UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 2)
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 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)
N/A
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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 [X] No.
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 25,000,000 shares of common stock,
par value $.0001, as of March 30, 2007.
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 September 30, 2006 (unaudited)..... 3
Consolidated Statements of Operations and Comprehensive Income (loss)
for the Three and Nine Months Ended September 30, 2006 and 2005
(Unaudited)......................................................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2006 and 2005 (Unaudited)...................... 6
Notes to Consolidated Financial Statements.......................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation..... 11
Item 3. Controls and Procedures........................................ 16
Part II. Other Information
Item 1. Legal Information............................................. 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds... 16
Item 3. Defaults Upon Senior Securities............................... 16
Item 4. Submission of Matters to a Vote of Security Holders........... 16
Item 5. Other Information............................................. 16
Item 6. Exhibits and Reports on Form 8-K.............................. 16
Signatures............................................................. 17
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
DAHUA, INC.
Consolidated Balance Sheet
(Unaudited)
ASSETS
September 30, 2006
--------------------
Current Assets:
Cash and cash equivalents.......................... $ 2,984,055
Inventory (note 4) ................................ 14,252,752
------------------
Total Current Assets............................. 17,236,807
Equipment:
Computer equipment................................. 24,297
Office equipment................................... 65,035
Telephones......................................... 2,832
Vehicles........................................... 62,225
------------------
Total Equipment................................. 154,389
Less: Accumulated depreciation.................. (36,572)
------------------
Net equipment................................... 117,817
Loans receivable.................................... 130,235
Deferred - VAT tax.................................. 284,656
Restricted cash..................................... 253,911
------------------
Total Assets........................................ $ 18,023,426
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $ 94,817
Customer deposits (note 6)......................... 7,779,459
Short-term loans - related parties (note 5) ....... 5,139,832
Accrued interest - short-term loans, related parties 646,208
Income tax payable................................. 188,108
Other accruals..................................... 95,046
------------------
Total Current Liabilities....................... 13,943,470
Minority interest in subsidiary..................... 820,728
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 shares issued and outstanding 2,500
Additional paid-in capital.......................... 3,130,452
Accumulated deficit................................. (20,186)
Accumulated other comprehensive income.............. 146,462
------------------
Total stockholders' equity....................... 3,259,228
------------------
Total Liabilities and Stockholders' Equity.......... $ 18,023,426
==================
See accompanying notes to unaudited consolidated financial statements
DAHUA, INC.
Consolidated Statement of Operations and Comprehensive Income (loss)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
2006 2005 2006 2005
---------------- -------------- ---------------- ---------------
<s> <c> <c> <c> <c>
Revenues
Sales revenues......................................... $ 3,294,393 $ - $ 6,704,740 $ -
Cost of goods sold..................................... 1,846,213 - 3,894,840 -
--------------- --------------- -------------- ---------------
Gross Profit........................................ 1,448,180 - 2,809,900 -
Expenses
Advertising............................................ 718,515 5,232 1,096,909 66,176
Depreciation........................................... 3,544 1,734 6,814 5,150
Payroll expense........................................ 81,670 16,731 128,562 47,838
Selling, general and administrative.................... 101,753 36,233 383,578 202,018
-------------- --------------- -------------- ---------------
Total expenses...................................... 905,482 59,930 1,615,863 321,182
-------------- --------------- -------------- ---------------
Net income (loss) from operations....................... 542,698 (59,930) 1,194,037 (321,182)
Other Income (expense)
Interest expense....................................... (78,938) - (174,413) -
Other revenues......................................... 1 - 250 -
Interest income........................................ 3,977 556 6,152 2,139
-------------- ---------------- -------------- ---------------
