (621,280) (448,633)
Prepaid construction costs - (295,729)
Loans receivable - (172,480)
Restricted cash (22,558) -
Accounts payable 26,263 -
Customer deposits 848,538 1,264,692
Accrued interest 50,920 84,036
Accrued sales and income taxes 21,312 -
Accrued others 2,043 1,763
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Net cash provided operations 142,936 294,815
Cash flows from investing activities:
Advances to related parties (303) -
Repayment of advances to related parties - -
Purchases of property, plant & equipment (14,539) -
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Net cash (used in) investing activities (14,842) -
Cash flows from financing activities:
Net proceeds from issuance of common stocks - -
Purchase of stock in merger transaction - -
Net proceeds from related party loans payable 24,832 10,883
Investment in subsidiary by minority owner - -
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Net cash provided by financing activities 24,832 10,883
Effect of rate changes on cash 21,231 -
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Increase in cash and cash equivalents 174,157 305,698
Cash and cash equivalents, beginning of period 417,065 474,784
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Cash and cash equivalents, end of period $ 591,222 $ 780,482
============== =============
Supplemental disclosures of cash flow information:
Interest paid in cash $ - $ -
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Income taxes paid in cash $ - $ -
=============== =============
See accompany notes to consolidated financial statements
DAHUA INC.
Notes to the Unaudited Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the instructions
to Form 10-QSB and item 310 of Regulation SB. Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America for annual financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included.
The accounts of the Company and all of its subsidiaries are included in the
consolidated financial statements. All significant intercompany accounts and
transactions have been eliminated in consolidation. The consolidated operating
results for the three months ended March 31, 2006 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2006. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Form 10-KSB for the year ended
December 31, 2005.
1. Nature of operations
Dahua, Inc. (Dahua) was incorporated on March 8, 2002 in the State of Delaware
as Norton Industries Corp. The name was changed to Dahua, Inc. on February 7,
2005 as result of a reverse acquisition in which Norton acquired all capital
shares of Bauer Invest Inc. ("Bauer"). The acquisition was accounted for as
a reverse merger, as the post acquisition owners and control persons of Dahua
are substantially the same as the pre acquisition owners and control persons
of Bauer.
Bauer Invest Inc. was incorporated on December 10, 2003, under the laws of the
Territory of the British Virgin Islands (BVI). Bauer has had no operations
other than the acquisition of 80% of Beijing Dahua Real Estate Development,
Ltd. (Subsidiary) on May 25, 2004. The Subsidiary is a corporation established
on September 24, 2001 in the People's Republic of China (PRC). The acquisition
was accounted for as a reverse merger, as the post acquisition owners and
control persons of Bauer are substantially the same as the pre acquisition
owners and control persons of the subsidiary. These financial statements are
essentially those of the Subsidiary with a recapitalization to show the
effects due to the reverse mergers. The consolidated entity is hereafter
referred to as 'the Company'.
The Company engages in the development of real estate and the sale of
commodity housing. The Company has been in the process of acquiring and
developing land and housing for sale, and is now prepared for sales of those
items to begin.
2. Basis of Presentation
The accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP). This
basis differs from that used in the statutory accounts of the Company, which
were prepared in accordance with the accounting principles and relevant
financial regulations applicable to enterprises in the PRC. All necessary
adjustments have been made to present the financial statements in accordance
with US GAAP.
Economic and Political Risks
The Company faces a number of risks and challenges as a result of having
primary operations and markets in the PRC. Changing political climates in
the PRC could have a significant effect on the Company's business.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
includes cash on hand and demand deposits held by banks. Deposits held in
financial institutions in the PRC are not insured by any government entity
or agency.
Trade Accounts Receivable
Trade accounts receivable are recognized and carried at original invoice
amount less an allowance for any uncollectible amounts. An estimate for
doubtful accounts is made when collection of the full amount becomes
questionable. The Company had no trade accounts receivable during the
periods presented.
