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 June 30, 2007
[ ] 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 August 14, 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 June 30, 2007 (unaudited)......... 3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Three and Six Months Ended June 30, 2007 and 2006 (Unaudited) 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2007 and 2006 (Unaudited).......................... 6
Notes to Consolidated Financial Statements......................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation.... 12
Item 3. Controls and Procedures...................................... 16
Part II. Other Information
Item 1. Legal Information............................................ 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.. 18
Item 3. Defaults Upon Senior Securities.............................. 18
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
Item 5. Other Information............................................ 18
Signatures............................................................ 19
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
DAHUA INC.
Consolidated Balance Sheet
(Unaudited)
ASSETS
June 30, 2007
-----------------
Current Assets:
Cash and cash equivalents............................. $ 1,451,795
Inventory (note 4) ................................... 14,744,197
------------------
Total Current Assets............................... 16,195,992
Equipment:
Computer equipment.................................... 50,338
Office equipment...................................... 90,146
Telephones............................................ 2,942
Vehicles.............................................. 272,917
------------------
Total Equipment................................... 416,343
Accumulated depreciation.......................... (74,809)
------------------
Net equipment..................................... 341,534
Construction in progress (note 5)...................... 274,184
Loans receivable....................................... 17,184
Tax prepaid (note 9)................................... 762,103
Restricted cash........................................ 542,308
------------------
Total Assets........................................... $ 18,133,305
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 131,311
Customer deposits (note 7)............................. 12,745,604
Short-term loans - related parties (note 6) ........... 298,633
Accrued interest - short-term loans, related parties... 795,885
Other accruals......................................... 129,589
-----------------
Total Current Liabilities........................... 14,101,022
Minority interest in subsidiary......................... 782,127
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..................................... (174,589)
Accumulated other comprehensive income.................. 291,793
-----------------
Total stockholders' equity......................... 3,250,156
-----------------
Total Liabilities and Stockholders' Equity.............. $ 18,133,305
=================
See accompanying notes to unaudited consolidated financial statements
DAHUA, INC.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------------ ---------------------------
2007 2006 2007 2006
-------------- -------------- ------------- ------------
<s> <c> <c> <c> <c>
Revenues
Sales revenues................................. $ 2,500,012 $ 3,081,195 $ 5,627,934 $ 3,410,347
Cost of goods sold............................. 2,086,135 1,801,817 4,197,698 2,048,627
------------- -------------- ------------- ------------
Gross Profit.............................. 413,877 1,279,378 1,430,236 1,361,720
Expenses
Advertising.................................... 141,469 251,371 360,667 378,394
Depreciation................................... 16,237 1,983 31,392 3,270
Payroll expense................................ 142,662 28,920 229,302 46,892
Other general and administrative............... 294,139 181,611 757,367 281,825
------------- -------------- ------------- -------------
Total expenses............................ 594,507 463,885 1,378,728 710,381
------------- -------------- ------------- -------------
Net income (loss) from operations............... (180,630) 815,493 51,508 651,339
Other Income (expense)
Interest expense............................... (27,963) (44,555) (59,051) (95,475)
Other revenues................................. 2 249 436 249
Interest income................................ 4,459 1,808 7,870 2,175
-------------- -------------- -------------- -------------
Total other income (expense).............. (23,502) (42,498) (50,745) (93,051)
-------------- -------------- -------------- -------------
Net income (loss) before taxes and minority interest (204,132) 772,995 763 558,288
Provision for income taxes...................... 67,363 (184,235) (252) (184,235)
-------------- -------------- -------------- -------------
Net income (loss) before minority interest...... (136,769) 588,760 511 374,053
Minority interest in subsidiary income (loss)... (27,354) 117,752 102 74,811
-------------- -------------- -------------- -------------
Net income (loss)............................... $ (109,415) $ 471,008 $ 409 $ 299,242
============== ============= ============== =============
Foreign currency translation adjustment......... $ 61,408 $ 9,191 $ 97,444 $ 30,422
============== ============= ============== =============
Comprehensive income (loss)..................... $ (48,007) $ 480,199 $ 97,853 $ 329,664
Basic and diluted income (loss) per share....... $ (0.00) $ 0.02 $ 0.00 $ 0.01
============= ============= ============= ============
Weighted average common shares outstanding...... 25,000,000 25,000,000 25,000,000 25,000,000
============= ============= ============= ============
See accompanying notes to unaudited consolidated financial statements
DAHUA, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
------------------------------------
2007 2006
----------------- ------------------
<s> <c> <c>
Cash Flows from Operating Activities:
Net income............................................. $ 409 $ 299,242
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................... 31,392 3,270