Total other income (expense)......................... (74,960) 556 (168,011) 2,139
-------------- ---------------- -------------- ---------------
Net income (loss) before taxes and minority interest.... 467,738 (59,374) 1,026,026 (319,043)
Provision for income taxes.............................. (154,353) - (338,588) -
--------------- ---------------- -------------- ----------------
Net income (loss) before minority interest.............. 313,385 (59,374) 687,438 (319,043)
Minority interest in subsidiary income (loss)........... 62,677 (11,875) 137,488 (63,809)
-------------- ---------------- -------------- ----------------
Net income (loss)....................................... $ 250,708 $ (47,499) $ 549,950 $ (255,234)
============== ================ ============== ================
Foreign currency translation adjustment................. $ 45,356 $ - $ 75,779 $ 59,499
============== ================ ============== ==============
Comprehensive income (loss)............................. $ 296,064 $ (47,499) $ 625,729 $ (195,735)
============== ================ ============== ==============
Basic and diluted loss per share........................ $ 0.01 $ 0.00 $ 0.02 $ (0.01)
============== ================ ============== ==============
Weighted average common shares outstanding.............. 25,000,000 20,489,130 25,000,000 20,164,835
============== ================ =============== ==============
See accompanying notes to unaudited consolidated financial statements
DAHUA, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
---------------------------------------
2006 2005
------------------- -----------------
<s> <c> <c>
Cash Flows from Operating Activities:
Net income (loss).................................... $ 549,950 $ (255,234)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation......................................... 6,814 5,150
Minority interest.................................... 137,487 (63,809)
Changes in operating assets and liabilities:
Inventory............................................ 968,399 (1,468,561)
Prepaid construction costs........................... - (2,972,398)
Due from related parties............................. (124,844) (1,101)
Receivable-VAT tax................................... (281,102) -
Accounts payable..................................... - (25,393)
Customer deposits.................................... 1,455,849 1,883,935
Accrued interest..................................... 174,413 100,382
Income tax payable................................... (39,698) -
Other accruals....................................... 62,031 4,834
------------------- -----------------
Net cash provided by (used in) operating activities 2,909,299 (2,792,195)
Cash Flows from Investing Activities:
Purchase of property, plant and equipment............. (91,094) (1,307)
Loan receivable....................................... (128,609) (114,485)
------------------- ------------------
Net cash used in investing activities............... (219,703) (115,792)
Cash Flows from Financing Activities:
Payment on loans payable, related party............... (162,984) -
Proceeds from loans payable, related party............ - 2,074,251
Investment in subsidiary by minority owner............ - 566,265
------------------- ------------------
Net cash provided by (used in) financing activities. (162,984) 2,640,516
------------------- ------------------
Effect of rate changes on cash......................... 40,378 75,010
Increase (decrease) in cash and cash equivalents...... 2,566,990 (192,461)
Cash and cash equivalents, beginning of period........ 417,065 474,784
------------------- ------------------
Cash and cash equivalents, end of period.............. $ 2,984,055 $ 282,323
=================== ==================
Supplemental disclosure of cash flow information:
Interest paid in cash................................. $ - $ -
=================== ==================
Income taxes paid in cash............................. $ 242,209 $ -
=================== ==================
Sales taxes paid in cash.............................. $ 832,886 $ -
=================== ==================
See accompanying notes to unaudited consolidated financial statements
DAHUA, INC.
NOTES TO UNAUDITED CONSOLIDATED 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 nine months ended September 30, 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. ("Norton"). 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"). Incident to the
reverse acquisition the Company paid $100,000 to the previous shareholders of
Norton for shares of stock that were canceled. 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 and the $100,000 paid to purchase and cancel the previous
shares was treated as an adjustment to paid in capital.
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 completed all of the construction on its current
development project and all of the houses are available for sale.
2. Basis of Presentation
The consolidated financial statements include the accounts of Dahua, Inc., Bauer
Invest, Inc. and Beijing Dahua Real Estate Development, Ltd. All material
intercompany accounts and transactions have been eliminated in consolidation.
