UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 3)
(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, 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 August 28, 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, 2006 (unaudited)............... 3
Consolidated Statements of Operations and Comprehensive Income (loss)
for the Three and Six Months Ended June 30, 2006 and 2005 (Unaudited)... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2006 and 2005 (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............................................ 17
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................................................. 19
Item 6. Exhibits and Reports on Form 8-K.................................. 19
Signatures................................................................. 20
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
DAHUA INC.
Consolidated Balance Sheet
(Unaudited)
ASSETS
June 30, 2006
-------------
Current Assets:
Cash and cash equivalents............................ $ 2,231,718
Inventory (note 4) .................................. 14,938,676
------------------
Total Current Assets............................... 17,170,394
Property, Plant, & Equipment:
Computer equipment................................... 14,186
Office equipment..................................... 46,934
Telephones........................................... 2,801
Television........................................... 5,456
Vehicles............................................. 30,181
------------------
Total Property, Plant, & Equipment.................. 99,558
Less: Accumulated depreciation...................... (32,620)
------------------
Net property, plant and equipment................... 66,938
Loans receivable...................................... 127,519
Deferred - VAT tax.................................... 222,015
Restricted cash....................................... 375,349
Due from related parties.............................. 171,180
------------------
Total Assets.......................................... $ 18,133,395
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 93,750
Customer deposits (note 6)........................... 8,212,902
Short-term loans - related parties (note 5).......... 5,271,939
Accrued interest - short-term loans, related parties. 560,140
Income tax payable................................... 170,477
Other accruals....................................... 102,973
------------------
Total Current Liabilities.......................... 14,412,181
Minority interest in subsidiary....................... 758,051
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................................... (270,894)
Accumulated other comprehensive income................ 101,105
------------------
Total stockholders' equity.......................... 2,963,163
------------------
Total Liabilities and Stockholders' Equity............. $ 18,133,395
==================
See accompanying notes to unaudited consolidated financial statements
DAHUA, INC.
Consolidated Statement of Operations and Comprehensive Income (loss)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------------- ------------------------------
2006 2005 2006 2005
-------------- ------------ -------------- --------------
<s> <c> <c> <c> <c>
Revenues
Sales revenues............................. $ 3,081,195 $ - $ 3,410,347 $ -
Cost of goods sold......................... 1,801,817 - 2,048,627 -
-------------- ------------ --------------- --------------
Gross Profit............................. 1,279,378 - 1,361,720 -
Expenses
Advertising................................ 251,371 46,042 378,394 60,944
Depreciation............................... 1,983 1,708 3,270 3,416
Payroll expense............................ 28,920 (6,447) 46,892 31,107
Selling, general and administrative........ 181,611 78,445 281,825 165,785
------------- ------------ ------------- ------------
Total expenses........................... 463,885 119,748 710,381 261,252
------------- ------------ ------------- ------------
Net income (loss) from operations........... 815,493 (119,748) 651,339 (261,252)
Other Income
Interest expense........................... (44,555) - (95,475) -
Other income............................... 249 - 249 -
Interest income............................ 1,808 621 2,175 1,583
------------- ------------ ------------- ------------
Total other income....................... (42,498) 621 (93,051) 1,583
------------- ------------ ------------- ------------
Net income (loss) before taxes and minority interest 772,995 (119,127) 558,288 (259,669)
Provision for income taxes.................. (184,235) - (184,235) -
------------- ------------ ------------- ------------
Net income (loss) before minority interest.. 588,760 (119,127) 374,053 (259,669)
Minority interest in subsidiary income (loss) 117,752 (23,826) 74,811 51,934
------------- ------------ ------------- ------------
Net income (loss)........................... $ 471,008 $ (95,301) $ 299,242 $ (207,735)
============= ============ ============= ============
Foreign currency translation adjustment..... $ 9,191 $ - $ 30,422 $ -
============= ============ ============= ============
Comprehensive income (loss)................. $ 480,199 $ (95,301) $ 329,664 $ (207,735)
Basic and diluted loss per share............ $ 0.02 $ (0.00) $ 0.01 $ (0.01)
============= ============ ============= ============
Weighted average common shares outstanding.. 25,000,000 20,000,000 25,000,000 20,000,000
============= ============ ============= ============
See accompanying notes to unaudited consolidated financial statements