Inventories
Inventories consist primarily of land acquisition and development costs,
engineering, infrastructure, capitalized interest, and construction
work-in-progress costs. The inventories are valued at cost based on the level
of completion. No provision for potential obsolete inventory has been made.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less accumulated
depreciation, which is computed using the straight-line method over the useful
lives of the assets. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
income. Property and equipment are depreciated over their estimated useful
lives as follows:
Computer equipment 3 years
Office equipment 7 years
Vehicles 7 years
Depreciation expense for the three month periods ended March 31, 2006 and 2005
was $1,485 and $1,708, respectively.
Property, Plant, and Equipment (Continued)
Long-term assets of the Company are reviewed annually to assess whether the
carrying value has become impaired, according to the guidelines established
in Statement of Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company also evaluates the
periods of amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives. No impairment of
assets was recorded in the periods reported.
Revenue Recognition
The Company recognizes revenue on the sale of a house when the consummation of
a sale is evidenced by: 1) a contractual arrangement that is binding to both
parties; 2) the exchange of all consideration (i.e. the seller has transferred
to the buyer the usual risks and rewards of ownership and the buyer has made
payment in full to the seller); 3) the arrangement of all permanent financing
for which the seller is responsible and; 4) the performance of all conditions
precedent to closing. No revenue is recognized when the Company's receivable
is subject to future subordination, as is the case when the Company guarantees
a bank loan for the period prior to the certification of title transfer.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense amounted to
$127,023, and $14,902 for the three month periods ended March 31, 2006 and
2005.
Foreign Currency and Comprehensive Income
The accompanying financial statements are presented in United States ("US")
dollars. The functional currency is the Yuan Renminbi ("RMB") of the PRC. The
financial statements are translated into US dollars from RMB at period-end
exchange rates for assets and liabilities, and weighted average exchange rates
for revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
During July 2005, China changed its foreign currency exchange policy from a
fixed RMB/US dollar exchange rate into a flexible rate under the control of
China's government. We used the Closing Rate Method in translation of the
financial statements.
RMB is not freely convertible into the currency of other nations. All such
exchange transactions must take place through authorized institutions. There
is no guarantee the RMB amounts could have been, or could be, converted into
US dollars at rates used in translation.
Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
statement of operations in the period that includes the enactment date.
A valuation allowance is provided for deferred tax assets if it is more
likely than not these items will either expire before the Company is able
to realize their benefits, or that future deductibility is uncertain. Nearly
all differences in tax bases and financial statement carrying values are
permanent differences. Therefore, the Company has recorded no deferred tax
assets or liabilities.
Estimates
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The discussion in this quarterly report on Form 10-QSB contains forward-
looking statements. Such statements are based upon beliefs of management, as
well as assumptions made by and information currently available to management
of the Company as of the date of this report. These forward-looking statements
can be identified by their use of such verbs as "expect", "anticipate",
"believe" or similar verbs or conjugations of such verbs. If any of these
assumptions prove incorrect or should unanticipated circumstances arise, the
actual results of the Company could materially differ from those anticipated
by such forward-looking statements. The Company assumes no obligation to
update any such forward-looking statements.
Overview
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We, through our subsidiary Beijing Dahua Real Estate Development Ltd., are
engaged in the business of development, construction and sale of luxury
residential single-family homes in Beijing, China. In July 2003, we began to
develop our first real estate project, Dahua Garden (the "First Phase"), which
consists of 76 luxury residential units, all of which are single-family houses
ranging from approximately 2,000 to 5,000 square feet, each with 3 - 4
bedrooms. The construction site is located at the northern skirt of Beijing,
China. The construction began in July 2003 and was completed in December 2005.
As of March 31, 2006, seven units have been sold, 28 units were reserved with
clients' deposits, and 41 units were available for sale.
Plan of Operations
- ------------------
For the next 12 months, we plan to do the following:
(1) To date, we have made the full payment to the government, which amounts
to approximately 20,000,000 yuan, approximately $2.49 million, for the
acquisition of land use rights. We are applying for deeds for our newly built
homes with the government. Upon receipt of the deeds, we will distribute the
deeds to individual homeowners. We expect to complete this process by June
of 2006.
(2) As of March 31, 2006, we have sold 35 units, including 28 which were
reserved with clients' deposits, out of the 76 housing units. For the next 12
months, we will continue to sell the remaining 41 units to the public. At
present, we don't know when they can be sold, although we expect that they can
be sold out by the end of December 2006. There is no significant amount of
budget required.