The Company records minority interest expense, which reflects the 20% portion
of the earnings of Beijing Dahua Real Estate Development, Ltd. allocable to
holders of the minority interest.
The accompanying consolidated 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.
3. Summary of Significant Accounting Policies
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 at September 30, 2006.
Inventories
- -----------
Inventories consist primarily of land acquisition and development costs,
engineering, infrastructure, capitalized interest, and construction costs. The
inventories are valued at cost based on the level of completion using the
weighted-average method. 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 nine-month periods ended September 30, 2006 and
2005 was $6,814 and $5,150, respectively.
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
$1,096,909 and $66,176 for the nine-month periods ended September 30, 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.
Earnings Per Share
- ------------------
Basic earnings per common share ("EPS") are calculated by dividing net income
by the weighted average number of common shares outstanding during the year.
Diluted EPS is calculated by adjusting the weighted average outstanding shares,
assuming conversion of all potentially dilutive securities, such as stock
options and warrants. The numerators and denominators used in the computations
of basic and diluted EPS are presented in the following table:
For the nine months ended
---------------------------------------------
September 30, 2006 September 30, 2005
------------------- ---------------------
<s> <c> <c>
NUMERATOR FOR BASIC AND DILUTED EPS
Net income (loss) to common stockholders $ 549,950 $ (255,234)
==================== =====================
DENOMINATORS FOR BASIC AND DILUTED EPS
Weighted average shares of common stock outstanding 25,000,000 20,164,835
-------------------- ---------------------
Add: dilutive equity securities outstanding - -
-------------------- ---------------------
Denominator for diluted EPS 25,000,000 20,164,835
-------------------- ---------------------
EPS-Basic $ 0.02 $ (0.01)
-------------------- ---------------------
EPS-Diluted $ 0.02 $ (0.01)
-------------------- ---------------------
The Company had no potentially dilutive securities outstanding at September 30,
2006 and 2005.
4. Inventory
Inventory represents completed houses available for sale at September 30, 2006.
During 2005, the Company completed all of its construction-in-progress. As of
September 30, 2006, 23 units were sold, 28 units were reserved with clients'
deposits, and 25 units were available for sale.
5. Related Party Transactions
Short-term loans due to related parties including accrued interest had balances
of $5,786,040 and $7,457,436 at September 30, 2006 and December 31, 2005,
respectively. The loans carry an annual interest rate of 6 percent and are
due on demand. Interest accrued on the loans was $174,413 and $100,382 for the
nine months ended September 30, 2006 and 2005. The interest amounts, which were
accrued for the nine months ended September 30, 2006, were expensed as interest
expense since houses were substantially constructed and ready for sales as of
December 31, 2005.
6. Customer deposits
Customer deposits consist of down payments received on sales contracts for
houses. When all of the conditions set forth in the Company's revenue
recognition policy are met, the Company will recognize the down payments as
revenue. The aggregate of the customers' deposits at September 30, 2006 was
$7,779,459. Of the 28 units reserved, 8 unit's deposits are money received from
bank arrangements (see note 7) in the amounts of $1,915,297. Accordingly, the
bank has liens against these 8 units.
7. Off-Balance Sheet Arrangements
The Company entered into an agreement with two banks that extended mortgage
loans to its home buyers, where the Company agrees 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 Banks
have withheld 5% of the loan, which was a percentage ranging from 5% to 20% in
June 2006, and deposited such funds into a segregated account in each bank. At
September 30, 2006, the balance of this separate account was $253,911. Since
the Company does not recognize revenue when its 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, as is explained in note 6.
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
- --------
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
September 30, 2006, 23 units have been sold, 28 units were reserved with
clients' deposits, and 25 units were available for sale.
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 Changping 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 Chinese
Yuan, or approximately $550,000 to $720,000. We will serve as the sole developer
of the project, including construction and sales. As of the date of this report,
the status of the Company's applications for permits, licenses and approvals is
as 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 2007. There is no assurance that
said permit will be issued within the timeframe anticipated. There is no
significant amount of budget required.