DAHUA, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
-------------------------------------
2006 2005
------------------- ----------------
<s> <c> <c>
Cash Flows from Operating Activities:
Net income (loss).............................. $ 299,242 $ (207,735)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation................................... 3,270 3,416
Minority interest.............................. 74,811 (51,934)
Changes in operating assets and liabilities:
Inventory...................................... (7,308) (869,307)
Prepaid construction costs..................... - (2,956,117)
Due from related parties....................... (125,401) -
Receivable-VAT tax............................. (222,015) -
Accounts payable............................... 813 (25,393)
Customer deposits.............................. 1,906,235 1,505,320
Accrued interest............................... 99,861 92,638
Income tax payable............................. (53,305) -
Other accruals................................. 71,382 2,687
------------------- ----------------
Net cash provided by (used in) operating activities 2,047,585 (2,518,446)
Cash Flows from Investing Activities:
Purchase of property, plant and equipment...... (38,380) -
Loan receivable................................ (127,519) (12,021)
------------------ ----------------
Net cash used in investing activities......... (165,899) -
Cash Flows from Financing Activities:
Acquired treasury stock........................ - (100,000)
Payment on loans payable....................... (97,455) -
Proceeds from loans payable, related party..... - 1,876,120
Investment in subsidiary by minority owner..... - 568,320
----------------- -----------------
Net cash provided by (used in) financing activities (97,455) 2,344,440
----------------- -----------------
Effect of rate changes on cash.................. 30,422 -
Increase (decrease) in cash and cash equivalents 1,814,653 (174,006)
Cash and cash equivalents, beginning of period.. 417,065 474,784
----------------- -----------------
Cash and cash equivalents, end of period........ $ 2,231,718 $ 300,778
================= =================
Supplemental disclosure of cash flow information:
Interest paid in cash.......................... $ - $ -
================ ================
Income taxes paid in cash...................... $ 100,537 $ -
================ ================
Sales taxes paid in cash....................... $ 564,561 $ -
================ ================
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 six months ended June 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 June 30, 2006 and 2005.
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 six-month periods ended June 30, 2006 and 2005 was
$3,270 and $3,416, 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
$378,394 and $60,944 for the six-month periods ended June 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 six months ended
-----------------------------------------
June 30, 2006 June 30, 2005
--------------------- ------------------
<s> <c> <c>
NUMERATOR FOR BASIC AND DILUTED EPS
Net income (loss) to common stockholders $ 299,242 $ (207,735)
==================== =================
DENOMINATORS FOR BASIC AND DILUTED EPS
Weighted average shares of common stock outstanding 25,000,000 20,000,000
-------------------- -----------------
Add: dilutive equity securities outstanding - -
-------------------- -----------------
Denominator for diluted EPS 25,000,000 20,000,000
-------------------- -----------------
EPS-Basic $ 0.01 $ (0.01)
-------------------- -----------------
EPS-Diluted $ 0.01 $ (0.01)
-------------------- -----------------
The Company had no potentially dilutive securities outstanding at June 30, 2006 and 2005.
4. Inventory
Inventory represents completed houses available for sale at June 30, 2006.
During 2005, the Company completed all of its construction-in-progress. As of
June 30, 2006, 15 units were sold, 34 units were reserved with clients'
deposits, and 27 units were available for sale.
5. Related Party Transactions
The Company made an advance to a director in the amount of $46,180. The advance
bears no interest and has no fixed repayment terms. Consequently, it has been
excluded from current assets.
The Company made an advance to a company with common shareholders in the amount
of $125,000. The advance bears no interest and has no fixed repayment terms.
Consequently, it has been excluded from current assets.
Short-term loans due to related parties had balances of $5,832,079 and
$7,457,436 (including accrued interest) at June 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 $99,861 and $92,638 for the
six months ended June 30, 2006 and 2005. The entire interest amounts were
capitalized during 2005 as costs of construction and expensed during 2006 after
houses were substantially completed for sales in December 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 June 30, 2006 was
$8,212,902. Of the 34 units reserved, 13 unit's deposits are money received from
bank arrangements (see note 7) in the amounts of $3,188,750. Accordingly, the
bank has liens against these 13 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 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, 2006, the balance of
this separate account was $375,349. 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
June 30, 2006, fifteen (15) units have been sold, 34 units were reserved with
clients' deposits, and 27 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 2,175,000 square feet 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.