Minority interest...................................... 102 74,811
Loss from disposition of equipment..................... 417 -
Changes in operating assets and liabilities:
Inventory.............................................. (494,894) (7,308)
Tax prepaid............................................ (481,794) (222,015)
Accounts payable....................................... (279,278) 813
Customer deposits...................................... 2,702,814 1,906,235
Accrued interest....................................... 59,051 99,861
Income tax payable..................................... - (53,305)
Other accruals......................................... 35,878 71,382
---------------- ----------------
Net cash provided by operating activities......... 1,574,097 2,172,986
Cash Flows from Investing Activities:
Purchase of equipment.................................. (32,447) (38,380)
Proceeds from disposition of equipment................. 4,275 -
Construction in progress............................... (270,476) -
Due from related parties............................... - (125,401)
Loan receivable........................................ (16,952) (127,519)
---------------- -----------------
Net cash used in investing activities............. (315,600) (291,300)
Cash Flows from Financing Activities:
Net payments on loans payable-related parties.......... (2,190,680) (97,455)
----------------- -----------------
Net cash used in financing activities.............. (2,190,680) (97,455)
----------------- -----------------
Effect of rate changes on cash.......................... 45,143 30,422
Increase (decrease) in cash and cash equivalents........ (887,040) 1,814,653
Cash and cash equivalents, beginning of period.......... 2,338,835 417,065
---------------- -----------------
Cash and cash equivalents, end of period................ $ 1,451,795 $ 2,231,718
================= =================
Supplemental disclosure of cash flow information:
Interest paid in cash................................. $ - $ -
================= ==================
Income taxes paid in cash............................. $ 317,498 $ 100,537
================== =================
Sales taxes paid in cash.............................. $ 517,128 $ 564,561
================== ================
See accompanying notes to unaudited consolidated financial statements
DAHUA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 sold or 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 June 30, 2007.
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.
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 six-month periods ended June 30, 2007 and 2006 was
$31,392 and $3,270, 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
$360,667 and $378,394 for the six-month periods ended June 30, 2007 and 2006.
Foreign Currency and Comprehensive Income
The accompanying consolidated financial statements are presented in United
States ("US") dollars. The functional currency is the Yuan Renminbi ("RMB") of
the PRC. The consolidated 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 consolidated 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 consolidated
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 six months ended
-------------------------------------------------
June 30, 2007 June 30, 2006
----------------------- -----------------------
<s> <c> <c>
NUMERATOR FOR BASIC AND DILUTED EPS
Net income to common stockholders $ 409 $ 299,242
====================== =======================
DENOMINATORS FOR BASIC AND DILUTED EPS
Weighted average shares of common stock outstanding 25,000,000 25,000,000
---------------------- -----------------------
Add: dilutive equity securities outstanding - -
---------------------- -----------------------
Denominator for diluted EPS 25,000,000 25,000,000
---------------------- -----------------------
EPS-Basic $ 0.00 $ 0.01
---------------------- -----------------------
EPS-Diluted $ 0.00 $ 0.01
---------------------- -----------------------
The Company had no potentially dilutive securities outstanding at June 30, 2007
and 2006.
4. Inventory
Inventory represents completed houses available for sale at June 30, 2007.
During 2005, the Company completed all of its housing construction. As of
June 30, 2007, 41 units were sold, 31 units were reserved with clients'
deposits, and 4 units were available for sale.
5. Construction in progress
Construction in progress represents the cost of the new building, which the
Company is constructing. The new building will have four stories. The Company
plans to use two stories for its office and administration, and give out the
other two stories (lease free) to the home owner association. The home owner
association will hire a third party to collect usage fee and maintain the
facilities at their cost. As of June 30, 2007, the balance of construction in
progress was $274,184.
6. Related Party Transactions
Short-term loans due to related parties had balances of $1,094,518 and
$3,176,699 (including accrued interest) at June 30, 2007 and December 31, 2006,
respectively. The loans carry an annual interest rate of 6 percent and are due
on demand. Interest accrued on the loans was $59,051 and $95,475 for the six
months period-ended June 30, 2007 and 2006. The interest amounts, which were
accrued for the six months periods ended June 30, 2007, were expensed as
interest expense since houses were substantially constructed and ready for sales
as of December 31, 2005.
7. 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 June 30, 2007 was
$12,745,604. Of the 31 units reserved, 12 unit's deposits are money received
from bank arrangements (see note 7) in the amounts of $3,890,749. Accordingly,
the bank has liens against these 12 units.
8. 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 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 June 30, 2007, the balance of
this separate account was $542,308. 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.
9. Tax
The Company made a provision for sales tax, which totaled $337,676 and $708,016
respectively for the six months period-ended June 30, 2007 and the year ended
December 31, 2006. The sales tax is calculated on the basis of sales revenues.