After we obtain all necessary permits and approvals, we plan to begin our
construction of 250 units of luxury single-family houses (the Second Phase of
Dahua Garden). We plan to begin our Second Phase of Dahua Garden in the end of
2007. The construction will take up to 18 to 20 months to complete, and we
expect to commence sales in the middle of 2009. It is estimated that
approximately $60.5 million is needed to complete the project.
Results of Operations
- ---------------------
For the Three Months Ended September 30, 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. For the three months ended September 30, 2006, we sold an
additional eight (8) units, of which six (6) units were released from reserve
because all payments were received in the current quarter. The following table
sets forth certain information about our sales of housing units:
------------------- Cumulative Balance as of------------------
September 30, 2006 June 30, 2006 December 31, 2005
------------------- ----------------- --------------------
<s> <c> <c> <c>
Units sold 23 15 6
Units reserved with deposits 28 34 27
Units available for sales 25 27 43
------------------- ----------------- -------------------
Total 76 76 76
=================== ================= ===================
Nine months Three months Six months
ended ended ended
September 30, 2006 September 30, 2006 June 30, 2006
------------------ ------------------ -------------------
Houses sold 17 8 9
Houses reserved 1 (6) 7
For the three months ended September 30, 2006, we recognized sales revenues of
$3,294,393 from the sale of our housing units. No sales revenues were 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 Goods Sold
- ------------------
Cost of goods sold consists primarily of land acquisition and development costs,
engineering, infrastructure, capitalized interest, and construction costs. For
the three months ended September 30, 2006, our cost of goods sold was
$1,846,213, approximately 56.0% of sales. No cost of goods sold was recorded
for the three months ended September 30, 2005, because no houses had been sold.
Operating Expenses
- ------------------
For the three months ended September 30, 2006, our operating expenses were
$905,482, an increase of $845,552, or 1410.9%, as compared to $59,930 for the
same period of prior year. The increase in operating expenses resulted
primarily from substantially increased advertising expenses, which increased
from $5,232 for the three-month period ended September 30, 2005 to $718,515 for
the same period of 2006, or approximately 13,633.1%. The reasons for the large
increase of advertising expenses were as below:
(1) We began our First Phase of Dahua Garden construction in July 2003. The
construction was not completed until December 2005. Therefore, no much money was
needed to spend on advertising for the three month ended September 30, 2005.
(2) After our construction was completed in December 2005, one of our big
jobs in fiscal 2006 after the construction was completed was to sell those
housing units to public. We are a small company and have little market share in
our target market. We are little known by many of our potential customers.
Therefore, for the three months ended September 30, 2006, we spent much more on
advertising than that we spent for the same period of 2005, and hope such large
amount of advertising expense can make more people know us and know our Dahua
Garden, and may help us to have more brand recognition when we start our Second
Phase of Dahua Garden in the end of 2007.
Our selling, general and administrative expenses also increased greatly, from
$36,233 for the three-month period ended September 30, 2005 to $101,753 for the
same period of 2006, or 180.8%, mostly due to increased sales and marketing
activities.
Net Income (Loss)
- -----------------
For the three months ended September 30, 2006, we had a net income of $250,708,
or $0.01 per share, as compared with a net loss of $47,499, or $0.00 per share,
for the same period of the prior year.
For the Nine Months Ended September 30, 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. For the nine months ended September 30, 2006, 17 units were sold,
and one additional unit was reserved with client's deposits. During this
period, sales revenue of $6,704,740 was recognized from the sale of our housing
units. No sales revenues were 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 Goods Sold
- ------------------
Cost of goods sold consists primarily of land acquisition and development costs,
engineering, infrastructure, capitalized interest, and construction costs. For
the nine months ended September 30, 2006, our cost of goods sold was $3,894,840,
approximately 58.1% of the sales. No cost of goods sold was recorded for the
nine months ended September 30, 2005, because no houses had been sold.