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. As of the
date of this report, we don't have any current plan or arrangements for
development of apartment buildings.
Results of Operations
For the Three Months Ended June 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 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, 2006, March 31, 2006, December 31, 2005
---------------- ----------------- -----------------
<s> <c> <c> <c>
Units sold 15 7 6
Units reserved with deposits 34 28 27
Units available for sales 27 41 43
---------------- ----------------- ----------------
Total 76 76 76
================ ================= ================
Six months Three months Three months
ended ended ended
June 30, 2006 June 30, 2006 March 31, 2006
---------------- ------------------ ----------------
Houses sold 9 8 1
Houses reserved 7 6 1
--------------- ----------------- ---------------
For the three months ended June 30, 2006, we recognized sales revenues of
$3,081,195 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 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, 2006, our cost of goods sold was $1,801,817,
approximately 58.5% of sales. No cost of goods sold was recorded for the three
months ended June 30, 2005, because no houses had been sold.
Operating Expenses
For the three months ended June 30, 2006, our operating expenses were $463,885,
an increase of $344,137, or 287%, as compared to $119,748 for the same period of
prior year. The increase in operating expenses resulted primarily from
substantially increased advertising expenses, which increased from $46,042 for
the three-month period ended June 30, 2005 to $251,371 for the same period of
2006, or approximately 446%. 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 months ended June 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 the 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 June 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 next year.
Our selling, general and administrative expenses also increased greatly, from
$78,445 for the three-month period ended June 30, 2005 to $181,611 for the same
period of 2006, or 132%, mostly due to increased sales and marketing activities.
Net Income (Loss)
For the three months ended June 30, 2006, we had a net income of $471,008, or
$0.02 per share, as compared with a net loss of $95,301, or $0.00 per share, for
the same period of the prior year.
For the Six Months Ended June 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 six months ended June 30, 2006, 8 units were sold, and
7 units were reserved with clients' deposits. During this period, sales revenue
of $3,410,347 was recognized 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 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, 2006, our cost of goods sold was $2,048,627,
approximately 60.0% of the sales. No cost of goods sold was recorded for the six
months ended June 30, 2005, because no houses had been sold.
Operating Expenses
During the six months ended June 30, 2006, our operating expenses were $710,381
as compared to $261,252 during the six-month period in 2005, an increase of
$449,129 or 172%. The increase was primarily due to substantially increased
advertising expenses, which increased approximately 520%, from $60,944 for the
six-month period ended June 30, 2005 to $378,394 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 six months ended June 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 the 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 six months ended June 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 next year.
Selling, general and administrative expenses of the Company also increased, from
$165,785 for the six months ended June 30, 2005 to $281,825 for the same period
of 2006, or 70.0%, largely due to increased sales and marketing activities in
2006.
Net Income (Loss)
For the six months ended June 30, 2006, we had a net income of $299,242, or
$0.01 per share, as compared with a net loss of $207,735, 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, 2006, our customer deposit balance was
$8,212,902.
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, 2006, the short-term loans due to
related parties had a balance of $5,271,939, and accrued interest of $560,140.
As of June 30, 2006, we had cash and cash equivalents balance of $2,231,718. For
the six months ended June 30, 2006, our operating activities provided $1,920,066
of net cash, largely due to net income of $299,242, and increase in customer
deposits of $1,906,235. During the six months ended June 30, 2006, our investing
activities used $38,380 of net cash, mainly for the purchase of property and
equipment. For the same period, the financing activities used net cash of
$97,455 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, 2006, the balance of this separate account was
$375,349. 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
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, 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 as of June 30, 2006.
Recently our management re-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 June 30, 2007.
Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures are effective.
(b) Changes in internal controls 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 quarter ended March 31, 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.
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
(Principal Executive Officer)
August 28, 2007
By: /s/ Hua Meng
- -------------------------------------------------------------
Hua Meng, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
August 28, 2007