(3) We are currently in the process of applying with Beijing municipal and
Changping district government agencies for the requisite licenses, permits,
and approvals in order to start the Second Phase of Dahua Garden, which will
include 250 units of luxury single-family houses located in Chanping District,
Beijing, China, on an approximately 267,000 square-meter site with a community
clubhouse, creeks, ponds, and professionally manicured gardens and landscape.
Each will be 3,000 to 5,000 square feet in size to be sold for 4.5 to 6
million yuan, or approximately $550,000 to $720,000. We will serve as the sole
developer of the project, including construction and sales. The Second Phase
is not contingent upon our successful completion of the First Phase. As of the
date of this report, the status of the Company's applications for permits,
licenses and approvals is set forth below:
(i) We have entered into an agreement with the land owner, the
Village Committee of Lutuan Village, Beiqijia Township, North Changping
District, which has been approved by the government of Beiqijia Township;
(ii) Upon receipt of such approval, we have submitted a proposal for
the Second Phase development to the Development and Reconstruction Commission
of Changping District, which, in turn, submitted the proposal to the
Development and Reconstruction Commission of Beijing Municipal government;
(iii) Upon receipt of the proposal, the Development and Reconstruction
Commission of Beijing sent a letter to the Urban Planning Commission of
Beijing for its opinion, which it is reviewing; and
(iv) We are currently applying with the National Land Resource Bureau
and Housing Administration Bureau of Beijing Municipality for the initial
development rights and land use rights of the Second Phase development.
In addition to the above permits and approvals, we also need to obtain a
permit to commence construction by Beijing Municipal Construction Commission.
We expect to obtain this permit by the end of September 2006. There is no
assurance that said permit will be issued within the timeframe anticipated.
There is no significant amount of budget required.
(4) After we obtain all necessary permits and approvals, we plan to begin
our construction of 250 units of luxury single-family homes (the Second Phase
of Dahua Garden). We plan to begin our Second Phase of Dahua Garden in August
2006. The construction will take up to 18 to 20 months to complete, and we
expect to commence sales in the end of 2008. It is estimated that
approximately $60.5 million is needed to complete the project.
Results of Operations
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For the Three Months Ended March 31, 2006 and 2005
Revenues
We began our First Phase of Dahua Garden construction, which consists of 76
luxury residential units, in July 2003. The construction was completed in
December 2005. As of March 31, 2005, we have sold 7 units out of 76 units.
For the three months ended March 31, 2006, we recognized sales revenues of
$329,152 from the sale of our housing units. No sales revenues was recognized
for the same period of the prior year because the house construction was not
completed at that time, and all clients' deposits and installment payments
were recorded as customer deposits until physical delivery and release of any
Company's guarantees to the financing bank.
Cost of Good Sold
Cost of good sold consists primarily of land acquisition and development costs,
engineering, infrastructure, capitalized interest, and construction costs. For
the three months ended March 31, 2006, our cost of good sold was $246,810. No
cost of good sold was recorded for the three months ended March 31, 2005,
because no houses had been sold.
Operating Expenses
For the three months ended March 31, 2006, our operating expenses were $246,496,
an increase of 74.2%, as compared to $141,504 for the same period of prior year,
largely due to the substantial increase, by 752%, in advertising expenses, from
$14,902 for the quarter ended March 31, 2005 to $127,023 for the same period of
2006. Because of the completion of our First Phase of Dahua Garden, the payroll
expenses were significantly reduced, from $37,554 for the three months ended
March 31, 2005 to $17,972 for the same period of 2006. However, our other
general and administrative expenses increased 14.5%, or $12,676.
Net Loss
For the three months ended March 31, 2006, we had a net loss of $131,030, or
$0.01 per share, as compared with a net loss of $112,434, or $0.01 per share,
for the same period of the prior year.
Liquidity and Capital Resources
- -------------------------------
Since inception, our operations have been primarily funded by equity capital,
unsecured short-term loans from Dahua Project Management Group
("Dahua Group"), our affiliate, and customer deposits that we received from
our pre-sale of housing units.