Operating Expenses
- ------------------
During the nine months ended September 30, 2006, our operating expenses were
$1,615,863 as compared to $321,182 during the nine-month period in 2005, an
increase of $1,294,681 or 403.1%. The increase was primarily due to
substantially increased advertising expenses, which increased approximately
1557.6%, from $66,176 for the nine-month period ended September 30, 2005 to
$1,096,909 for the same period of 2006. The reasons for the large increase of
advertising expenses were as below:
(1) We began our First Phase of Dahua Garden construction in July 2003. The
construction was not completed until December 2005. Therefore, no much money was
needed to spend on advertising for the nine months ended September 30, 2005.
(2) After our construction was completed in December 2005, one of our big
jobs in fiscal 2006 after the construction was completed was to sell those
housing units to public. We are a small company and have little market share
in our target market. We are little known by many of our potential customers.
Therefore, for the nine months ended September 30, 2006, we spent much more on
advertising than that we spent for the same period of 2005, and hope such large
amount of advertising expense can make more people know us and know our Dahua
Garden, and may help us to have more brand recognition when we start our Second
Phase of Dahua Garden in the end of 2007.
Our selling, general and administrative expenses also increased, from $202,018
for the nine months ended September 30, 2005 to $383,578 for the same period of
2006, or 89.9%, largely due to increased sales and marketing activities in 2006.
Net Income (Loss)
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For the nine months ended September 30, 2006, we had a net income of $549,950,
or $0.02 per share, as compared with a net loss of $255,234, or $0.01 per
share, for the same period of the prior year.
Liquidity and Capital Resources
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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. As of September 30, 2006, our customer deposit
balance was $7,779,459.
We also borrow from time to time based on a verbal line of credit agreement
from Dahua Group, our affiliate. The funds 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 operations. 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 September 30, 2006, the short-term loans
due to related parties had a balance of $5,139,832, and accrued interest of
$646,208.
As of September 30, 2006, we had cash and cash equivalents balance of
$2,984,055. For the nine months ended September 30, 2006, our operating
activities provided $2,909,299 of net cash, largely due to net income of
$549,950, and increase in customer deposits of $1,455,849. During the nine
months ended September 30, 2006, our investing activities used $219,703 of net
cash, mainly for the loans receivable. For the same period, the financing
activities used net cash of $162,984 in making payment on loans payable.
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
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We entered into an agreement with two banks that extended mortgage loans to our
home buyers, where we agree 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 each bank. At September 30, 2006, the balance of this
separate account was $253,911. Since the Company does not recognize revenue
when its 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
(a) Evaluation of disclosure controls and procedures. The Company's Chief
Executive Officer and Chief Financial Officer, after re-evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this report, have concluded that, the Company's disclosure controls
and procedures contained certain deficiencies and weaknesses in the internal
control over financial reporting, thus they concluded that, the Company's
disclosure controls and procedures were ineffective.
(b) Changes in internal controls over financial reporting. The internal control
deficiencies that were identified as weaknesses were (i) the lack of adequate
accounting and reporting personnel with sufficient US GAAP knowledge related
to construction accounting and (ii) the lack of sufficient formalized and
consistent finance and accounting procedures to detect instances of
non-compliance with existing policies and procedures.
The Company is committed to remedying these deficiencies and weaknesses and has
planned to implement certain remedial measures, including (i) the provision of
additional training to our accounting personnel on the requirements of US GAAP
to increase their familiarity with those standards, (ii) the expansion of our
finance and accounting team by seeking to recruit additional qualified
personnel, and (iii) the reassessment of our existing finance and accounting
policies and procedures.
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
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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
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Younglin Du, Chief Executive Officer and President
(Principal Executive Officer)
March 30, 2007
By: /s/ Hua Meng
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Hua Meng, Chief Financial Officer
(Principal Accounting and Financial Officer)
March 30, 2007