The provision for sales tax is included as part of cost of inventory.
The Company made a provision for income tax, which totaled $252 and $184,235
respectively for the six months periods-ended June 30, 2007 and 2006. The income
tax is calculated on the basis of the net income before taxes and minority
interest.
The Company paid sales tax and income tax in cash, which totaled $517,128 and
$317,498 respectively for the six months periods ended June 30, 2007.
The Company owed individual tax on behalf of staff, which totaled $3,846 at
June 30, 2007.
10. Stock
The Company is authorized to issue up to 80,000,000 shares of common stock,
$.0001 par value, and 20,000,000 shares of preferred stock, $.0001 par value per
share. As of June 30, 2007, there were 25,000,000 shares of common stock issued
and outstanding, and no shares of preferred stock were issued and outstanding.
11. Contingencies
The Company has not, historically, carried any property or casualty insurance.
No amounts have been accrued for any liability that could arise from the lack of
insurance. Management feels the chances of such an obligation arising are
remote.
Deposits in banks in the PRC are not insured by any government entity or agency,
and are consequently exposed to risk of loss. Management believes the
probability of a bank failure, causing loss to the Company, is remote.
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
June 30, 2007, out of 76 luxury residential units, 41 units have been sold, 31
units were reserved with clients' deposits, and 4 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. But, in August 2006,
Chinese government issued a number of new rules and regulations for real estate
developers, like us, in an attempt to push down rising house prices by cutting
down luxury single family house constructions and favoring construction of
apartment buildings. Under the government's new policy, (i) no single family
houses can be built, if the construction has not started, without special
construction permits; (ii) All permits previously issued have to be re-reviewed
and re-approved; and (iii) the land previously acquired for luxury housing
construction have to be revalued and sold to the people who offer the most
money for the land in an auction. Because of those new government policies, we
have incurred a long delay for obtaining the consents and approvals to commence
our construction for the second phase of Dahua Garden. On May 9, 2007, we
contacted a Beijing Municipal Government agency, who is responsible for the
issuance of construction permits, for our construction approval time frame
guidance. We were told two weeks later that our construction permit is very much
likely to be issued for two reasons: (1) We have completed our First Phase of
Dahua Garden; and (2) We have acquired for this land for almost ten (10) years.
It is expected that we may obtain our construction approvals by the middle of
2008. However, there is no assurance that we will obtain those consents and
approvals from the government. If no consents and approvals are obtained, we
may have to cease our Second Phase of single luxury family house operations, and
change our business plan to build apartment buildings.
Results of Operations
For the Three Months Ended June 30, 2007 and 2006
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 June 30, 2006, we sold additional
eight (8) units, and additional six (6) were reserved with deposits. The
following table sets forth certain information about our sales of housing units:
----------------- Cumulative Balance as of---------------------
June 30, 2007 March 31, 2007 December 31, 2006
----------------- -------------------- -----------------------
<s> <c> <c> <c>
Units sold 41 36 30
Units reserved with deposits 31 27 30
Units available for sales 4 13 16
----------------- -------------------- ----------------------
Total 76 76 76
================= ==================== =======================
Six months Three months Three months
ended ended ended
June 30, 2007 June 30, 2007 March 31, 2007
------------------ -------------------- -----------------------
Houses sold 11 5 6
Houses reserved 1 4 (3)
For the three months ended June 30, 2007 and 2006, we recognized sales revenues
of $2,500,012 and $3,081,195 from the sale of our housing units, respectively.
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 June 30, 2007 and 2006, our cost of goods sold was
$2,086,135 and $1,801,817, respectively, approximately 83.4% and 58.5% of
sales. As compared to 2006, the decrease in gross profit was primarily due to
the increase of cost of goods sold. In order to improve the quality of units and
sale the units at higher price, we invested more on the modification of units.
Operating Expenses
For the three months ended June 30, 2007, our operating expenses were $594,507,
an increase of $130,622, or 28.2%, as compared to $463,885 for the same period
of prior year.
Net Income
For the three months ended June 30, 2007, we had a net loss of $109,415, or
$0.00 per share, as compared with a net income of $471,008, or $0.02 per share,
for the same period of the prior year.
For the Six Months Ended June 30, 2007 and 2006
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 six months ended June 30, 2007, 11 units were sold, and
1 unit was reserved with clients' deposits. During this period, sales revenue
of $5,627,934 was recognized from the sale of our housing units. For the same
period in 2006, we recognized sales revenues of $3,410,347.
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 six months ended June 30, 2007 and 2006, our cost of goods sold were
$4,197,698 and $2,048,627 respectively, approximately 74.6% and 60.1% of the
sales. As compared to 2006, the decrease in gross profit was primarily due to
the increase of cost of goods sold. In order to improve the quality of units
and sale the units at higher price, we invested more on the modification of
units.