After receiving the Residential Housing Pre-sale Permit issued by the
government, we are permitted to sell the residential units to be built to
the public, which is common practice in China. Upon execution of a binding
purchase contract between the developer and a homebuyer, a deposit and
installment payments are required to be made to the developer, which we use
to construct our residential housing units. At March 31, 2006, our customer
deposit balance was $7,135,530.
We also borrow from time to time based on a verbal line of credit agreement
from Dahua Group, our affiliate. The funds so borrowed are unsecured and there
is no upper limit on the amount of money that we can borrow as long as there
are funds available and we need it for our operation. The money we borrow
under this arrangement bears interest at an annual rate of 6%, repayable
within 30 days upon demand by the lender. As of March 31, 2006, the short-term
loans due to related parties had balance of $5,394,226, plus accrued interest
of $511,199.
As of March 31, 2006, we had cash and cash equivalent balance of $591,222. For
the three months ended March 31, 2006, our operating activities provided
$142,936 of net cash, largely due to increase in customer deposits of $848,538,
and offset by increase in inventory of $621,280. During the three months ended
March 31, 2006, our investing activities used $14,842 of net cash, mainly for
the purchase of property and equipment. For the same period, the financing
activities provided us with $24,832 of net cash, which were net proceeds from
loans payable to a related party.
Our First Phase of Dahua Garden was completed in December 2005. We are
currently applying with Beijing municipal and Changping district governmental
agencies for all the requisite licenses, permits, and approvals to start our
Second Phase of Dahua Garden. It is estimated that approximately $60.5 million
is needed to complete the Second Phase. In addition to customer deposits, and
short-term loans (line of credit) from Dahua Group, the proceeds generated
from sale of the First Phase will also be used to finance the Second Phase
development. There are no material commitments for capital expenditures.
While there can be no assurance that we will have sufficient funds over the
next twelve months, we believe that funds generated from the sale of our First
Phase of Dahua Garden housing units, purchaser deposits from pre-sale
contracts, and the line of credit provided by our affiliate, Dahua Group, will
be adequate to meet our anticipated operating expenses, capital expenditure
and debt obligations for at least the next twelve months. Nevertheless, our
continuing operating and investing activities may require us to obtain
additional sources of financing. In that case, we may seek financing from
institutional investors, banks, or other sources of financing. There can be no
assurance that any necessary additional financing will be available to us on
commercially reasonable terms, if at all.
Off-balance sheet arrangements
- ------------------------------
We entered into an agreement with each of two banks that extended mortgage
loans to our home buyers, whereby we agreed to provide a certain limited
guarantee, which covers the risk before the conveyance of title upon closing.
Upon initiating the loan on behalf of the buyer for the down payment, the bank
has withheld a percentage ranging from 5% to 20% of the loan and deposited
such funds into a segregated account in the bank. At March 31, 2006, the
balance of the separate accounts was $378,232. Since we don't recognize
revenue when our receivables are subject to future subordination, the entire
amount that could become payable to the bank under the limited guarantee is
recorded as a liability on the balance sheet and is included in customer
deposits.
Item 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report on Form 10-QSB,
we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, and our internal control over financial reporting.
This evaluation was performed by our President and Chief Executive Officer,
Yonglin Du and Meng Hua, our Chief Financial Officer.
Based upon the Evaluation, our CEO and CFO have concluded that our disclosure
controls are effective to ensure that material information relating to the
Company is made known to management, including the CEO and CFO, particularly
during the period when our periodic reports are being prepared, and that our
Internal Controls are effective to provide reasonable assurance that our
financial statements are fairly presented in conformity with accounting
principals generally accepted in the United States. Additionally, there has
been no change in our internal controls that occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to
affect, our internal controls.
PART II. OTHER INFORMATION
Item 1. LEGAL INFORMATION: None.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES: None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION: None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
--------- --------------------------------------------------
31.1 Section 302 Certification of CEO
31.2 Section 302 Certification of CFO
32.1 Section 906 Certification of CEO
32.2 Section 906 Certification of CFO
(b) Reports on Form 8-K: None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAHUA, INC.
By: /s/ Yonglin Du
- ---------------------------------------------------
Younglin Du, Chief Executive Officer and President
May 16, 2006