Operating Expenses
During the six months ended June 30, 2007, our operating expenses were
$1,378,728 as compared to $710,381 during the six-month period in 2006, an
increase of $668,347 or 94.1%, mainly due to the large increase of the other
general and administrative expense, which increased $475,542, or 168.7%, to
$757,367 from $281,825 for the same period of prior year. The reason for the
large increase of other general and administrative expenses was as below:
In February 2007, one person wanted to purchase the unit which has been reserved
by one client. However, the new client wanted to purchase the unit from us,
rather than from the older client. After talking with him, the older client
agreed that we could repurchase the unit. As the compensation, we should
compensate the older client $135,049 in additional to the amounts he paid
originally. We have pre-sold the unit to the new client at a higher price.
Payroll expenses of the Company also increased, from $46,892 for the six months
ended June 30, 2006 to $229,302 for the same period of 2007, or 389%, largely
due to the increased employees.
Net Income
For the six months ended June 30, 2007, we had a net income of $409, or $0.00
per share, as compared with a net income of $299,242, 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. As of June 30, 2007, our customer deposit balance
was $12,745,604.
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 June 30, 2007, the short-term loans due to
related parties had a balance of $298,633, and accrued interest of $795,885.
As of June 30, 2007, we had cash and cash equivalents balance of $1,451,795. For
the six months ended June 30, 2007, our operating activities provided $1,573,680
of net cash, mainly due to the increase in customer deposits of $2,702,814.
During the six months ended June 30, 2007, our investing activities used
$315,183 of net cash, mainly for the cost of the new building, which we are
constructing. For the same period, the financing activities used net cash of
$2,190,680 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
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 June 30, 2007, the balance of this separate account was
$542,308. 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
(i) Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation and under the supervision of
our Chief Executive Officer and Chief Financial Officer, the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this Quarterly Report on Form 10-QSB. Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports that we file or submit under the Securities Exchange Act
of 1934, as amended, is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure and that
such information is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
(ii) Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially affected or is
reasonably likely to materially affect our internal control over financial
reporting, except as follows:
On December 6, 2006, we identified two material weaknesses in our internal
control over financial reporting related to construction interest accounting.
The amount of $51,220 interest expense was incorrectly shown as capitalized
construction interest. These material weaknesses resulted in the restatements of
our previously reported financial statements for the year ended December 31,
2005 and for the quarters ended March 31, June 30, and September 30, 2006. The
restatement resulted in (i) an increase in net loss of $40,736 for the quarter
ended March 31, 2006; (ii) a decrease in total assets of $50,920; and (iii) a
decrease in stockholders' equity of $40,736. The restatement has no impact on
the statement of cash flows.
In connection with this restatement, management assessed the effectiveness of
the Company's internal control over financial reporting, and identified the
following deficiencies:
(a) We lacked adequate resources with sufficient technical expertise to
properly account for construction in accordance with U.S. general accepted
according principles; and
(b) We lacked consistent and effective review and supervision to ensure that
the review of accounts entries supporting our construction interest provision
was conducted in sufficient detail by someone other than the preparer of such
entries.
Over the past six months, we have taken steps to strengthen our ability to
identify and resolve GAAP construction accounting issues as they arise.
Specifically, we have implemented new controls and procedures to substantially
mitigate the risks associated with the material weaknesses identified above:
(1) We provided additional training to our accounting staff on the
requirements of the U.S. generally accepted accounting principles to increase
their familiarity with those standards, and ensure their proper application of
the U.S. GAAP to various transactions, including construction accounting, and
other financial statements matters;
(2) We designated an experienced individual who is expected to provide
additional review over our presentation and disclosure in financial statements
and to provide further technical accounting expertise in applying U.S.
generally accepted accounting principles; and
(3) We adopted procedures to conduct additional detailed transaction review
and control activities to confirm that our financial statements for each period,
present fairly, in all material respects, our financial positions, results of
operations and cash flows for the periods presented in conformity with U.S.
generally accepted accounting principles.
(4) We adopted procedures to solicit the services of the outside consulting
firm to assist in complex and non-routine accounting transactions.
Our CEO and CFO do not expect that our internal controls and procedures will
prevent all error and all fraud. Although our internal controls were designed
to provide reasonable assurance of achieving their objectives, a control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people or by management override of the control. The design of any
system of controls is also based partly on certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
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.
(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
- --------------------------------------------------
Younglin Du, Chief Executive Officer and President
(principal executive officer)
August 14, 2007
By: /s/ Hua Meng
- --------------------------------------------------
Hua Meng, Chief Financoal Officer
(principal accounting and financial officer)
August 14, 2007